The earlier you can begin planning when buying a home, the better.
The earlier you can begin planning when buying a home, the better. Before purchase, improving your financial situation will increase your budgeting potential and mortgage options.
However, even if you're prepared to purchase right away, you can take steps to facilitate the home buying process. Let’s look at how you can get ready!
STILL IN THE EARLY STAGES? START PREPARING NOW.
Check your credit
An important step to starting the mortgage process is checking your credit report. This will tell you how much of a loan you can qualify for, how much you’ll pay in interest, and may even identify errors within your report. Knowing your credit report helps determine what’s possible when it comes to purchasing your next property.
Lower your DTI
Your debt-to-income ratio (DTI) reveals how much of your gross monthly income is used to make the minimum payments on your debt. To determine how much of a mortgage payment you could afford, mortgage lenders use DTI. The lower the number, the more options will be available to you!
Monthly Minimum Payments ÷ Gross Monthly Income = DTI (Debt-to-Income)
Gross Monthly Income $7000
Minimum monthly payments sample
Car # 1 $500
Student Loan # 1 $200
Student Loan # 2 $75
Credit Card # 1 $225
Credit Card # 2 $75
Credit Card # 3 $25
New Proposed house payment $1700
Monthly minimum payments $2900
Save for a down payment
Buying a home is one of the most important financial decisions you'll make for the first time or again. The size of your down payment will significantly affect your loan amount, monthly payments, building equity, and leaving a good impression on lenders.
For today’s most widely-used mortgage programs, down payment requirements are:
- Conventional Loan (with PMI): 3% minimum
- Conventional Loan (without PMI): 20% minimum
- FHA Loans are guaranteed by the Federal Housing Administration and require as little as 3.5% down
- VA Loans are backed by the Department of Veterans Affairs and have no down payment requirements. VA loans are designed for active military, veterans, and some surviving spouses
- USDA Loans are guaranteed by the U.S. Department of Agriculture and require nothing. However, USDA loans are devised for home buyers in suburban and rural areas who meet income limits and other eligibility criteria
- Fannie Mae HomeReady Loan: 3% down minimum
- Freddie Mac Home Possible: 3% down minimum
- Jumbo Loan: typically 10% down, depending on the lender
These requirements may also vary by lender and a home buyer’s financial situation.
Determine Your Budget
To figure out 'how much house I can afford', a general rule of thumb is using the 28% / 36% rule, which states that you shouldn't spend more than 28% of your gross monthly income on home-related costs and 36% on total debts, including your mortgage, credit cards, and other loans like auto and student.
ALREADY HOUSE HUNTING? STAY PREPARED.
Research loan programs
At 1st Securities, we will discuss different types of mortgages with you, but you can still, do your own research before meeting with one of our loan officers. Shop around – Before you qualify based on your income and credit, do some research on the various loan programs available to you. No one size fits all mortgage – Each person's financial situation is unique and may require a custom-fit mortgage. We'll find the right loan program for you. We're here to help – Along the way, we'll assist you every step of the way. Because buying a home is an exciting but sometimes stressful time!
Get pre-qualified and/or pre-approved
A mortgage pre-qualification and pre-approval can speed up your home buying process. Although the two steps appear to be similar, there are a few distinctions.
A loan pre-qualification allows you to get some information about your home buying ability, with a focus on your income and debt. A loan pre-approval goes further, in that the lender will confirm the property price, your down payment and your total financing amount. If you choose to proceed with a property deal, you will be ready to close once your offer is accepted.
Find a real estate agent
Buying a home can be a complicated and intimidating process, so you'll want a professional to answer questions and look out for your best interests.
Asking friends and colleagues for referrals to find prospective agents is a good way to start. Look up the agents’ websites and online profiles, read about their specialties, experience, and check out customer reviews.
Be ready to make an earnest money deposit
Make sure you have enough cash on hand for the earnest money deposit. When you find a property, you must include an earnest money check with your offer. This is a deposit that says, "I'm a serious buyer."
If you find a home you like and get a good deal on it, it might be tempting to quickly write up an offer and send it off with only a token amount of earnest money. But that could cost you, since your biggest negotiating chip with sellers is your ability to walk away from the home if they don't give you what you want. If your offer has little or no earnest money deposit, sellers may assume you're not serious about buying their home, and could lose interest in selling it to you.