A successful home buying experience is all about getting the details right from start to finish. Like any big project, having your research done before starting can make a difference in the long run!
Read on for the first-time home buyer tips you need to help navigate the process, save money, and close the deal.
1. Perform a Credit Checkup
Before applying, give your credit health a checkup. Verify there are no errors on your report or recent derogatory items like late payments. You can get free copies of your credit report from each of the three credit bureaus, Experian, Equifax, and TransUnion. Avoid applying for new credit in the few months leading up to your mortgage application.
Good credit history is reflective of a strong credit score which qualifies you for the most competitive mortgage loan rates. Continue to pay all your bills on time, and keep credit card balances as low as possible. Don’t close any active cards as this can reduce your available credit which can lower your overall score.
2. Get Pre-Approved
If you want the most accurate picture of what you can qualify for as a first-time home buyer, get a pre-approval letter. Since pre-approvals require documentation, they’re typically the best indicator of whether you’ll qualify for a home loan or not and for how much.
Getting pre-approved could help you stand out from other buyers. If multiple offers are on the table, sellers will often choose a pre-approved buyer. This indicates you’re more likely to be approved for financing (and ultimately follow through with the deal).
3. Stick to Your Budget
Mortgage lenders calculate your current debt based on how much money you make. This is known as your debt-to-income (DTI) ratio. The most important ratio referenced by most lenders is your front-end and back-end ratios.
Your front-end ratio is calculated by taking your proposed housing expense divided by your gross, pre-tax income. Keeping this percentage right around 28% is the most competitive, offering you the best options as a homebuyer.
The back-end ratio involves all your current loan payments – including housing expenses and monthly debts (but not utilities or other living expenses) divided by your gross monthly income. Keeping this number near 36% ensures you won’t be stretching limits by buying a new home.
4. Know Your Mortgage Options
There are many types of mortgage loans available so take the time to dig into your options. Remember to find what works best for your situation. Get in the know by taking a look at some of the most popular options:
These loans are your match if you have a strong credit history, stable employment history, minimal debt, and enough funds to put down at least 3%. They’re used to finance most properties including primary residences, vacation homes, or investment properties.
Due to being well qualified, your overall borrowing costs tend to be lower than other types of mortgages, even if interest rates are slightly higher.
The U.S. government isn’t a mortgage lender, but it does play a role in helping more Americans become homeowners. These loans are protected by mortgage insurance making it easier to offer more flexibility for qualifying.
Some examples of government-backed loans include the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans), and the U.S. Department of Veterans Affairs (VA loans). These loans typically have lower down payments and more flexibility in the qualification process.
Curious about how various mortgage loans compare? Click here!
5. Understand Loan-To-Value (LTV) Ratio
A loan-to-value ratio, or LTV ratio, is a key factor in determining your ability to qualify for a mortgage and how much home you can afford.
The LTV ratio represents the amount of your mortgage divided by the value of the home you’re planning to buy. This is important because lenders want to be confident in the fact you’ll be able to fully repay the loan.
This ratio is the most limiting factor on the price of a home you can purchase.
6. Consider the Importance of a Down Payment
This is how much you expect to put down or contribute to the purchase of your home. Whatever you don’t put down will likely have to be financed. Your down payment plays a big part in determining how much home you can afford.
The more money you put down, the more home you can afford to buy. If you don’t have a lot of money saved, you could still get a mortgage with little-to-no money down; it would just decrease the amount of house you could afford.
You can use money from savings, investments, or other sources to make up your down payment. At Baton Rouge Telco, we offer first-time home buyers a promotion of no Private Mortgage Insurance (PMI) with a 10% down payment instead of the traditional 20%.
7. Pay Attention to Interest Rates
Think of interest as the price you pay for using someone else’s money until you pay it back. More specifically, your mortgage rate is what it costs each year to borrow the money shown as a percentage.
Generally, the amount of interest you pay every month is added to the amount still owed on a loan, also known as the principal in which you repay monthly. Fixed interest rates stay the same for the entire length of your mortgage loan. This offers a predictable payment each month and makes budgeting easier.
An adjustable-rate mortgage (ARM) uses a rate that varies based upon the market. Therefore, the monthly payment may change over time as your interest rate increases or decreases along with market trends.
First-Time Home Buyer Tips Arm You With Buying Power
We understand qualifying for a mortgage is a unique process as it looks different for everyone. Our team is ready to help you throughout every phase of your home buying journey.
Keep these first-time home buyer tips handy as you start your search and click below to learn about a common fee you may find on your next mortgage.