For many people, making the decision to buy a home is exciting and means starting a new chapter in life. But preparing to take on a mortgage requires thought, preparation, and the right people around you to help the process along. As a loan officer, I see prospective homebuyers each day who are in the first steps of becoming home-owners. Some are fully prepared to dive into the home-buying process; others don’t have a clue – and that’s normal. No matter which group you fall into, if you know a few key tips before signing your closing paperwork, you can avoid some of that stress.
Being financially prepared is the biggest and most important part of the home-buying process. You should first figure out how much house you can afford. A lot of variables go into figuring this out, but you can pinpoint these numbers to start: your yearly income, monthly debts, and existing savings. Your savings will help you understand what you can use for a down payment on the home (if required, but we’ll get to that later). Your yearly income minus your debt helps you understand what is actually available to pay off a mortgage each month. Once you have a big picture of your finances, you can better understand just how much you are able to put toward your dream home.
Credit score is also a point of concern. Different loan programs have interest rate breaks at different credit score numbers. Thus, the better your score, the lower the interest rate you might have. Generally speaking, your credit score should be 640 or above to qualify for a home loan, but loans do vary.
Working with a trusted lender can make the entire process much easier. An educated lender will update you along the way so you feel involved, but not bogged down by paperwork or stuck keeping track of documents and important dates. He or she can guide you through the prep work required in obtaining a mortgage, and they should. In the beginning stages, gathering vital documents is crucial so you can achieve pre-approval status before even looking for a home. Pre-approval means you are already approved by your lender for a loan; this proves to sellers you’re a serious buyer and sets you up for success. For pre-approval, you’ll need to have a photo ID and gather the following documents from the past two years: W2 forms, 1099 forms, pay documents, bank statements, and federal tax returns. If applicable, you should also gather a record of military orders, DD214, child support orders, and your divorce decree.
Once you’re pre-approved, you can get serious about the loan that works best for you. The four main loan types are FHA, conventional, USDA, and VA loans. Most homebuyers use conventional loans. This loan program has a minimum down payment of 5 percent, so it’s the best fit for financially prepared buyers who are interested in putting that amount or more down. Without at least a 20 percent down payment, though, this loan requires private mortgage insurance (PMI) – an additional fee on top of your mortgage payment – which is something not all buyers realize. Because most buyers want to avoid PMI costs, they opt for that 20 percent down.
If 20 percent down on your mortgage sounds like a hefty chunk of change, you might want to consider other options. If you are a service member or a veteran, that 20 percent down payment could be reduced to nothing, thanks to the VA home loan benefit. A VA loan does not require a down payment, and the credit score minimum is 620. This opens up substantial opportunity for veterans looking to buy.
Still, the FHA and USDA loan programs are out there if you don’t fall into the two aforementioned groups. FHA loans require lower down payments and accept buyers with less-than-perfect credit. USDA loans are good options for buyers who want homes in eligible rural communities. These four loan options ensure a good fit for every type of homebuyer.
Feeling confident in your financial status and being pre-approved for a loan can make house hunting a little less stressful. Knowing the types of loans that exist for you is also helpful. Understanding the preparation involved in buying a home and having a mortgage is a small step in the overall home buying journey, but it’s an important one.