1) Know Your Credit Score
One of the biggest factors in qualifying for a loan is your credit score. If you have good credit then you’ll increase the likelihood of loan approval under the most favorable terms. However, if your credit score is low you will have a hard time getting approved and if you do, your interest rate may be high. You can check your credit score for free on sites like Credit Karma. Review your report to see if there is any room for improvement. If you have open credit cards make sure you pay the balances down below 15% of the credit limit to maximize your credit score.
2) Get Pre-Approved for a Mortgage
First things first, you need to get a pre-approval letter before you start your home search. You need to contact a lender. A loan officer will pull your credit report to make sure you meet their minimum credit requirements. You will also need W-2s, tax returns, paycheck stubs and bank statements to verify your income, assets and ability to afford the loan. A pre-qualification letter is NOT the same as a pre-approval. Pre-qualified just means you spoke to a lender who pulled credit but did not verify your work history, income, or assets. The letter will show the maximum loan amount you qualify for so you know how much you can afford.
Documents You Need When Getting Approved:
• Past 2 years of tax returns
• Paycheck stubs and W-2s
• Last 2-3 months of bank statements
• Proof of down payment
3) Know Your Budget
There are many costs associated with a mortgage besides the loan payment. There are property taxes, mortgage insurance, homeowners insurance, Homeowner’s Association Fees (HOA) fees. You need to make sure you can afford all the additional costs. Most mortgages have the option to add the property taxes, mortgage and homeowner’s insurance to your monthly payment. Your debt-to-income ratio (DTI ratio) will help determine the maximum loan amount you qualify for. DTI is the amount of your monthly income compared to your monthly debt obligations, such as credit cards, auto loans, etc. Most mortgage lenders will allow a maximum DTI ratio of 41%.
4) Make a List of Home Features You Want
It’s a good idea to make a list of key features you want in your new home. Talk to friends and family members who own a home and ask them what features they wish they had, or didn’t have. The number of bedrooms, bathrooms, do you want an office? Media room? Open or closed floor plan. Mostly likely you will not find a house that has everything on your list so you should prioritize, which features are a must and which are preferred. Be ready to compromise.
5) Hire Your Own Real Estate Agent
Some first-time buyers make the mistake of not hiring their own realtor and working with the seller’s agent. This is a big no-no. The seller’s agent is loyal to the sellers and looks out for their interests first. This is why you should hire your own real estate agent that will work for you. Realtors do get a substantial commission when you buy a house, but you do not pay that fee out of your own pocket, it’s built into the sales price of the home and in most cases the seller will pay it.
6) Get a Home Inspection
Home inspections are not required by mortgage companies in order to close on a purchase. However, you should never skip the home inspection; even on brand new homes you should get an independent home inspector to ensure there are no problems, or potential problems. The average cost for a home inspection is around $300-$400, depending on the square footage of the property. If there are any issues, you can have the seller repair them before you close, or have them reduce the price so you can get it repaired on your own. Skipping the inspection could cost you thousands in repairs down the road.
7) Don’t Apply for New Credit
Your credit score is one of the most important factors when it comes to getting a mortgage. Make sure you do not do anything to impact your credit score, or raise red flags to the lender. Avoid applying for any new lines of credit or loans while you are shopping for a new home. When you apply for new credit and open new accounts your credit score may drop initially and build back up over a few months. Don’t rack up debt on your credit cards either, as that will most likely drop your credit score as well. You should be working on paying the balances down as much as possible to help increase your score.
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