If you've made the decision to purchase a house but lack sufficient funds, you're not alone. Most individuals do not have enough cash readily available to buy a home outright. However, banks and mortgage companies offer a solution in the form of mortgages. These loans bridge the gap between your savings and the price of the desired home, allowing you to make the purchase.
While many people typically find a home first and then seek a mortgage, it is advisable to prequalify for a home loan and explore your options beforehand. Understanding your borrowing capacity before house hunting is crucial. It enables you to determine how much you can borrow, empowering you to make informed decisions when searching for a suitable house.
Credit Score
It is important to start by reviewing your credit report and obtaining your credit score. Many banks and credit card companies offer these services for free, so it's worth checking with them first. Additionally, the three major credit rating agencies—Equifax, Experian, and TransUnion—are required to provide one free credit report per year.
You can request a credit report by contacting the credit reporting agencies directly. If you're planning to purchase the home with a partner or another individual, they should also obtain and review their credit reports. Take the time to carefully examine your credit reports for any inaccuracies. If you identify any errors, make sure to contact the credit reporting agency to request a correction.
It is also crucial to check your credit score, which ranges from 300 to 850. A higher score not only enhances your chances of securing a mortgage loan but also increases the likelihood of qualifying for a lower interest rate.
Rather than waiting until you find the perfect home, it is advisable to start looking for a mortgage early on. This allows you ample time to improve your credit score by reviewing your credit report for accuracy, ensuring timely bill payments, and reducing balances on your credit accounts. By proactively managing your credit, you can enhance your financial standing and increase your chances of securing a favorable mortgage.
Related: The Importance of Getting Pre-Approved for Financing Before Buying a Home
Down Payment
Opting for a higher down payment can yield benefits such as a reduced interest rate and faster equity accumulation in your home. In the case of a conventional loan, if your down payment is less than 20%, you will be required to pay private mortgage insurance (PMI).
PMI safeguards the lender in the event that you default on your loan and cease making mortgage payments. Typically, PMI costs around 1% of your outstanding loan balance annually, and this amount is included in your monthly mortgage payment. Once your outstanding balance reaches 80% of the original loan amount, you can request to have PMI removed.
Certain loan types may have lower down payment requirements, such as as low as 3% to 5%. For example, Federal Housing Administration (FHA) loans mandate a down payment of 3.5%, while U.S. Department of Veterans Affairs (VA) loans may not require any down payment at all.
Debt to Income Ratio
Typically, it is advisable for all your monthly payments, including current and future debts, to be less than 43% of your monthly income. However, it's important to note that the amount you qualify for based on this calculation may not necessarily align with what you can comfortably afford. It is recommended that you carefully evaluate your personal financial situation and consult with a financial advisor to determine a suitable mortgage amount. During the application process, we will verify your income.
To calculate your debt-to-income ratio, simply divide your monthly payments by your monthly gross income. This ratio serves as an important factor in assessing your eligibility for a mortgage. If your debt-to-income ratio exceeds 43%, there may still be options available to you.
For instance, you can consider applying for the mortgage with a co-applicant, such as a spouse, relative, or someone who resides in the home. We will request the necessary information for the co-applicant during the application process.
Getting an early start in the mortgage process can provide you with additional time to address any outstanding credit card balances or smaller loans. By paying off these debts, you can lower your debt-to-income ratio and potentially improve your credit score, thereby enhancing your overall financial profile.
Mortgage
Once your offer has been accepted by the seller, you can proceed with the mortgage process and prepare to take ownership of your new home. The first step is to choose a lender and determine the most suitable mortgage type for your needs.
A fixed-rate mortgage ensures consistent monthly payments for both principal and interest throughout the loan term. Fixed-rate mortgages are available in 10-, 15-, 20-, 25-, or 30-year terms.
On the other hand, an adjustable-rate mortgage (ARM) may offer lower initial payments compared to a fixed-rate mortgage. ARMs typically have a 30-year term with a fixed interest rate for 5, 7, or 10 years (depending on the selected product), followed by an adjustable rate for the remaining loan term, which adjusts annually.
Opting for a 15-year term instead of a 30-year term can result in interest savings over the life of the loan, although the monthly payments will be higher.
Your lender will arrange for an appraisal to determine if the purchase price aligns with the values of similar properties in the area. An appraiser will evaluate the house and compare it to recently sold homes in the vicinity.
During the period leading up to the closing, it's crucial to maintain your financial stability and avoid any actions that could alter your financial situation, such as applying for new credit, changing jobs, or falling behind on credit payments.
Once your mortgage loan is approved, your lender will schedule a closing date.
Three business days before the closing, you will receive a Closing Disclosure, which provides a detailed breakdown of all funds and costs paid by both the buyer and seller prior to or during the closing. This document includes information such as the loan amount, interest rate, loan term, origination fees, title insurance, property insurance and tax deposits, homeowners insurance, and other applicable fees. It's important to carefully review the Closing Disclosure and compare it with the Loan Estimate you previously received to ensure there are no unexpected surprises.
During the closing, you will receive a Final Closing Disclosure, which is the final version of the document you received three business days before the closing. Take the time to check for any last-minute changes.
Common closing fees include:
Appraisal fee: Covers the evaluation of your home's market value.
Attorney fees: Account for any legal representation required to prepare and record documents.
Inspection fee: Encompasses examinations for structural issues, termites, lead paint (in older homes), and roof condition.
Origination fee: Covers the processing and administration of your loan.
Underwriting fee: Accounts for the review of your mortgage application.
Title fees: Include a search to ensure there are no tax liens on the property and provide insurance to protect against potential issues.
Related: How to Buy a Home in a Competitive Market
Final Thoughts
Purchasing a home is a substantial investment that requires careful consideration. It's important to take the necessary steps to position yourself in a favorable financial situation for pre-qualification and approval. By doing so, we aim to simplify the buying process and enable you to fully enjoy the experience of becoming a homeowner.
Related: What is a Mortgage Insurance Premium?
King & Edge Real Estate in Boise, Idaho
We are honored to have the opportunity to serve you and be a part of your real estate journey. Let us guide you towards a successful and rewarding experience, where your goals become our goals, and your vision becomes a reality. Contact us today and discover the unparalleled service and expertise that sets King & Edge Real Estate apart as we help you sell your home in Boise or find your place to call home.
