There are a number of factors to consider when preparing to be a homeowner for the first time. As much fun as it can be to go home shopping, you’ll save yourself time and heartache if you plan ahead and understand the process. Consider this a new homeowner’s guide to navigating a mortgage and refer to it when looking to buy a home.
Before You Start Home Shopping
Before you open that Internet browser and begin looking at homes, be sure you know what your budget is. Determining the amount you can pay each month on your new home is fairly straightforward; there are a number of factors that can tell a lender about your eligibility.
Factors that Affect New Homeowners
- Credit Score: Why do you need to know your credit score in order to secure a mortgage? Lenders will look at your credit score to determine whether or not you’re a high- or low-risk applicant. If your credit score is high, it shows you’ve paid off credit cards and previous loans in a timely manner, you’re a more desirable candidate. However, if your credit score is low and you have a history of late or unpaid payments, a lender is less inclined to approve you for a home loan. If you have a low credit score and do get approved for a mortgage, you’re likely going to be faced with much higher interest rates.
What if you’ve paid cash for everything up to this point and don’t have a credit score? Before you try applying for a mortgage, you’ll need to establish a credit history. A good way to do so is to use a credit card for some of your monthly expenses, and pay off the limit entirely at the end of the month. Ideally, you want a credit score of at least 700 when looking to purchase a home. Anything lower and you are likely to have higher interest rates if you get approved for a home loan.
- Debt-to-Income Ratio: This is another method lenders use to determine your eligibility as a borrower. Before being approved for a mortgage, lenders will take all of your monthly debt payments and divide them by your gross, monthly income. The resulting number indicates how much of your income is going toward debt, and what you can manage when it comes to a mortgage payment. The higher a borrower’s debt compared to the borrower’s income, the higher the potential risk to a lender, thus influencing their decision to issue a loan.
- Down Payment Amount: A down payment can greatly affect your eligibility for a loan. If you’re able to reduce the principal amount of your potential mortgage, you not only make smaller monthly payments, but you pay less monthly interest as well. Any amount put down upfront is beneficial, whether it’s 20 percent or two percent. Depending on the type of mortgage you’re obtaining, the desired down payment amount may vary. Additionally, the value of the house can affect what down payment the lender prefers.
So, now that you’ve thought about all of the above, how much house can you actually afford? There are mortgage calculators that give an estimate of monthly payments based on the home’s cost, the down payment available and the interest on the loan. It’s a convenient way to find out if the house you’re daydreaming about is actually in your budget. Your lender can provide you with access to a mortgage calculator, or you can find them online when house hunting.
Think About Your Preferred Loan Terms
Many people think choosing a 30-year mortgage is more budget-friendly when buying a home. While it is true the monthly payment will be less than a 15-year mortgage on the same property, this is not actually the case long-term. A 15-year mortgage allows homeowners to pay less in interest charges over time since the monthly payment toward the principal is higher. As the principal amount gets paid off in larger increments on a 15-year loan, the interest charged decreases at a faster rate.
If you prefer a 30-year mortgage, it is possible to more rapidly pay down the principal amount owed, in turn decreasing the amount of interest paid overtime. Things to consider when choosing between a 15 or 30-year mortgage are additional monthly expenses. What are the property taxes for the home? Does your loan require mortgage insurance? What are the estimated utilities in the area? Understanding these costs can create a better understanding of what constitutes an “affordable” monthly mortgage payment for you.
Ready to Navigate Your Mortgage? You’re All Set!
Consider this your crash course in navigating a mortgage as a new homeowner! Your tool kit is now stocked with the basics, and you’re ready to start the search for your new home.