There are many things to take into consideration when preparing to buy a home.
Below, I have outlined 6 key issues that are important for you, a prospective homebuyer, to address.
Each item is detailed below the outline.
- Review your credit
- Lower your debt, if possible
- Save as much as you can toward a down payment
- Get pre-approved to determine target home price
- Compare loan programs
- Find your property
1. Review your credit
Once you decide you may be in the market to buy a home, you’ll need to take a look at your credit report. The credit report should be pulled from all three credit bureaus Experian, TransUnion and Equifax separately, or combined, using a company such as annualcreditreport.com. During the pre-approval process, your mortgage company will also pull your credit. You can skip this step of pulling your own credit report if you have applied to be pre-approved.
Your credit report will show both your FICO scores as well as your outstanding debt balances.
The lender uses your FICO scores to determine eligible loan programs and interest rates.
Your monthly debt balances determine how much of your monthly income can be dedicated to a mortgage loan.
2. Lower your debt, if possible
When a lender is calculating your debt-to-income ratio, they will add all your monthly debt to your proposed monthly mortgage payment (including property tax, homeowner insurance, HOA if applicable, PMI if applicable). The less monthly debt, the better. If you can pay off a credit card, or installment account (such as a automobile payment) that is costing you $200 per month, that $200 per month can go toward your mortgage payment instead.
Your debt-to-income ratio determines how much of a home loan you can qualify for.
3. Save as much as you can for down payment and closing costs
There are quite a few mortgage loans that require very little down payment. VA offers 100% financing, FHA offers 96.5%, and Conventional offers up to 95% financing (97% for first time home buyers).
Along with the down payment, you will also be responsible for closing costs. These include, but not limited, to title, escrow and loan fees. You will also be required to buy homeowner’s insurance and pre-pay a certain amount of you property tax as well.
If you do not have enough cash, there are mortgage programs that do allow buyers to receive gift funds.
There are also down payment assistance programs (DPAs) in every state. Ask your mortgage company to see if you qualify for either a grant or a loan in your area.
4. Get pre-approved to determine target home price
You can do this at the beginning of these 6 steps and your loan officer will be able to help you from the beginning. Being pre-approved will help you know that you are shopping in the right price range. Your lender will be able to provide you with a pre-approval letter that will accompany your purchase offer, when you find the right house.
5. Compare loan programs
Your loan officer will be able to show you all the different loan options available to you. Whether you choose government or conventional, there are many choices within each.
6. Find your property
Once you have done all of the above, you will be ready to start shopping for your home. A good start would be seeking the help of your local real estate agent. There are plenty of online resources you can search but your local real estate agent, who’s familiar with the area, will be of great help. Your local real estate agent will also be able to assist you in setting appointments to view the properties that are of interest to you.