1. Get Your Credit in Order: Before you start the home-buying process, check your credit score. This will influence your ability to secure a mortgage and the interest rate you'll be offered. According to Joshua McCarroll, Loan Officer with SWBC Mortgage, mortgage brokers use companies like Factual Data or Partners Credit to pull your credit, which is more accurate than consumer-facing tools like Credit Karma. They also have tools like WayFinder to help identify ways to raise your score. McCarroll says, “Don’t wait; do it now; it’s not as hard as you think to clean up your credit, but it could take up to a year.”
2. Save For a Down Payment: LendingTree suggests that many lenders prefer a down payment of at least 20% of the home's purchase price. This not only reduces the lender’s loan risk but also has significant benefits for you. A larger down payment can substantially lower your monthly mortgage payments and potentially eliminate the need for mortgage insurance, saving you a considerable amount in the long run.
3. Secure a Pre-Approval: A pre-approval letter from a lender is a powerful tool in the home-buying process. It demonstrates to sellers that you're a serious buyer with the financial means to purchase your home. According to LendingTree, it can give you a competitive edge in a crowded market, making it a crucial step to take early on.
Per NerdWallet, lenders value a steady income history of two years; self-employment isn’t a roadblock if you can show a steady income from your business. Employment gaps of up to six months shouldn’t be that big of an issue. Also, per McCarroll, when discussing income and assets with your lender, it's crucial to be honest and upfront with them. Treat them like your confidant – share everything. For income to count, it needs to be declared and added to your taxes; otherwise, it’s like it never happened. This responsible approach can build trust with your lender and strengthen your mortgage application.
McCarroll also points out a key financial advantage of homeownership: building equity. If you're currently renting, you're not building equity, which means your monthly payment could be higher if you own a home. This is because the mortgage payment includes both principal and interest, and often insurance, property taxes, and sometimes mortgage insurance. Understanding this can help you make an informed decision about your housing situation.
4. Shop Around for a Great Mortgage Rate: Don't just accept the first mortgage rate you're offered. Shop around with different lenders to ensure you're getting a competitive rate. You can do this through your local credit union, national bank, mortgage lender, or a reputable mortgage broker who will save you time by pulling together multiple options/quotes.
McCarroll suggests talking to your realtor about who they would recommend – if you don’t have a good feeling about them, shop for one you like.
5. Understand the Different Types of Mortgages: There are several different types of mortgages available, including fixed-rate, adjustable-rate, FHA, and VA loans. Understand the pros and cons of each before deciding which is best for you.
For example, according to McCarroll, with VA loans, you can 100% finance, but you will not have private mortgage insurance (PMI). The VA will carry a funding fee (unless you’re exempt) that is determined on your down payment. For FHA, you can finance up to 96.5%, but you will have a set PMI. FHA loans have an upfront mortgage insurance premium (UFMIP) that is 1.75% of the loan amount rolled into the back end of the loan.
McCarroll emphasizes asking your lender if FHA is right for you as there are conventional products that let you finance up to 97% of the purchase price, and the mortgage insurance is less, plus you don’t have UFMIP.
6. Budget for Closing Costs: In addition to your down payment, you'll also need to budget for closing costs, ranging from 2% to 6% of your loan amount per LendingTree.
7. Consider the Total Homeownership Cost: Homeownership involves more than just a mortgage payment. You'll also need to budget for property taxes, home insurance, HOA fees, and maintenance costs. Do yourself a favor and familiarize yourself with property taxes—for example, per McCarroll, in Texas, they vary by school district and sometimes by a lot.
8. Don't Max Out Your Budget: Just because you're approved for a certain amount doesn't mean you should spend that much. Give yourself some financial breathing room by buying a home within your budget. CFP Professionals typically guide borrowers to spend no more than 28% of their monthly income on housing and an additional 8% on other debt so that total debt service does not exceed 36% of monthly income.
9. Be Patient: The home-buying process can take time. Be patient, and don't rush into a purchase. Ensure you're buying a home that meets your needs and that you can afford.
10. Work with a Trusted Advisor: Whether it's a real estate agent, a mortgage lender/broker, or a financial advisor, having a trusted professional on your side can help you navigate the home-buying process and avoid potential pitfalls.
WHWM is here to help you identify your priorities, develop a plan, and adjust along the way. Putting your trust in WHWM means working with WHWM’s Founder and President, Stephen Bodwell, a CFP® professional committed to helping you achieve your financial goals and big dreams. Take the next step towards getting what you want in life. Schedule your complimentary, no-obligation 30-minute consultation today.
Walnut Hill Wealth Management, LLC (“WHWM”) is a registered investment advisor offering advisory services in the State of Texas and in other jurisdictions where exempt. The information provided is as of the date indicated and is subject to change.
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