There are many steps to buy a house: figuring out a budget, researching properties, researching agents – the list goes on and on.
Among these are some things you should absolutely have in order before you even think of purchasing your future home.
1. An Idea of Your DTI
Your debt-to-income ratio is the percentage of your monthly gross income that goes toward debt repayment. Lenders look at this ratio when considering the types of loans they could offer you.
Typically, lenders prefer a DTI ratio that’s no higher than 36% to 43%, depending on the mortgage program. Some may be ok with a higher DTI, but only if the borrower has compensating factors such as a high credit score or large cash reserve.
Pay off as many debts as you can before being considered for a mortgage, as this can increase your purchasing power.
2. A Picture of Your Credit Score
Another thing lenders will look at is your credit score. Pull reports from each of the three credit reporting bureaus – Experian, TransUnion, and Equifax – to better understand your credit score.
Most mortgage programs require a minimum credit score between 580 and 620. Check your score at least 6 months before applying for a mortgage loan, as it will give you time to improve upon your score if you need to do so.
3. A Down Payment
The majority of mortgage loans require a down payment, though the amount depends upon the loan itself.
This amount ranges from a minimum of 3% to 5% for a conventional loan, and a minimum of 3.5% for FHA loans.
If you have less than a 20% down payment on your home, your lender will require you to purchase private mortgage insurance. This protects the lender in the event you default on your loan.
4. A Budget
Utilize an affordability calculator to determine just how much home you can afford. Once you know what your purchasing price range will be, you can estimate how much to save for your down payment and closing costs.
Mortgage calculators vary in what they take into account. Some estimate monthly payments based on the home price, down payment amount, interest rate, loan term, and other monthly mortgage expenses such as homeowner’s insurance and property taxes.
Along with a good real estate agent, a reputable mortgage broker can help you familiarise yourself with the various mortgage types that are available. Mortgage brokers can discuss your home loan opportunities and are able to provide you with any assistance in accessing your home loan application process.
There are many mortgage types out there and you should familiarize yourself with the most common. Don’t take on the first loan offered to you. Shop around for the best deal.
This can also be done when it comes to things like homeowners insurance or private mortgage insurance. Do your research to see who offers the best rate.
You will also want to research and nail down a good real estate agent. They can cast a wide net for your search, tilt negotiations in your favor, and be a general fount of knowledge as you go through the home buying process.
You probably have a general idea of the type of house you want, but what about the neighborhood? Research what a potential neighborhood is like in the way of cost of living, and also what comparable houses in the area are going for to ensure you aren’t overpaying for your home.