1. Determine your budget.
While many borrowers attempt to skip this step, determining how much you can afford to borrow is crucial when searching for the right home. Without proper planning and consideration, borrowers may waste time looking at homes outside of their price range or secure a property whose monthly mortgage payments exceed their affordable budget.
In order to prepare for this financially significant event, borrowers should establish realistic financial goals and consider their needs, plans and financial capabilities. If you do not have a budget, assess your finances and make one. Analyze the best and worst case scenarios for the next several years, planning out courses of action for each potential difficulty.
For instance, if you lost your job or had to assume unexpected expenses such as medical bills, consider how you would react to these situations. Remember, formulating a strategy ahead of time will relieve a great deal of stress and allow you to stay prepared for any unanticipated emergencies or misfortune.
2. Consider your options.
Homebuyers have various available home loan options. While borrowers can select between a range of repayment options such as a fixed-rate mortgage, an adjustable-rate mortgage or an interest only loan, they may also choose between several loan programs, each with unique advantages and disadvantages.
3. Assess your price range.
Along with developing budget guidelines, borrowers will need to consider the price range of their intended purchase, based on the type of home and the area in which the property is situated. Before even beginning your home search, you should prepare both a budget and a price range, considering the implications of a purchase for various ranges.
If you are securing an FHA home loan, find out the relevant FHA loan limits, as they vary from county to county depending on the home values of the area. With this information, you will be able to determine a maximum range which your home price must accommodate.
4. Check your credit score.
As early as possible, obtain a copy of your credit report and carefully evaluate your credit score. This can be acquired online through one of the various reputable sites which allow you to check your credit score online free or by requesting a copy from the credit agencies. Borrowers are entitled to one free credit report per year and any subsequent reports only cost $35.
If you discover an error or inaccuracy on your credit report, resolve this issue before applying for a loan to receive a small credit boost and possibly a more beneficial interest rate offer.
If your credit score is poor or recovering from a derogatory event, you may not be able to qualify for your mortgage loan. If credit prevents you from qualifying, take some time to repair your credit before pursuing a mortgage. Not only will a higher credit score help you qualify, but you will receive much more advantageous mortgage rate offers, potentially saving tens of thousands of dollars over the life of your loan.
5. Gather the documentation.
Once you have considered your credit circumstances, you should retrieve the necessary documentation relevant to loan acquisition. This will include information to prove steady employment and income, such as two months of pay stubs, two months of bank statements and your W2 form.
While the exact paperwork required may vary from lender to lender, these are the traditional items necessary for a first time homebuyer to acquire a mortgage loan. Self-employed borrowers constitute a different case; rather than accepting pay stubs, your lenders will want to review your income tax returns for the previous two years to verify a stable income.
6. Compare mortgage rates.
Although this step may seem trivial, borrowers should always compare mortgage rates in order to save money in the long term. Even minute percentage differences can translate to thousands if not tens of thousands of dollars over the course of the loan.
As such, contact at least four to five different lenders in your region and find out what mortgage interest rates they offer. Essentially, the interest rate when securing a mortgage loan is the cost which lenders charge for borrowing the money. As with shopping for any other product, you should shop around and try to get the best deal available.
7. Get pre-approved for a loan.
Although preapproval is not a mandatory step in loan acquisition, getting preapproved is critical for buyers, and if a borrower skips this step, he or she may not be able to close the loan and may even lose out on the home purchase.
Basically, the mortgage approval process can take some time; if you start this process from the beginning once you find your desired home, you could potentially lose the purchase opportunity while waiting for approval if the seller offers the home to another buyer. Even worse still, you may find that you do not actually qualify for the loan which you need. In this case, you will be put back to square one, which can create major uncertainty and manifest stress.
To prevent this issue from arising, borrowers should seek preapproval. Essentially, preapprovals constitute lender promises to provide the borrower with the necessary funds to purchase a home, contingent upon the nature and value of the home. In order to be preapproved, your lender will need to assess your credit score and you will need to provide documentation to prove a stable income and steady employment record.
Once preapproved, you do not need to worry about the uncertainty of the mortgage, as you have the lender’s guarantee. Before searching for a home, be sure to apply for preapproval.
8. Evaluate your financial situation again.
After you have dealt with a lender and received preapproval, you should reevaluate your finances from a different perspective. Essentially, borrowers should evaluate their financial standing according to two ratios which lenders consider: loan-to-value ratio (LTV) and debt-to-income ratio (DTI).
A borrower’s LTV is simply the amount of the mortgage weighed against the value of the home which he or she is purchasing. If the home is worth $300,000 and a borrower has secured a loan for $225,000, the borrower’s loan-to-value ratio is 75 percent; literally, the amount of the loan comprises 75 percent of the home’s value. When securing a loan, lenders prefer issuing loans to borrowers with lower LTV ratios, as borrowers with a low LTV ratio assume more risk upon themselves rather than the lender. While many first time homebuyers will not have the cash reserves in order to pay a substantial down payment and achieve a low LTV, borrowers should be aware of their LTV ratio for future mortgage insurance considerations.
The second ratio, your DTI, is merely a comparison of your monthly debt, including car payments, utilities, student loan payments, future mortgage payments and other recurring charges, versus your gross monthly income. When securing a mortgage loan, borrowers should have a DTI ratio of 33 percent or less.
9. Anticipate the closing costs.
As early as possible in the lending process, request a Good Faith Estimate (GFE) from your lender. This document will list and explain all fees and costs connected with the mortgage acquisition, providing an accurate estimate of the closing costs. Many first time buyers can be caught off guard by the cost of closing on their mortgages, however, with a GFE you will know the upfront costs of closing and be able to plan accordingly.
10. Secure a down payment.
For many first time homebuyers, this step can be the most problematic, as many do not have a large sum of money in savings to put forth toward a down payment. For instance, conventional loans require a down payment of at least 20 percent for borrowers hoping to avoid expensive private mortgage insurance (PMI) premiums. On a home valued at $300,000, a conventional loan would require a down payment of $60,000, well outside of many borrowers’ affordable range. However, other options are available.
FHA mortgages, for example, require a minimum down payment of only 3.5 percent in the majority of cases. With 96.5 percent financing, these loans are tremendously popular among first time homebuyers.
When funding a down payment, borrowers can also receive funds from friends or family as gift money to be applied toward the down payment price. Additionally, some lenders may be willing to provide lower down payment requirements in exchange for higher interest rates on the mortgage. Before making a final decision, determine and consider all of your available options.
If you follow each of these simple steps, you will be ready to purchase your first home with minimal stress. Refer to this checklist as often as necessary to help you get through the home purchase process as a first time homebuyer.
Courtesy of lender411.com- 9/25/12