Purchasing a home remains one of the main pillars of the American Dream and, for nearly three-quarters of Americans, home buying is still a major life goal. But given the hardships of the past two years, today’s raging inflation, and the rising house prices, buying a home can be challenging for most families.
That is why, if you are looking to take this step in 2023, it is important to start preparing for it now. Get started with the steps below!
Look Into Your Mortgage Options
The first step is to look into what mortgage options are available to you.
Some of the main mortgage products worth considering include Conventional, Jumbo, and Government-insured (or Government-backed) loans. However, within each of these three categories, you’ll have a wide range of options to choose from, especially in terms of repayment terms, interest rates, and fixed vs adjustable rate offers.
If you are not sure about the best option for your needs, consider working with a direct lender such as loanDepot and compare the different loan types available to you.
Have a Budget in Mind and Get Pre-Approved
Before setting off on a house-hunting spree or planning a house move, it is crucial to determine your budget. And, to know how much you can spend on your home without compromising your finances, you’ll need to know how much you can borrow.The best way to do so is to undergo the pre-approval process with your lender of choice. Once you know how much you can borrow, consider using a mortgage calculator to better understand how your mortgage repayments will impact your family’s finances on a monthly basis.
Start Monitoring Your Credit Score
Although some mortgage products are accessible to applicants with a poor credit history, you should consider spending the next few months tracking and improving your credit score.Indeed, with a credit score of 740 or higher, you will be able to access jumbo mortgages, lower interest rates, and more convenient repayment terms.
Diving into the mortgage application process with a low credit score can cause you to get stuck with interest rates up to 1.6% higher than the ones you’d be able to access with a higher FICO score - thus impacting your finances for the lifetime of your mortgage!
Tackle Your Debt and Lower Your DTI
Reducing your debt should be a priority at all stages of life, but it is even more important as you get ready to purchase your first home.Most traditional lenders will look at candidates’ Debt-to-Income ratios (DTI) to gain an understanding of their financial habits and creditworthiness. That is why, ideally, you should strive to have a DTI of 28% or lower (not including your mortgage) or 36% (including your mortgage payments).
Start Building Your Down Payment
The larger your down payment, the better mortgage terms you’ll be able to access. Indeed, having an available down payment of at least 20% will reduce your loan-to-value and boost your equity in your home. In turn, this can minimize your risk as a borrower and give you access to more convenient interest rates and repayment terms.But while a 20% down payment might be recommended, it isn’t necessary. Some government-backed loans, such as FHA, VA, and USDA loans are accessible with a low (usually 3-5%) or 0% down payment.
Know What To Expect From the Mortgage Application Process
Before applying for your mortgage, make sure to be clear about what the journey ahead will look like - both in terms of timelines and costs. Usually, mortgage applications are processed within two to six weeks, and closing costs can be as high as 3-5% of the loan amount. What’s more, mistakes in the application can stretch timelines and even lead to a refusal.If you are looking for more guidance to navigate this process with ease, make sure to surround yourself with qualified professionals, including real estate agents, financial advisors, and mortgage brokers.
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