Whether you’re a first-time homebuyer or a seasoned homeowner thinking about refinancing, here are four great tips to consider before you apply for a home loan.
1) Check your credit report. Lenders will pull your credit report as soon as they receive your application, so make sure it will get you the best rate. Get a free copy at annualcreditreport.com and contact the credit bureaus to correct any bad information about your accounts or addresses. Then take steps to improve your credit score like paying down credit card balances to at least 15% below the credit limit, disputing negative account information, or working with a creditor to pay off any unpaid bills.
2) Be realistic about what you can afford. The down payment and monthly payments are the two main expenses to consider. Lenders typically require a 20% down payment, but there are loan programs available that require less. The monthly payment should be about 36% of your debt-to-income (DTI). For example, if your gross monthly income is $10,000 then your maximum mortgage payment should be $3,600. You should also consider the annual homeowners’ insurance and property taxes, which can be included with your mortgage payment or separately if required by your lender. A refinance doesn’t always need to lower your monthly payment—if you can afford the same or a higher payment and refinance for a shorter term, you could save thousands of dollars in interest.
3) Save extra cash for your reserves. Lenders typically want you to have at least two months of mortgage payments set aside in savings (reserves). There will be additional fees and closing costs with your loan, and you don’t want to use up all your savings. A higher savings account balance also shows your lender that you’re well prepared. And the general rule of thumb for an emergency fund is six months of expenses saved.
4) Choose the right mortgage. There are lots of different types of home loan programs, and you should review your options to make sure you’re choosing the right one. A conventional 30-year mortgage offers stability, but doesn’t always offer the lowest monthly payment.
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