Congratulations on starting your journey to becoming a new homeowner. Homeownership is a dream so many families hope to achieve, but if you’re not prepared it can quickly turn into a real headache of confusing terms, financial uncertainty and legally-binding paperwork. The decisions you make with your lender will impact you throughout the life of your mortgage, so here are a few things to keep in mind to start the process on the right foot.
Determine Your Budget
Spending too much on a monthly payment will leave you unable to afford repairs, furnishings, property taxes, and other costs associated with homeownership. Avoid these pitfalls by using this general lending rule of thumb: Your monthly home payment should be 28% or less of your monthly income. Take into account all of your monthly spending and debts to determine how much you can afford. It’s also helpful to keep in mind other financial goals you might have such as saving for retirement or college savings before finalizing this number. A residential mortgage loan originator (RMLO) can help you with these calculations to determine how much home you can afford and what loan products for which you will qualify.
Know Your Credit Situation
Plain and simple, a better credit score means a better mortgage rate. While lenders can qualify for a loan with a credit score of X [JL2] or above, higher scores will directly help you to qualify for lower monthly payments, better loan terms and even lower upfront payment options. If you think your credit score isn’t where it needs to be, take action to address it. Speak with a home loan expert about ways to improve your score over the next 3-6 months. With proper coaching, it’s not uncommon to see credit scores improve within a matter of weeks. If you’re satisfied with your credit score, it’s wise to stop spending on credit prior to purchasing a home to avoid increasing your debt-to-income [JL3] ratio.
Save for Upfront Costs
Traditionally, borrowers tend to use 20% of the house value as a down payment which provides the best and most mortgage loan options. However, if a full 20% is going to drain your bank account, you might want to consider alternative options. Loans from the Federal Housing Administration (FHA) allow you to place as little as 3.5% down if you meet certain criteria. Military veterans and their families who qualify can enter into a VA Loan with no down payment. Keep in mind though that a down payment less than 20% may require you to purchase private mortgage insurance (PMI), which is an extra fee tacked on to your monthly payment until the 20% is paid. An experienced loan officer can work with you to help find the loan program that works best for your unique situation.
Don’t Forget Closing Costs
Often overlooked when contemplating purchasing a home, closing costs tend to add an additional 2-3 percent of your loan amount to the upfront costs. For example, a $200,000 loan will likely have $5,000 worth of closing costs that must be paid before you receive the keys. This is extra capital needed in addition to your down payment. A good lender will provide a closing cost estimate or fee sheet at the beginning of the mortgage process.
Ask The Questions
Ready to take the next step toward homeownership? We're here to help. Call Rock Mortgage today at 832-230-3067 or begin the process directly on our site. We'll be in touch soon and look forward to working with you!