If you are a first-time home buyer who will have a first mortgage, then this is the right article for you. First-time home buying can be challenging because there is so much to understand about choosing a home, the costs associated, when to purchase a home and how to find the right lender for you. Lending banks often have special discounts and programs for people who are first-time home buyers. These programs offer significant savings to first-time buyers.
Learn About Today’s Mortgage Market
Mortgage markets change all of the time. Inflation and recession are two of the main reasons for a major market change. When housing demands are low, lenders often use lower rates to entice buyers. When housing demands are high, look for rates to increase, which means more money in the pockets of lenders. Pay attention to the mortgage market and seek advice from lending banks to determine when is the best time to buy your new home.
What You Need to Get Approved For a Mortgage
The documents needed for a loan application are thirty days of your most recent paycheck stubs, two months of bank statements, all pages of checking and saving accounts, IRA, 401(K), stocks and other investments, last two years of W-2s, and most recent 2 years of tax returns. Ultimately it is up to your lending bank to tell you what will be needed when filling out a mortgage application. The lending bank will tell you the needed documents to bring in along with your mortgage application. Some lending banks allow the mortgage applicant to complete the application online with the documents uploaded.
Calculate Your Income and Monthly Debt Obligations
It is important to know your income to debt obligations before purchasing a new home. Your monthly mortgage payment should be no more than 28% of your pre-tax income and no more than 36% of your total debt on a conventional loan. Your income to debt ratio should be no more than 43% on a mortgage payment versus your total debt for an FHA loan, which is often more liberal.
Check Your Credit Score
Your credit score is one of the most important reasons a lending bank will loan you money for a new home. You will need to know your FICO score from each of the three major credit score bureaus that include: Experian, Transunion and Equifax. These are the credit bureaus that banks use along with your FICO score for each company to determine if you are creditworthy enough to get approved for a home loan.
Decide on a Down Payment Amount
Traditionally, you will need between 10% to 20% of your home’s total cost saved up for a down payment. Lenders prefer these amounts because it lets them know that you will be more responsible with their money.
Determine How Much House You Can Afford
Use your income to debt ratio to determine how much house you can afford. One of the best ways to determine a mortgage payment amount is by using the 28/36 rule. According to the 28/36 rule, your mortgage payment should not be more than 28% of your pre-tax income and no more than 36% of your total debt.
When to Apply For a Mortgage
There is always a better time to apply for a home loan. Watch for interest rates to go down before purchasing a home. Get a copy of your credit report from the three major bureaus which are Transunion, Equifax, and Experian. Check your credit reports for any errors and work to get them off your report either by complaints or other alternative means.
Pay down your debt, particularly high-interest credit cards which could bring down your FICO score. A good FICO score is 760 and is recommended by experts for a person applying for a home loan. However, if you do not have a 760 credit score, then 620 is the recommended FICO score to apply for a home loan. Your credit report criteria will depend upon your type of loan.
If your score is low, there are still a few lenders that have loan programs for people with poor credit that are more liberal for approval. Loan programs that accept poor credit will probably accept people with FICO scores in the 500s. Poor credit programs often come with a higher than normal interest rate on your new home.
Eliminate all of the debt on your credit reports and begin to save for closing costs, down payment, and any other fees that will be assessed before you can purchase your home. Never purchase a home while there is an inflation or recession going on in the country. These two economic disasters represent volatile times in the economic future and a time when purchasing a home is not a good idea.
Research the different loan programs for new home buyers, such as FHA, VA and other special loans, along with the requirements and benefits with your lender.
Get a pre-approval letter from your lending bank to show an estimate of how much they are willing to lend you for your home. The pre-approval letter gives you an estimate for a pre-approval loan amount from the lending bank that you can afford. All of these things should be done before you apply for a mortgage to make sure that your application process goes as it should.
Compare Mortgage Lenders
it is always best to compare the interest rates of different mortgage lenders for the best rates. Experts say to compare up to 5 lenders for best results. Lenders will often give you the length of the loan, usually 15, 20 or 30 years, interest rates, penalty points and expected payment, interest, taxes, and insurance or PITI payment amount for the duration of your loan.
These are some need-to-know tips and advice about your first mortgage as a first-time home buyer. Remember to do your homework before choosing a lender, look for specials and discounts that are often given through a first-time home buying program, and ask about the home buying gifts that are given to help buyers pay for closing costs and down payments.
Only buy when you have repaired your credit by paying down bills on your credit reports from Experian, Equifax and Transunion, saved enough to give 10% to 20% of your home’s total costs and gotten up the necessary documents that are required by your lending bank for the mortgage application.
All of these things will ensure that your mortgage application will go smoothly and get you a loan approval for your new dream home!