When buying your own home, there are a lot of things to know. We have listed some of the basics for home ownership to help you navigate your first steps of the home buying experience. The information below will be valuable in understanding the process which is about to take place and will help you prepare for this exciting experience!
There is a lot of information that you need to know when you’re applying for a loan. It has become more challenging to get approved since the housing bubble burst in 2008 and 2009. After the collapse, mortgage lenders tightened their fists after the recession.
With the following tips and the help of Intuit Equity Group it is still possible to get approved for a mortgage.
- Calculate Your Income & Monthly Fixed-Debt Obligations
Your debt-to-income ratio must meet certain criteria in order to get approved for a home mortgage. Usually, the target debt ratio is 40%, meaning that your fixed debts (i.e., rent, mortgage, credit card payments, auto loans, etc.) do not exceed 40% of your total monthly income.
- Credit Check
Do you know your credit score? If you’re applying for a home loan, you should. There are many websites you can go to that allow you to check your credit score and report for free. If you find wrong information on your report, you can dispute the claim and even get it removed. You could spend months shopping for a new home. That’s why it’s important to know your credit score before you start the process.
The target credit FICO score should be 680, but preferably above 700. If your credit score is not adequate, you may need a cosigner or spend some time improving your credit before getting a mortgage. In addition, if your credit score falls below 680, you might be able to qualify for a government FHA loan, which is also a good option for first-time home buyers. The interest rate is fixed and is often lower than getting a conventional loan.
- Determine Your Mortgage Budget
This is a crucial step in the home-buying process. When determining your budget, a good rule of thumb is to make sure your mortgage is no more than 35% of your gross income. For instance, if your combined income is $80,000 a year, your maximum housing payment would be $2,333 a month. That’s an absolute max. Ideally, in order to give yourself more financial freedom, 25% is a better choice.
- Down Payment
Most mortgage lenders require a minimum of 3.5% to 10% down, depending on the type of loan you require. At Intuit Equity Group, we require 10% to 20%. Even though the amount is a bit more, it allows us the ability to provide custom loans for our customers with less-than-perfect credit.
- Finding Your REALTOR®
Shopping for a home is enjoyable, but not always easy. You must take into account your current real estate market, interest rates, paperwork, and property values. We recommend working with a trusted real estate agent to guide you through the home-buying process. Even though you must pay a percentage at closing to your REALTOR®, the fee outweighs the cost of going into the buying process alone and uninformed. Using a real estate agent helps you minimize long-term financial risk.
Tips to improve your Credit
Those three digits on your credit score are very important. They range from 300 (poor) to 850 (excellent). The higher your score, the more creditworthy you are to financial lenders. A lower score indicates you are a higher risk to the lending institution. This could warrant stricter guidelines, higher rates, or loan disapproval. In order to improve your credit, it usually takes between three to six months of good information reported to the credit bureau. Listed below are a few things that you can do in order to improve your credit in a timely manner.
- Review your credit report to check for any errors. Dispute anything that you might find.
- Set up payment reminders or auto pay, so you consistently pay your bills on time, month after month.
- Contact your creditors when you are unable to pay. Many times, they will work with you to come to a viable solution and minimize any adverse effects.
- Do not apply for new credit unless you absolutely need it. Try and avoid the retail credit programs and gimmicky sales plans. Applying for credit too often causes you to become “over-leveraged.” It acts as a red flag for potential lenders moving forward.
- Do not close old unused credit cards. Your credit history matters, and the older it is, the better. The old credit card that you opened when you were a lot younger can be playing a very positive role in your current credit position – as long as it is in good standing and has minimal to no balance.
- Pay off maxed out credit cards. This brings down your credit “utilization rate” and improves your credit score. Being maxed out or at the top of your lending limit with a particular creditor is viewed as negative and adversely affects your score.
Types of Mortgage Loans
There are many options available when shopping for a home loan. The following is a summary of some of the most popular mortgage loans:
Loan Type 1: Fixed-Rate vs. Adjustable-Rate Mortgages
A fixed-rate mortgage loan has the same interest rate for the entire repayment term.
It never changes – month after month and year after year.
An adjustable-rate mortgage (ARM) has an interest rate that adjusts, usually every year after an initial fixed period. It is considered a hybrid product, because it starts off with a fixed interest rate, before switching to an adjustable rate. For instance, the 5/1 ARM, has a fixed rate of interest for the first five years. After that, it begins to change annually.
Both fixed-rate and adjustable-rate mortgages have their advantages and disadvantages. With a fixed-rate mortgage, you will pay the same rate regardless of the market. An ARM will adjust with the market, but it’s based on the index of interest rates set by market forces and published by a neutral party.
Loan Type 2: Government-Insured vs. Conventional Loans
A conventional home mortgage is a loan that the federal government does not guarantee. They are held by banks and mortgage lenders. Because these lenders set their own guidelines, these products may have features that other mortgages do not.
However, government-backed mortgage loans must follow certain guidelines. Federally-insured home loans include the following:
The Federal Housing Administration (FHA) provides mortgage programs that are available to all types of borrowers, not just first-time buyers. The FHA is managed by the Department of Housing and Urban Development (HUD). The US government ensures a lender against losses if a borrower defaults on the loan. One of the most popular features of this loan is that it allows you to make a down payment as low as 3.5% of the purchase price. However, you are required to pay mortgage insurance, which increases the amount of your monthly payments.
The US Department of Veterans Affairs (VA) offers a loan program to military service members and their families. Similar to the FHA program, the federal government guarantees these mortgages. So, the VA reimburses the lender for any losses if a borrower defaults on the loan. The primary advantage of this program is that borrowers may receive 100% financing for the purchase of a home. That means no down payment whatsoever.