To bring to reality your dream of buying a home, you’ll have to follow a series of procedures that include working with lenders, real estate agent, and sellers.
From choosing a mortgage to closing a loan, how do you know that you’re ready?
Here are some steps to consider:
• Prepare your credit. Check your credit report. Credit scores have a direct impact on mortgage interest rates. You can still qualify for certain loans if your score is under 680, but might want to aim for a score of 700 or higher to pay the lowest rates.
• Know your goal. A discussion about spending, saving, debt and credit will help you make decisions about what you can afford, how much you need to save and whether you need to work to improve your credit score.
• Get pre-approved for a mortgage. This will tell you how much the lender is going to let you borrow for a home before you start looking at houses.
• Choose the right mortgage. Do you want a 10-year, 20-year or 30-year mortgage? Fixed or adjustable rate? Conventional or government-backed loan? Don’t borrow more than you can handle.
• Research lenders and loan options. Don't automatically assume that the banking institution where you maintain a checking account is the best place to get a loan. Identify a lender who has a wide range of home loan options, including low down payment mortgages, and who is willing to provide you with personalized guidance
• Submit your application. You’ll have to submit your most recent financial information.
- W-2 forms from the past two years
- Pay stubs from the past 30 days
- Federal tax returns from the past two years
- Proof of other sources of income
- Recent bank statements
- Details on long-term debts such as car or student loans
- ID and Social Security number
• Get your down payment ready. Most lenders are looking for a 20% or higher down payment on a conventional loan, but there are options where you can put down much less. If you don’t have money saved for a down payment, create a budget for your monthly spending so you can identify areas where you can save.
• Beware of closing costs. Closing costs include the fees for the services and expenses required to finalize a mortgage. Mortgage closing costs can typically run from 2% to 5% of the loan cost, including property taxes, mortgage insurance, title search fees and more. The most cost-effective way to cover your closing costs is to pay them out-of-pocket as a one-time expense.
• Keep an eye on your overall debt. A good rule of thumb is to keep your overall debt level at or below 36% of gross monthly income.
• Think beyond the down payment. Consider setting aside 1% to 2% of the purchase price of your home each year for maintenance projects. If that is too much, start with a little less and work your way up.
Sources: Realtor.com, Moneyunder30.com, confused.com.