1. Unless you’re planning to pay cash, know mortgage lender requirements
Do you have what it takes to qualify for a home loan? Housing markets are super competitive. That means getting approved for a mortgage has become a harder task. We’ve seen a trend in lenders issuing mortgages to borrowers with stellar credit histories.
Whether you’re applying for a conventional, FHA, VA, or USDA loan, the minimum qualifications will fall somewhere in the ranges below. Make sure you’re well above to boost your chances at qualifying. If you don’t meet these requirements, start taking steps to save more, pay down debt, stabilize or increase your income, and improve your credit score.
Min. down payment: 0% to 3.5%
Income: 12 to 24 months of steady, ongoing income
Credit score: At least 620 for most loans, but sometimes lower
Max Debt-to-income ratio: 36% to 50%
2. What’s your homebuying budget?
Know what you can afford before you set your heart on a particular home or location. Should you stretch your budget for the better home or compromise to leave yourself more financial breathing room? We can’t answer that, but we can do advise you to take your personal risk tolerance and safety net into account.
Being a very substantial commitment, a mortgage should force you to consider not just what payment you can afford today, but what payment you may be able to afford in the future. Things to consider: large expenses associated with maintaining a home and shifts in your personal life that might eat into your budget.
Potential home expenses: A new roof, a new HVAC system, a new coat of exterior paint, or other home improvements.
Potential personal expenses: Childcare, care for elderly parents, changing jobs, and personal health issues.
Create both short- and long-term budgets to evaluate whether you can handle the housing payment (remember to include principal, interest, property taxes, and homeowners insurance).
3. Get and compare offers from multiple lenders
Getting multiple offers can save you big bucks. Small differences in interest rates can add up to thousands of dollars in interest over the life of a loan. And with thousands of mortgage lenders in the United States, there’s no excuse not to shop around.
A lower interest rate also increases your buying power. Shopping around, then, can mean the difference between affording your dream home or losing a bidding war. See how much a 1% difference can make.
4. Get pre-approved
This shows sellers your purchase offer is likely to close. For sellers, accepting an offer means taking their home off the market. If your offer falls through, the seller has to go through the process of listing, showing, and evaluating offers all over again. The delay may affect their moving plans, cost them money, and a lot of headache.
These hassles are largely preventable when you show you’re serious by submitting a pre-approval letter from your lender along with your purchase offer.
5. Avoid the bidding war
Exceeding your homebuying budget can add unnecessary stress to your life for years to come. In a highly competitive market, you can avoid a bidding war by making your highest and best offer right away. If someone beats you with a better offer, you’ll know you could not have done any better.
Keep sight of your long-term goals during the home shopping process. Remember that you want to have money every month to do other things besides pay the mortgage. You don’t want your housing payment to take up all your disposable income.
Also, avoid the temptation to make a more competitive purchase offer by waiving inspection, appraisal, or financing contingencies. If anything goes wrong and you have to back out, you’ll lose your earnest money deposit.
6. Be realistic about closing timelines
Closing late can be costly. The average time to close a purchase loan in February was 53 days, according to ICE Mortgage Technology. Ask your lender how long its home closing process takes. That way you don’t lose money by promising a home seller you can close on a shorter deadline than is realistic.
Also, make sure your mortgage rate lock will be long enough to get you to closing. If your rate lock expires and rates increase, the new, higher payment might mean you no longer qualify for a mortgage.
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