In the United States, about 65.1% of people are homeowners.
Although over half of the population has gone through the home buying process, the process is daunting for many. If you’re ready to give the next step and buy your dream home, you came to the right place.
Read on to learn how to get a mortgage.
Determine What You Can Afford
If you buy your dream home, but you can’t afford it, the dream might die out soon. The last thing you want is for your monthly payment to take over your life.
As a good rule of thumb, you should look at homes that are no more than 2.5 times your yearly income.
Work on Increasing Your Savings
Aside from paying for your mortgage, you will also have to pay for property taxes, home insurance, closing costs, and you will also need a downpayment.
Typically, you will be expected to put down 20 percent of the total price of the house. Also, you should have six months’ worth of living expenses in your account separate from the downpayment.
Many Americans also forget that they need to set aside money for emergency repairs and other unexpected expenses.
When you’re in the process of applying for a mortgage, lenders will look at the whole picture. After they look at your income, they will look at how much of your monthly income goes into your debts.
This is known as your debt-to-income ratio, and the lower it is, the lower the interest rate you will get. For example, if you make $5000 a month and your payments are $2500 a month, including your mortgage, your debt-to-income ratio is 50%.
A debt-to-income ratio of more than 50% will not make you an attractive candidate for a lender. If you want to have a lower interest rate, try to keep your debt to income ratio below 36%.
Increase Your Credit Score
Once you have put your finances on the table, it’s time you look at improving your credit score. Although there are other factors that play into you getting approved for a loan, think of your credit score as the first impression.
When mortgage companies look at a low credit score, they will either decline your application or offer you a higher interest rate.
If you’re serious about obtaining a mortgage for your dream home, you need to need to start improving your credit score. Make sure you obtain copies of your credit scores to get your starting point.
Anything below 750 will not provide you a low-interest rate. Once you know your credit score, start paying off credit cards, get delinquent accounts current, and don’t open new accounts.
Put Together a Down Payment
While most lenders expect future homebuyers to put down 20 percent, not everyone has that kind of money. However, not having 20 percent will not disqualify you for a mortgage.
Some first-time homebuyers get away with putting down less than 10 percent. Homebuyers who qualify for a Federal Housing Loan (FHA) can end up putting down as little as 3.5 percent.
If saving for a down payment is your biggest hurdle, you can always look into first-time homebuyers grants.
The last thing you want is to find your dream home only to find out you don’t qualify for a mortgage. In fact, many realtors won’t show you houses unless you are pre-qualified for a mortgage. Also, sellers will take your offer more seriously when you arrive prequalified.
Getting prequalified will also give you the option of comparing lenders and pick the best interest rate.
If you get denied during the pre-qualifying process, you will get an opportunity to improve your credit score before trying again.
Learn About Mortgage Options
It’s important to note that not all mortgages are created equal. If you’re a first-time homeowner, chances are you don’t know a lot about mortgages. You should familiarize yourself with some of the lingoes.
Mortgage Term: How many years do you want to spend paying for your mortgage? While 30-year loans are the most common, you also have the option to select a 10-year or 20-year term loan.
Fixed and Adjustable Rates: With a fixed mortgage rate, you can be sure the rate won’t change over time. Adjustable rates, on the other hand, fluctuate with the market and can provide you extra savings.
Government-Backed Loans Vs. Conventional Loans: As the name suggests, government-backed loans make it easier for people who don’t have a high credit score or a large downpayment. Conventional loans come from private lenders, banks, or credit unions.
Get Ready to Search for a Home
Once you have sorted out the paperwork, it’s time you begin the search for your dream home. While the process can take a really long time, you can get lucky and find it within a few weeks.
Work with your realtor to find a house that fits your criteria and your price range.
Start the Underwriting Process
After you put an offer, the underwriting process will start. Even if you have been preapproved, you will get a little nervous during this time.
During the underwriting process, you can expect the bank to go over your credit history, employment, debt-to-income ratio, and other debts.
The lender will get your property appraised and match the value of the home against the loan. They will want to make sure you’re asking to borrow the right amount.
Take this opportunity to get the home inspected and find any problems with the home before you close.
Close on the Home
Once your loan has been approved, you can get ready to close on the home. During the closing process, you will have to purchase homeowners’ insurance, get a title policy, and do a final walk-through.
On average, you should be prepared to pay between 2% to 5% on closing costs.
This is How to Get a Mortgage for Your Dream Home
Now that you know about how to get a mortgage for your dream home, it’s time you get the process started.
Start by determining how much you can afford, increase your savings, check your credit score, get preapproved, and more.
Are you ready to become a homeowner? Let Late Time Realty help. Contact us today.