Applying for a mortgage and purchasing your home is an exciting time. You can make the process of buying your first home more accessible by being prepared and absorbing as much as you can ahead of time. Here we will let you know the three things that first-time mortgage applicants need to know.
Before buying a home, you need to decide who you will use for the homebuying process. There are different options for obtaining a mortgage, and you can use a bank or a mortgage company.
Difference Between a Bank and Mortgage Company
Banks are federally chartered financial institutions. They offer mortgage loans, along with other banking products, such as checking and savings accounts. Many banks also offer investment and insurance products. Mortgages are one aspect of a bank’s business. Banks only being able to offer their products is the main difference between them and a mortgage company. Mortgage brokers have licensed mortgage specialists who have access to multiple lenders and mortgage rates. Mortgage brokers can negotiate lower rates for you, whereas banks can only offer their products. Depending on your financial needs, a private lending company may be a better fit than a traditional bank.
Here are three things you need to know as a first-time mortgage applicant:
Know Your Budget
Sometimes first-time mortgage applicants do not qualify on their first try, so it is essential to know how big a loan you can realistically afford. Lenders will figure this out by reviewing your debt-to-income ratio, which is the percentage of your income you are spending each month to pay debts.
Lenders typically have two separate rules about their debt-to-income ratio. It is more favorable if you do not spend more than 28% of your income on your mortgage payment, and your mortgage plus other debts should not eat up more than 36% of your income. Improve your budget by:
Improving your debt-to-income ratio – when applying for a mortgage, and you are told you will not qualify for a sizeable enough loan to afford a home in your area, you can take steps to improve your debt-to-income ratio. These can include increasing your income and reducing your debts. Pay down your debts, such as student loans, credit cars, or auto loans.
Save Up for a Down Payment – If you have no other debts to pay off, and can’t increase your income, the best way to qualify for a larger loan is to shrink the size of the loan you need. The easiest way to do this is by saving a more significant down payment. If you can succeed in saving a down payment of at least 20%, you won’t need private mortgage insurance, which helps lower your monthly mortgage payments.
Improve Your Credit Score – When applying for a mortgage having a good credit score is a huge advantage. A good credit score allows you to qualify for better interest rates, which helps save you a large amount of money over the life of your mortgage loan. If your credit score is not the best, there are ways to boost it. First, paying off debts and paying bills on time help your credit score the most. Also, avoid opening new accounts while keeping your old accounts active.
Know Your Loan Options
Before looking for a mortgage, you need to learn about the different loan options available and what they have to offer. Here are some things you need to know.
- The difference between a fixed-rate and adjustable-rate
- Special programs for first-time homebuyers in your area
- Factors that affect the interest rate, such as loan terms
- Types of dues you may need to pay on your home loan.
Along with finding the right loan, you need to find the right lender. Once you know the home loan you want, it’s time to find the lender. Look for these three things in a mortgage lender:
- An excellent understanding of the mortgage business. The lender should know the different loan options you’ve research and any special rules that apply in the area you are looked to live in.
- An excellent overall reputation
- An excellent deal. You are looking for more than the interest rate, and your mortgage lender should look at a combination of interest rates, fees, and points to give the most bang for your buck.
- Get Your Paperwork in Order
When you have decided on the loan and lender, the last thing you need to do is get all the documents required to apply for a mortgage. Be prepared for your meeting by asking your broker what to bring. Typically, most lenders will need to see pay stubs from the past month, a few month’s worths of bank statements, and your tax return from the past year. Other documents that might be required could include loan or credit card statements and proof of assets, such as investments or retirement funds.
There can never be a guarantee in the mortgage application process, but being prepared ahead of time can make the experience more accessible.