It may seem like you're comparing apples to apples when you trade rent payments for a house payment, but there are more expenses to consider when buying a home and you have to make sure that you can afford to pay for them all. Spending less than 28% of your pretax income is the first, most fundamental, rule for determining how much you can truly afford. Along with your mortgage payment, make sure you've accounted for property taxes, homeowners insurance and maintenance costs that average about 1% of the home's value each year. Also, find out what the payments would be for a 30 year fixed rate mortgage on the house. If you can't afford a house based on a fixed rate mortgage at today's low rates, you don't need a different mortgage, you need a different house.
Good preparation is the key to a good mortgage. Before shopping for a home, make sure you can actually qualify for financing by getting a pre-approval. A mortgage pre-approval is more involved than a simple pre-qualification because the bank pulls your credit and looks at your income, assets and employment. Your debt to income (DTI) ratio will also come into play to ensure you know exactly how much you can afford. Plus, getting pre-approved is the best way to tell a potential seller that you're serious. However, when you get the pre-approval for a mortgage, it's a good idea to take the lender's highest amount you qualify for and lop off 20% so that you aren't stretching yourself to the limit.
Owning your own home comes with new expenses that surprise many first-time buyers. Each year budget approximately 1% of your homes purchase price for routine maintenance. If your home costs $250,000, expect to spend around $2,500 annually on unglamorous items like a new water heater or having the furnace serviced. Some years you'll spend less. When that happens, set the money aside for more expensive items like a new roof. Property taxes also add to the cost of home ownership each year.
In the case of a mortgage, the annual percentage rate, or APR, is the total yearly cost of financing a home, expressed as a percentage of the amount financed. So for instance, say you are quoted a mortgage APR of 3.8 percent—that means if all the interest, points, and any other closing costs were added up, and then that sum was spread evenly across the entire loan term, annual payments on that total would equal 3.8 percent of the original loan amount.
It's important to check your credit report from all three major bureaus - Equifax, Experian and TransUnion - six months to a year before applying for a mortgage. Examine the reports Mistake carefully, because any mistakes ( and they are very common ) could lead to a higher interest rate or even loan rejection if not corrected. If there are errors, fix them. (Examples: Any accounts listed that aren't yours, accounts incorrectly listed as being in collections, incorrect large balances reported, or incorrect late payments reported.) The bureaus have 30 to 45 days to investigate the issue and fix it accordingly. Use free resources, like Credit Karma or Credit Sesame to get an estimate of your credit score. If you want to see your actual FICO scores for each bureau, buy them outright (about $15 to $20 each). With below-average credit, the only loan you might qualify for is an FHA loan, which has expensive mortgage insurance premiums for the life of the loan.
Avoid applying for any other type of credit before and during the mortgage application process. Whenever you apply for new credit, you're seen as a greater credit risk, at least initially. The same goes for closing an old account. It will affect the amount of credit you have available, which will negatively affect your score. If you happen to apply for a credit card or an auto loan around the same time you apply for a mortgage, your credit score might get dinged enough to kill your eligibility or increase your interest rate. ( For car or home loans, all credit inquiries made within about 2 weeks of each other count as one inquiry, so when you're shopping around for mortgage brokers, be sure to submit all of your loan applications around the same time).
VA loans are the best mortgages for pretty much anyone who qualifies for one. Millions of veterans, along with those on active duty, including the National Guard and reserve units, are eligible. Among the advantages: (1) The VA makes sure buyers don't overpay for a home and that it's move-in ready, without any costly, unexpected problems. (2) It requires no down payment on purchases up to $417,000 in most areas and yet charges no mortgage insurance. (3) The VA tightly restricts the type and amount of closing costs. (4) Interest rates are very competitive, even if you have relatively poor credit and/or lots of debt. In most cases, you'll pay the same interest rate as borrowers with a 760 credit score and a 20% down payment. The only financial drawback to a VA loan is what's called the funding fee, which can range from 1.5% to 3.3% of the amount you're borrowing. However, the fee can be added to the loan so you won't have to pay it up front, and if you have a service-connected disability, the funding fee is waived.
Another key to mortgage approval is steady employment and income. An underwriter will want to know that the income you bring in every month is consistent and expected to continue into the foreseeable future. So don't jump from job to job too much before applying for a mortgage. If the change is within the same field, it shouldn't be a deal breaker, but a career change will to problems
A mortgage rate means very little if it's not locked-in. Mortgage interest rates change daily so if you're happy with your rate, lock it. All those mortgage quotes you get are just quotes until you actually tell the bank, lender or broker to lock it in. Once locked, your rate is guaranteed for a certain period of time, be it 7 days, 15 days, or a month. Never assume your rate is locked until you get it in writing.
Make sure you understand what kind of loan you're getting, what the payments will be from beginning to end, how much interest you're paying, and whether you'll have a fixed interest rate, or whether it will be fixed for a limited time before becoming variable. Also, know how much money you'll be required to bring to closing. Many lenders require you to pay property taxes and insurance up front, and it could be a big check. Finally, it's your responsibility to read and accept the terms of your mortgage. It might be a pain to go through all the loan documents at signing, but it's a bigger pain to sign up for something you don't want or agree with. Take the time at closing to ensure you understand everything you're signing. And NEVER be afraid to ask questions! Otherwise you might wind up with a mortgage with predatory terms and no place to turn.
If you are looking for someone you can trust to help you with your mortgage.
Why not consider The Disney Team to help you.
We have already helped thousands of good folks just like you!
Mike Disney, Loan Officer, Realtor