Entering the world of homeownership starts with the right preparation, and that means starting with the home loan. Many prospective buyers put the cart before the horse and begin with a real estate search, when they should first understand and prepare for their home financing.
Knowing how much you can borrow for a mortgage will help you determine what you look for in a home in terms of amenities, location, and, of course, price. As you start working with a loan officer, there are several critical considerations you’ll want to address in preparing to obtain a home loan:
- Have a budget. At the outset, homebuyers should know how much they can afford for housing. But it’s key to ensure you take all considerations into account, because mortgage payments go beyond the principle and interest. Other factors are insurance, property taxes, possibly private mortgage insurance, initial repairs or renovations, utilities, regular maintenance, and unexpected repairs and additions. You also need to consider other major expenses that you might take on while living in your home, such as children, educational expenses, and saving for retirement.
- Know your credit rating. Your credit rating is perhaps the most important element when applying for a home loan. You must have a good credit rating for a lender to loan you money, and the better your credit the more likely you’ll qualify for the best possible rate and terms. The standard method for scoring credit histories is via a Fair Isaac Corporation (aka, FICO) score, which will range between 350 and 850. Lenders usually consider borrowers with a score of 750 to be low risk, while a score of 600 is thought to be high risk. Three credit bureaus, Equifax, Experian and TransUnion, generate reports, and a lender will typically average the three for your FICO.
- Protect your credit rating. Various factors can impact your FICO so it’s important to ensure your credit history is free of items that lenders consider red flags. For instance, don’t ever get behind on paying your rent or making payments on existing loans. Also, avoid opening new credit accounts or taking out loans; keep credit card balances well below their maximum line of credit; and always pay your bills on time.
- Have your documentation ready to go. Underwriting for home loans has grown more stringent in recent years, so you want to have detailed financial information on-hand in order to make the process smooth and to instill confidence in your lender. Key pieces of information your lender will want to see are W2 and 1099 statements, credit statements, detailed information on assets, and recent bank statements.
- Maintain stable employment. Now is not the time to hop jobs. While securing financing for a home purchase, you want to stick with your current employers. Lenders want to ensure that borrowers will have stable, reliable income with which to make their monthly loan payments.
- Understand your debt-to-income ratio. Your debt-to-income (DTI) ratio is described in two figures: the front-end and the back-end. The first number is simply the percentage of your pre-tax income against what will go to your home loan and related housing costs, and the second number indicates the percentage of household income comprised by all of your debt. The two are expressed with a slash. For a conventional loan, lenders typically want borrowers to have a 28/43 DTI. Understanding this will help you understand how much house you can afford.
- Learn about your lending options. Lenders typically offer first-time buyers a variety of loan programs that offer special interest rates, lower down payments, and attractive terms. Make sure you work with your loan consultant to understand your options.
Want to learn more about how you can properly prepare for a home loan? Your loan consultant will be happy to sit down with you and discuss your homeownership goals, life plans, and what home financing options can help you achieve your objectives.