The homebuying process typically begins with your preparation to buy – understanding the step-by-step process, getting aware of the certain key terms and making arrangement for the home finance. It may take months of planning and money management to save enough for certain upfront costs. You may also want to seek professional advice and ascertain whether your have everything to successfully complete homeownership responsibilities.
Learn as much as you can
Begin by understanding the benefits of homeownership. You may want to do a comparison between buying and renting and see how the former can help you attain your financial goal. Renting only makes sense when you are not left with extra income to meet the additional expenses as a homeowner. Extra responsibilities include things like lawn care, home maintenance and repairs, besides monthly mortgage payments.
Sometimes, you may not find it practically possible to settle in a permanent location because of your job. There may be certain issues – financial as well as others – that you may need advice before coming to a decision. It is here a qualified housing counselor plays a vital role. Research online and find a list of HUD-approved homeownership education counselors working in your neighborhood. You may also want to seek assistance from a community-based organization or a local housing counseling agency.
A housing counselor can help you learn the various steps of homebuying process. Every person has a different financial situation and housing need. Ask as many questions as you want to clarify all your doubts and get solutions to your specific queries. Among many things, you can discuss the various mortgage options, including FHA loans and other financing options backed by a government agency.
Analyze your Financial Situation
Filled with the power of knowledge, you can review your financial situation and see if homeownership is for you. Take particular note of your monthly income and expenditure. Estimate how much more you are able to add to your current rent payout. Check if you can cut down other expenses to meet the future mortgage obligations. Determine in exact amount how much you can afford to buy and comfortably pay every month.
You may need to use a range of mortgage calculators to play with numbers and come out with correct figures. Use an affordability calculator to know how much you can afford. Experienced agents suggest it to be three to five times your annual household income if you are able to put down 20% at closing and do not have much debt liability.
The debt-to-income ratio (DTI) is typically 28/43 for convention loans while it is 31/43 for FHA loans. This means you should not have more than 43% in recurring debt every month to qualify for a mortgage loan. Your housing expenses should not go beyond 28% of your monthly income in case of a conventional loan. You might qualify for an FHA loan if you maintain the front-end ratio below 31%.
Arrange for the Upfront Costs
You must also have enough to meet certain costs you need to pay upfront. Here is a break-down of some usual costs a borrower must pay out of the pocket.
- Down payment
- Closing costs
- Earnest money
- Application fee (check with your lender if it is applicable)
- Fees for attorney, appraisal and inspection
- Costs of remodeling or furniture (if you wish)
You must have saved money or have resources to meet these expenses. Depending on your loan type and certain other factors, some of these costs can be wiped out or reduced to affordable level. You should contact a loan officer to discuss your options if you are not able to meet these expenses. For example, you might get qualified for FHA loans that require as little as 3.5% of down payment.
You may also want to explore the various ways how you can find money for down payment and closing costs. Some lenders may allow you to put down less than 20%, but require you to pay for Private Mortgage Insurance (PMI). Surely, you will not like to increase your cost of mortgage, but it becomes inevitable sometimes.
Check your Credit Score
Credit verification is an important step of mortgage underwriting. Your lender must pull your credit report and know about your credit score before taking a final decision on mortgage approval. FICO credit score is the most common and is based on your credit report maintained by three credit bureaus – Equifax, TransUnion and Experian. You are entitled to receive one free credit report from each of these agencies every year.
You must check your credit report to ensure it is free of any errors. According to a report, there are millions of errors in reports maintained by these agencies. It is important to get these errors fixed, if you have any, prior to your lender having a look at it.
FICO credit scores range from 300 to 850 and a borrower must ensure a minimum of 620 before thinking to apply for a mortgage loan. Anything below 620 falls under poor credit and not many lenders are willing to talk with a person with bad credit.
Meet a Mortgage Professional
Sooner or later, you will have to face a wide variety of mortgage and other professionals. It is only prudent to get talking with a qualified real estate agent, mortgage broker or loan officer even when you are beginning to think about buying a home.
Their recommendations carry value as they are qualified people and have several years of experience. Discuss in detail your current financial situation and whether it is the right time to think about homeownership. They will also suggest you how you should proceed to fulfill your financial obligations.