Not planning ahead can be very expensive at best and prevent you from buying a home at worst. The process too many home buyers go through to make their first home purchase often looks like this. One day, either out of necessity or just the desire to own a home, Bob (the prospective home buyer) contacts a real estate agent to help him buy a house. Because a good agent won’t start showing houses to someone who isn’t pre-approved, they refer them to their preferred lender. The lender is either tasked with breaking the good news to the aspiring home buyer that luckily they do qualify, or because of a lack of planning, they are told they unfortunately do not qualify. In many cases the home buyer may qualify but have sticker shock when they realize how expensive home buying can be. New home buyers often have unrealistic expectations regarding the size/type of home they want to buy only to discover it is financially out of reach. A little advance preparation can take all the guesswork out of buying a home and put you in the best position to own the home of your dreams – all while ensuring it costs as little possible.
Here are some of the specific benefits of preparing for your home purchase in advance.
Lower monthly principal and interest payment. Generally speaking, the higher your credit score the lower your interest rate will be. The lower your interest rate the lower your monthly payment will bet. Seemingly small increases in your interest rate can compound over time and cost you a lot of money.
Lower monthly mortgage insurance. By not overextending yourself with lines of credit (Don’t max out those credit cards!) you keep your debt-to-income ratio low. Your debt-to-income ratio is both a qualifying factor (If it is too high you will not qualify) and it is also one of the factors used to determine how expensive your monthly mortgage insurance payment will be. Keeping your DTI below 45% will significantly lower how much mortgage insurance you pay monthly. Another way to lower your monthly mortgage insurance premium is to bring a larger down payment to closing. More below…
Eliminating monthly mortgage insurance. The higher down payment amount you can save the closer you are to the magic loan-to-value ratio of 80%. For most home buyers the ideal loan program is a Conventional mortgage (I’m setting aside the exemptions to this rule for another discussion). The reason it is ideal is that you are not required to pay mortgage insurance if you borrower no more than 80% of the home’s appraised value. Because mortgage insurance can cost hundreds of dollars per month you can see why having a 20% or higher down payment is optimal.
No delay buying a home. Because building credit takes time, years in fact, you want to have taken the necessary steps in advance so there is no delay when you decide to buy a home. Some of these steps should include having a minimum of three tradelines (Tradelines are lines of credit such as credit cards, automobile loans, etc) you can use to build a credit history. Remember to keep those credit card balances at 30% or below your available limit.
Qualifying for the home you really want. A little advance preparation will put you in the best financial position possible so you can purchase the home you really want vs having to settle for one you can “afford”.
So, what steps should a first-time home buyer take to put themselves in the best position possible to buy a house? The first thing you should do is contact a lender who is education focused. At this point you are not trying to close on a home but explore your options. The lender will explain the different loan programs available to you as well as provide some guidance on which one(s) might be best in your situation. The lender should pull your credit at this time and discuss potential actions you can take to improve your score. It is quite common to find mistakes on your credit report that you can take steps to remove. If your credit situation is in dire straits you might want to contact a credit repair company to assist in cleaning up your credit so you can qualify for a mortgage.
Another piece of information the lender can provide you with is a rough idea of how much money you need to have on hand both for a down payment as well as to cover your closing costs. This information will give you a clear target to shoot for and will keep you from scrambling at the last minute for funds to close your loan. One other thing home buyers always ask me is what will my monthly payment be at… (fill in the blank) loan amount. Obviously, for budgeting reasons, knowing how much of a monthly payment you can afford is important to find out.
How far in advance should you start planning? The answer to this question will depend on each borrower’s unique financial situation. Because preparing in advance can include, but does not necessarily require, saving for a down payment and closing costs, this question is difficult to answer. Because building and repairing credit takes time a bare minimum of 12 months is recommended, though I would suggest two years if possible. Really, the longer you can begin planning and saving the better. No matter what your situation, what you do not want to do is wait and just hope you qualify. Act now, you might be surprised to find you are in a better position that you thought.
I hope this brief article has been informative. Do not wait until the last minute to start planning your home purchase. If you want to start the process today feel free to give me a call at, 404-955-1253. You can email me at, bhanks@mortgageright.com. If you want to go ahead and start the application process you can follow my link, http://www.hankshomeloans.com, to fill out our online mortgage application.
0 comments:
Post a Comment