Wednesday, August 17, 2022 / by Ana Baldner
How to prepare for a mortgage
Purchasing a home is a huge financial decision. Whether you're transitioning from renting to purchasing or maybe downsizing, taking on a mortgage can be a confusing process. There are many underlying components that some might not be aware of.
Here are a couple of factors to keep in mind when understanding the financial undertaking of a home.
Have your credit score in order
This might be the most important factor to work on when thinking about purchasing a home. The interest rates you qualify for are based on how good your credit score is. This ends up affecting your down payment, your monthly mortgage and the interest on your home. A lower score will make this purchase a harder undertaking. If you do have a lower credit score, you'll be given a higher interest rate since lenders see you as a higher risk. Having a higher interest rate will make borrowing money for your home even more expensive. Conversely, a high credit score rewards you with a lower interest rate.
The best plan is to work on your credit score before you submit any mortgage applications. Double check your credit report. Look for any inaccuracies that may be affecting your score. These inaccuracies could increase your debt-to income ratio which lenders look at when granting you a mortgage. They want to make sure that your debt isn't too much more than you can afford before adding on yet another payment.
Pay down any existing debt
To increase your chances of getting a desirable interest rate, work on paying down your debt before applying for your mortgage. Your debt-to-income ratio will be a big factor when it comes to your mortgage rates. Lenders will determine if they think you can afford to purchase a home and take on a mortgage.
The snowball method is an effective way to work on eliminating debt. Begin by paying off your debt with the highest interest first and making the minimum payment on others. Work your way down to the debt with the lowest interest rate last. This method saves you the most money and keeps you motivated.
Make sure you have an emergency fund
Having an emergency fund is not commonly talked about, but it is important. There are many unexpected fees that pop up once you enter the homebuying process and even after you are a homeowner. From air conditioning to roof issues or floor replacements. There are many small issues that could pop up and require attention. Make sure you have some money set aside for this if it does happen so that you aren't stressed out with the sudden expenses.
Know your budget
The key is to make sure you know what you can afford and to not go over your limit. Getting pre-approved for a mortgage will give you a better idea of what loan you will qualify for and what your budget looks like in terms of monthly payments. Another thing to keep in mind is your monthly spending outside of your mortgage. Some of those costs may include any car payments, food, healthcare, child related expenses and personal purchases to name a few. Make sure to keep all those factors in mind and choose a budget that you are comfortable with. This may also mean cutting down on expenses that you deem aren't necessary.
Save enough for a down payment, closing costs and fees
The down payment on your home is the chunk of money you will have to save for. This is the portion of the home's value that you pay upfront and is one of the biggest upfront costs you'll have with your purchase. Depending on your loan, you may qualify for an extremely low down payment. However most conventional loans require a down payment of 5% to 20%.
Closing costs are another expense that comes with buying a home and can add up to 2% - 5% of the loan amount to your final price. These costs include things like home inspection fees, title insurance, appraisal fees, underwriting fees, and credit check fees. Be prepared to cover these costs or search for a lender that reduces or waives them.
Overall, it's important to be informed and aware about the entire home buying process and the underlying costs of it all. Prepare early to make sure you can find your perfect home and not have a stressful homebuying experience.
Florida Lifestyle Realty