Purchasing your first home can be a thrilling and nerve-wracking experience all rolled into one. Once you have decided whether or not to use a real estate agent in your search for a new home, what should you do next? It’s important to have a grasp of what the mortgage process entails so you will be prepared to pull the trigger when you find the perfect house.
Meet With a Mortgage Lender
Some people do this before even starting their home search so they can have a firm understanding of what their credit looks like and what they might be approved for.
A mortgage lender can explain the different types of mortgages (FHA or Conventional, Fixed-Rate versus Adjustable Rate) and the requirements for each one, including down payment (for example, an FHA loan often accepts a lower down payment but will require an up-front mortgage insurance called MIP) and interest rates.
Figure Out What You’re Comfortable Spending
It is important to assess your financial situation to determine your budget before you start looking for a home. Lenders can tell you what you are pre-approved for, but only you can decide what you are comfortable spending.
Here are the basic numbers you’ll need to know:
- Your monthly income
- Your total monthly debts (sum of auto loans, student loans, credit card payments, etc.)
- Your credit score (if you don’t know this, your lender can run a report for you)
- How much cash you can put down for a down payment
Hint: A general rule of thumb is your total housing payment (including fees, taxes and insurance) should be no more than a third of your pre-tax income, though many buyers aim for closer to a quarter.
The amount of cash you plan to put down (5%, 10% or even 20%) will impact your monthly payment and determine if you will be required to pay PMI (private mortgage insurance, often required if you put less than 20% down).
Once you’ve determined what you are comfortable spending, stick to that number.
Lenders will provide you with a list of required documents (think tax returns, pay stubs, employment history, etc.) so the more organized and efficient you are at providing documentation, the better.
Lenders will request your documentation in order to determine what you are pre-approved for. Again, this is just the amount they anticipate you will qualify for, which might be different than what you are comfortable paying. Once you find a home you’d like to put an offer on, most sellers will require a copy of your pre-approval letter to ensure you are a qualified buyer. Remember, the pre-approval letter is non-binding.
Interest rates and fees can vary between lenders, so it’s always a good idea to consult multiple lenders before determining which one you will select. Referrals from friends and family and even your real estate agent can be helpful when deciding who to request quotes from. Working with experienced professionals who are attentive and dedicated to assisting you through the mortgage process in an expeditious manner can also prove to be valuable and worth the extra investment.
Stay in touch
Real estate transactions are notorious for occasional hiccups, but with some prudence on your part, you can help to avoid delays. Keep the lines of communication open with your lender to ensure they have everything they need from you in order to close on your home on time. Remember, buying a home requires many professionals, from lenders to brokerages to banks and title companies to all work together.