As we all reach a certain age, we start to set our roots.For most of us that involves buying a home and beginning the cycle of home ownership. The very beginnings of this cycle involves preparing your life, credit, and income for the admittedly costly steps to mortgage pre approval.
Ultimately, it all depends on your current financial situation. If you are an ardent saver of cash, you may be ready to take the plunge with just a few steps and transferring a chunk of money.
If you haven't been stashing away some of your cash to prepare for this day, or if you've had credit issues, you may have to get a little more creative, but it's still possible. Here are your 5 steps to getting into your very own home:
Examine your debt to income ratio
Debt to income ratio is the amount of debt you have compared to the amount of pre tax income you have coming in. This ratio is important because it tells mortgage lenders how you treat the money you are borrowed, and how well you pay back over time. This ratio is a portion of your credit score and only contributes to the overall grade you are given.
This ratio means more to mortgage lenders because it gives them an idea of how much free cash flow you have each month after you pay your current obligations. For example, if you bring in $2,000 per month and you have $1,500 in bills, you only have $500 of free cashflow to put towards a home. Not good.
In the example above you have a debt to income ratio of 75 percent. While this example is extreme, most folks won't have a ratio that high. It just demonstrates why lenders look at that number. When applying for a mortgage try to keep this number below 30 percent for your best chance at approval.
Quick tip: Prepare for your mortgage pre approval by paying down as much debt as you possibly can before walking into a mortgage lender's office. This forward thinking will put you in a better financial position to be preapproved.
Peer into your credit history
The next tip to get you preapproved will be taking a close look at your credit history to determine if there are any hiccups on your financial journey. Missed payments, late payments of 30-60 days or more, unpaid utility bills, judgements, repossessions, and even bankruptcy are all factors lenders will look at to determine your creditworthiness.
The last few that we mentioned would probably disqualify you from mortgage pre approval right away. Don't get disheartened though. With time and making your best possible efforts to repay those debts, you can rebuild your credit stronger than ever.
Our example will be a a student loan payment that was missed over a year ago, but has since been caught up. If your only blemish looks something like this, and it has been corrected, you may be ready for a mortgage.
Stay on top of your credit report, and if you ever fall behind, rectify and pay that bill immediately. The stronger your payment history, the better your future home loan rate will be.
Quick Tip: While you are paying down you debt from the first tip, check your credit for anything that could be negatively viewed by a lender. If you have even one outstanding late bill, that could make your pre approval disappear.
How much can you afford?
Now that we have eliminated unnecessary debt and cleaned our credit report to a glossy shine, we want to look at how much home we can afford to buy. This number is tied to our debt to income ratio, and lenders do not want you saddled with more home than your checking account can handle.
Most lenders will not give you a loan that the payment exceeds 25-30 percent of your gross income each month. This is only a guideline and will not take into account any debt payments you already have. If you have more debt responsibilities, this percentage could go down.
Another thing to consider is this is just the mortgage payment. It doesn't include taxes, interest, or PMI(private mortgage insurance). Those are some factors that you need to consider when determining how much you can afford each month.
Quick tip: Mortgage lenders want you to take the maximum amount of loan dollars that you can afford, but you need to consider what you are comfortable with and plan accordingly. Do not take the full amount of pre approval if you are not comfortable with that payment for 15-30 years.
Cash for the down payment
Whether it is 3.5 percent down on an FHA backed home loan or 20 percent down on a conventional mortgage, you will need to bring cash to the table to get your new home. In your earliest planning stages you should be setting aside as much money as possible, no matter which type of loan you want to acquire.
Rates have been stagnant for many years, but they could go up at any moment. The sooner you decide to go in for a pre approval, you need to have all of your proverbial ducks in a row. That means any cash down that will be needed, should be ready and at your disposal. A lot of new home buyers look for a no money down option, but in most cases lenders frown upon this practice.
No money down loans are difficult to get, because it means you don't have anything backing your word at the start of the mortgage process. Cash is king, and bringing a large sum of money to the table will help any sellers see that you are serious as well.
Quick tip: Beyond the money needed for a down payment, you should have an emergency fund set up for any unwelcome expenses that may come your way. Imagine going in on closing day and that 20 percent down is your entire life savings. This could lead to serious life complications down the road.
Shop for a great rate
Once all of the other steps are taken care of, we start to look for a great rate. This goes hand in hand with all of the other steps, so if you have a clean credit record, low debt to income ratio, and a lot of cash to put down, you will be in line for the best possible rate.
Most mortgage brokers will give you the best possible rate that your situation will allow. They will get you prequalified and preapproved for a loan amount and send you out shopping if you agree to those terms. Because of this, you don't have to spend too much time shopping rates, but you should find someone that you are comfortable doing business with.
The internet will allow you to see what the current mortgage rates are, and you can find someone that can get you as close to that rate as possible.
Quick tip: Handshakes are wonderful, but make sure you get your entire pre approval in writing. This assures you can show your realtor and any potential sellers that you are a serious buyer, and the mortgage broker will honor the terms that were written out.