By Todd Nankivel, Senior Mortgage Loan Officer
Buying a home is one of the biggest life decisions you’ll ever make, and while the thought of preparing finances for homeownership can seem overwhelming, five easy steps can help simplify the mortgage loan process.
Once you become interested in purchasing a home, it’s important to check your credit history. Consider generating a free credit report from one of the three credit reporting bureaus (Experian, TransUnion and Equifax).
Improving your credit score can help increase your chances of being approved for a mortgage loan. The higher your score, the more likely you are to obtain a larger loan with a lower interest rate. If you need to boost your credit score, be sure to do the following:
If you have a bad credit score – or no credit history at all – qualifying for a mortgage could be a challenge. A simple way to start building credit is to open a first credit card and keep it paid off. It will feel great to watch your credit score go up!
When thinking about financial planning for a home, remember that less debt usually means more purchasing power. That’s why lowering your debt-to-income (DTI) ratio is so important. DTI measures your outstanding debt as a percentage of your income before taxes.
In other words, it’s a way for a lender to evaluate your ability to repay your mortgage. Calculate your DTI by adding up your monthly debt payments (including your estimated mortgage, appraisal and closing costs) and dividing that number by your income each month (before taxes and other deductions). The smaller the down payment, the larger the mortgage loan and interest rate.
Typically, lenders prefer a DTI ratio that’s no higher than 43%. To improve your DTI ratio, consider paying off as much debt as possible before applying for a mortgage loan. This includes debt stemming from credit cards, auto loans, student loans, etc.
Similar to when you make other sizeable purchases, it’s important to ask, “Can I afford it?” Consider talking to a helpful mortgage lender to get a feel for your price options and obtain a pre-approval letter.
From there, glance at the real estate market to see what options are available in your determined price range, as well as what your down payment could be. Check out this helpful mortgage payment calculator.
The more cash you can put down on your new home, the less your monthly payments will be. For down payments, bigger is better in terms of saving money overall. The minimum down payment ranges from 3% to 5%, depending on the type of loan. Your lender will ask for copies of your bank statements to confirm you have enough money for a down payment.
Additionally, if you put less than 20% down, you face an increased chance of having to pay private mortgage insurance (PMI), which adds to your monthly payments. (PMI protects lenders in the event borrowers can’t pay money back.)
If you’re a veteran or active-duty service member, consider reaching out to a lender who’s known for helping military members, especially when it comes to offering special VA loans.