Ready to purchase your first home? Follow these seven essential steps to ensure you not only secure a mortgage but find the perfect fit for your situation.
For many, purchasing a home represents the largest financial decision they’ll ever make. Most buyers rely on mortgage loans, which allow for property acquisition while offering tax-deductible interest.
If you’re on the hunt for a new residence, particularly as a first-time buyer, it’s crucial to understand mortgage financing so you’re prepared. Here’s what you need to know.
Start with Research
Prior to house hunting, assess your credit standing and prepare for discussions with a lender, advises a mortgage broker from California.
Begin by collecting tax documents, pay stubs, and additional paperwork showing your income for the past two years. You’ll also need proof of accessible assets, cash reserves, and your credit history. This may include statements from bank and investment accounts.
If you’re unsure of your credit score, request a complimentary credit report from one of the three major agencies. You can obtain this once a year without impacting your credit score. If you find inaccuracies, correct them before proceeding.
As you compile your details, remember what lenders are seeking. A financial expert notes the following criteria:
- A minimum credit score of 700.
- Clarifications for any late payments in the last two years.
- Credit card balances maintained at 30% or less of the limit.
- A stable work history and income.
- Reliable banking history and collateral such as accounts or policies.
- A debt-to-income ratio of 36% or less; ideally 28%, plus a down payment ranging from 3% to 5%.
Select the Right Loan Consultant and Lender
Before speaking with a real estate agent, consult with a loan expert, suggests a home loan consultant from California. “Don’t waste an agent’s time if you might not qualify for a loan,” she emphasizes.
Choose your lender wisely. Instead of simply opting for a recommended name, interview potential lenders. “Ask questions and trust your intuition,” she recommends. “Look for a loan consultant who will guide you through the entire process.”
To find a lender, consider your own bank, check mortgage rates on Bankrate.com, or use the “Find a Lending Integrity Professional” tool from the Association of Mortgage Professionals.
Avoid Marketing Traps
Many lenders promote appealing deals, but significant savings are rarely found in such tactics, warns the author of “The Loan Guide: How to Get the Best Possible Mortgage.” “Offers like ‘No points!’ or ‘We cover closing costs!’ often come with hidden costs in the interest rate,” he explains.
If you plan to sell in a short time, such promotions might be beneficial. However, over the long run, paying your own closing costs for a lower interest rate could save you more. He suggests contacting the “no cost” lender to compare rates if you paid the costs upfront.
Some lenders also claim to pay mortgage insurance, yet that typically means a higher interest rate. “The increased rate persists indefinitely, while mortgage insurance may only last two years,” he clarifies. “Ask them to compare plans with and without mortgage insurance to see the total costs over time, such as seven years.”
Get Prequalified
Once you've found a lender you're comfortable with, getting prequalified is a smart next step. This process involves discussing loan requirements and confirming if you meet the minimum down payment, employment, and income criteria.
Prequalification generally doesn’t require a credit check. “In most cases, an underwriter will assess your information and issue a Conditional Loan Approval,” she explains. The next phase is formal pre-approval, where a loan application and credit report are submitted along with income and asset documentation.
Be Aware of All Costs
Your down payment isn’t your only initial expense. “While lenders provide a good faith estimate of closing costs, it won’t cover all fees incurred,” she notes.
For example, the title company, which ensures no one else claims rights to the property, establishes its own fees, as do home inspectors and homeowners’ associations if applicable.
In some scenarios, you can include these fees in your loan or negotiate with the seller to cover some. According to the financial expert, consider these fees:
- Appraisal
- Credit report
- Title
- Loan points (1% of the loan for a lower interest rate)
- Escrow (typically $2 per $1,000 of the purchase price plus $250)
- Homeowners insurance
- Property taxes
- Recorder fees (paid to government for recording the property sale)
- Notary fees
Make Smart Choices
As you search for your new home, stay within your budget. Mortgage payments should ideally not exceed 28% of your monthly earnings, although a smaller percentage is preferable.
While selecting your property, view it not just as a residence, but as a valuable investment, advises a managing partner of a luxury real estate firm. “Real estate can protect against inflation, but ensure the area will remain appealing long-term.”
Besides the home, carefully choose your mortgage type. Avoid risky options like interest-only loans (which leave you with the full principal when the term ends) or adjustable-rate mortgages (which can see rates surge after the initial period).
Avoid Major Changes Before Closing
If you’ve been pre-approved for a loan, refrain from making significant changes, such as job switches, until after closing. Doing so may render your employment and income data inaccurate, jeopardizing your approval.
“Once the deal is finalized, you’re free to make changes,” says a branch manager at a mortgage company. “But until then, maintain your job as lenders verify employment right up to closing.”
Avoid taking on new credit accounts during this time, like purchasing a new car or moving credit card balances. “Any changes can impact your credit score and liabilities, affecting your pre-approval status,” the loan consultant warns.
