The mortgage process can be intimidating, and if you’re a first time homebuyer, you might be apprehensive about where to start. The Consumer Financial Protection Bureau (CFPB) has numerous tools to help you navigate the entire home purchase process and obtaining a mortgage loan. Use the CFPB roadmap to explore the tools the bureau has to offer.
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You may want to familiarize yourself with the variety of loan options available, such as fixed-rate conventional, adjustable-rate mortgages (ARMs), FHA, VA, and USDA loans. You can explore different loan and rate options with the CFPB calculator and factor in credit score, state average rates, house price, down payment, rate type, loan term and loan type. Run some preliminary numbers, and you’ll gain insight into the costs of a mortgage loan and whether it’s the best time for you to purchase a home.
Buying a home is a huge decision, and the options and potential pitfalls should be carefully analyzed before you decide to purchase. Many first time homebuyers get caught up in the desire to own a home, but if the numbers don’t fall in line, you could find yourself in a credit crunch. If you fall behind or default on a mortgage loan, it can have a lasting impact on your credit score for years. Most adverse credit reporting will remain on a credit bureau report for seven years.
A mortgage pre-approval is commonly the first order of business for any first time buyer. Many realtors request a pre-approval letter before they’ll show you a single home. The main reason for a pre-approval letter is to show proof that you can afford to buy the properties you tour. A lender will only issue a pre-approval letter if it feels confident that you can afford the loan monthly payments.
To obtain a pre-approval, submit a preliminary application to your lender. Your lender will evaluate your financial situation by running a credit report, verifying income and your ability to make a down payment. Once you have found your property, the lender will evaluate the property and ensure the home is sufficient collateral.
- Credit score: The lender will check your credit report. You may want to pull your report beforehand at www.annualcreditreport.com. Clean up any credit report errors and collections if possible. The better your score, the better your credit terms. Most lenders look for a minimum credit score of 640, so if you’re on the low side, you might want to wait and work on improving that score first.
- Monthly debt: The lender will determine your monthly debt obligations, add up all your monthly loan payments including credit cards and deferred student loan debt and calculate your debt-to-income ratio. Lenders look for DTI Ratios under 43% and will sometimes evaluate higher figures, but the interest rate might be significantly higher.
(DTI) = (Total Monthly Debt Payment + Mortgage Loan Principal & Interest Payment + Home Taxes & Insurance monthly figure) / Monthly Income *100.
- Income: Be prepared to bring your most recent paycheck stubs and last year’s W-2. Self-employed borrowers need to bring the last two years of tax returns.
The pre-approval process will help you get an idea of how much a lender might loan you, at what rate, and what the terms and payment options look like.
Once you determine your ideal price range, you can start shopping, but stick to your price range. If you find that the homes in your price range aren’t what you were hoping for, you might need to save additional funds for a larger down payment.
Always keep home costs in mind. There are more expenses to owning a home than just the mortgage payment. When evaluating your budget, be sure to consider taxes and insurance. You may need to consider the cost of utilities as well. If you’re accustomed to paying electricity on a small one-bedroom apartment, the transition to larger square footage might come with a higher electric bill.
Lastly, consider home repairs. Note any high-dollar repairs and whether you can afford them in addition to all of your other home expenses.
A pre-approval is no obligation, and you are not required to follow through with the loan. The pre-approval helps you evaluate your financial condition and narrow your shopping search. Schedule an appointment with a lender of your choice or apply online. Once you get your pre-approval letter, find a realtor in your area and start shopping for your new home.
Frequently Asked Questions
1) Q: How do I get pre-approved?
First, you need to fill out an application and submit it to the lender of your choice. For the application you need 2 previous years of tax returns including your W-2’s, your pay stub for past month, 2 months worth of bank statements and the lender will run your credit report. Once the application is submitted and processed it takes anywhere from 2-7 days to be approved or denied. Check out our top lenders and lock in your rate today!
2) Q: How much interest will I pay?
Interest that you will pay is based on the interest rate that you received at the time of loan origination, how much you borrowed and the term of the loan. If you borrow $208,800 at 3.62% then over the course of a 30-year loan you will pay $133,793.14 in interest, assuming you make the monthly payment of $951.65. For a purchase mortgage rate get a quote here. If you are looking to refinance you can get started quickly here.
3) Q: How much should I save for a down payment?
Most lenders will recommend that you save at least 20% of the cost of the home for a down payment. It is wise to save at least 20% because the more you put down, the lower your monthly payment will be and ultimately you will save on interest costs as well. In the event that you are unable to save 20% there are several home buyer programs and assistance, especially for first time buyers. Check out the lenders that specialize in making the home buying experience a breeze.