10 Things To Do Before Buying a Home
Get Your Credit Report
This tops the list, because you need to know where you currently stand. Fortunatley, credit reporting agencies must give a
free copy of your credit report once every 12 months, by request. To get a free copy of your credit report from any or a three
major agencies (Experian, TransUnion, and Equifax), go to www.annualcreditreport.com
After you get the report, review it for errors and then take steps to correct any mistakes or outdated information and add positive information. (Remember, this isn't just a case of wanting a lender to give a "thumbs up" rather than "thumbs down" on your loan -- lenders use your credit report to determine whether you should be charged a higher interest rate, too.)
Know Your Score
It’s also a good idea to find out your credit score before you shop for a mortgage. Your credit score is a numerical calculation that is designed to indicate your creditworthiness. While there are different types of credit scores (FICO, VantageScore), creditors often look at the FICO score. A basic FICO score ranges from 300 to 850. The closer your score is to 850, the better you’ll look in the eyes of the lender.
Your FICO score, however, isn't free. You can pay to find out your FICO scores at www.myfico.com/default.aspx. You can also contact Experian, Equifax, and TransUnion, but these companies may not give you the actual credit score that creditors will use to evaluate you. Instead, they'll sell you an “educational” score. Also, your lender may use a different FICO score than the versions you receive from FICO's website remember, there a lots of different types of FICO scores, or another type of credit score altogether. Still, you’ll get an idea of where you fall in terms of credit risk if you get your scores from FICO or from the credit reporting agencies.
Gather Your Financial Documentation
When you apply for a mortgage loan, you’ll be required to provide the lender with financial and employment documentation, as well as information about your assets and liabilities. You’ll need to provide pay stubs, bank statements, a government issued ID, and tax returns, among other things. Getting this information together ahead of time will give you a better understanding about your own finances, and the process will move ahead much more quickly when you eventually apply for a loan.
Learn the types of mortgages
It's worth getting educated about the different types of mortgages (such as conventional, FHA, VA, and others) that are available before you start shopping for a loan. Let our team educate you on these loans and find out which loan best fits your needs. A conventional home loan is not insured or guaranteed by the federal government, while FHA and VA loans are government backed.
Know what loan product works for you
If you select a fixed-rate mortgage, the amount you’ll pay in total for principal and interest remains the same over the entire mortgage term, because the interest rate stays the same. Although you slowly pay off the principal, your monthly payment will normally be set at the same amount each month, based on a mathematical process called "amortization." This payment could go up, however, if there is an increase in your property taxes or homeowners' insurance, and those items are escrowed and paid as part of your mortgage payment.
With an adjustable rate mortgage (ARM), the rate will change from time to time based on the interest rates in the economy. Your monthly payment will increase if rates go up and go down if rates fall.
Determine the mortgage term
A mortgage term (that is, how long it takes to pay off the loan) is typically 15 or 30 years, though it could vary. If you take out a 15-year mortgage, you’ll pay off the loan much quicker (half the time) as with a 30-year loan, but the monthly payment is higher. The advantage to choosing a 15-year mortgage is that you will save thousands of dollars in interest, but the higher monthly payment is not affordable for many borrowers.
Understand your housing debt-to-income ratio
Mortgage lenders often look at debt-to-income ratios to qualify you for a mortgage. A housing debt-to-income ratio (also called a front-end ratio) is the percentage of your gross (pre-tax) monthly income that goes towards a mortgage payment. According to many lenders, your housing payment should not exceed about 28% of your gross monthly income.
Understand your total debt-to-income ratio
The total debt-to-income ratio (called a back-end ratio) is a comparison of all your debts (such as monthly mortgage payments, car payments, credit card payments, and student loan payments) to your income. A high debt ratio indicates that your monthly expenses might be getting unmanageable. Most mortgage lenders prefer that your back-end ratio not exceed around 36% of your gross (pre-tax) monthly income.
Don’t apply for new credit around the time you’re trying to get a mortgage or during the loan process
It’s not a good idea to try to get other credit (such as a new car loan or a new credit card) around the same time you’re taking out a mortgage. This is because the lender may consider you to be a greater credit risk if you apply for additional credit at this time. It will best case scenario lower your credit score however if it might deny the ability to obtain a loan.
