The housing market is heating up and so is the homebuying competition. Recent data from the National Association of Realtors show that pending home sales are up nearly 5%.
Still, donâ€™t let the increased activity pressure you into getting a mortgage before youâ€™re truly ready. Take inventory of your personal and financial preparedness first.
Step back and ask yourself the following questions before you start your homebuying journey.
A preapproval is a letter from a mortgage lender that tells you how much money you might qualify to borrow for a home purchase along with an estimated interest rate. In order to get preapproved, youâ€™ll need to submit several documents and other pieces of information to the lender, including:
The lender will also pull all three of your credit reports and scores to help determine your creditworthiness.
Getting preapproved for a mortgage not only gives you a price range to use when you start shopping for a house; it also gives you an advantage over other buyers, and legitimizes you when itâ€™s time to put in offers.
Homeownership is a commitment. Youâ€™re committing to the mortgage you borrow, the home you choose and the surrounding community â€” this isnâ€™t the case as a renter.
The financial commitment is just as real as the moral one. Financial experts commonly say it takes five years to make the money back you spent on your house, should you decide to sell it. Owners typically stay in their home for a median of 10 years before selling, according to the Homebuyer and Seller Generational Trends Report from the National Association of Realtors.
Donâ€™t focus solely on stashing away just enough cash to cover your down payment. Factor in the many other costs of buying and owning a home.
Before youâ€™re handed the keys, you also have closing costs to pay. This could run you anywhere from 2% to 5% of your homeâ€™s purchase price â€” not to mention all the deposits and expenses related to moving in.
Youâ€™ll also want to have a sizable cash cushion for maintenance and unexpected expenses. Aim to have at least three to six monthsâ€™ worth of your living expenses saved in an emergency fund, such as a personal savings account. Be mindful of how your expenses might change as a homeowner and tweak your savings amount to reflect those changes.
Another consideration is how youâ€™re handling your current debt obligations. If youâ€™re struggling to stay afloat as is, a mortgage lender likely wonâ€™t approve you. Thatâ€™s because one of the main qualification factors a lender pays close attention to is your debt-to-income ratio, or the percentage of your income that is used to pay your debt every month. A good DTI ratio for all your debt payments, including your estimated monthly mortgage payment, is a maximum of 43%.
Youâ€™ll need to demonstrate your creditworthiness as a potential mortgage borrower before youâ€™re approved. Start by pulling your credit reports from all three credit reporting bureaus â€” Equifax, Experian and TransUnion â€” by visiting AnnualCreditReport.com. Youâ€™re entitled to one free report from each bureau once a year.
Review your reports for any negative remarks and errors. Do you have a history of multiple late payments? Are your credit card balances close to the limit? If you see room for improvement, you might need to postpone your homeownership goals until your credit profile is in a better position. Lenders want to see overwhelmingly positive credit habits from mortgage applicants.
Youâ€™ll generally want to have at least a 580 credit score to qualify for an FHA loan and a 620 score for a conventional loan. Read our guide on minimum mortgage requirements for more information on credit score specifics for other mortgage products.
There are several different mortgage products available and one may fit your financial situation better than others. For example, if you donâ€™t have a lot of money for a down payment and have a credit score in the 600 to 700 range, you might want to go with an FHA loan, which requires just a 3.5% down payment. On the other hand, if you have at least a 5% down payment and a score above 700, you could benefit from a conventional mortgage.
There are also VA loans, which cater to military service members and veterans, USDA loans that focus on homes in designated rural areas and several other options. Speak with your lender to get a rundown of their available mortgage programs.
It takes some time and effort to decide to buy a home. To help in your decision, itâ€™ll be worthwhile to develop answers to the above questions.
Once youâ€™re ready to take that leap, shop around with multiple lenders to get the best deal. Data show that homebuyers stand to save more than $36,000 in interest on a $300,000 mortgage over a 30-year term by shopping around, according to LendingTreeâ€™s Mortgage Rate Competition Index.
Review the Loan Estimates youâ€™ll receive from each mortgage lender after submitting your application to compare interest rates and the many other costs that come with borrowing.
This article contains links to LendingTree, our parent company.