Buying your first home can be confusing since you have no experience with the process. One of the first things to do, before you even go to your first open house, is to get your finances in order.
1. Know Your Down Payment Needs
Down payment requirements vary depending on the mortgage type you choose and the total purchase price that you are budgeting for. Some mortgage options require as little as 3 percent down, which means you only need $12,000 for a $400,000 mortgage. Keep in mind, though, that down payments below a certain level, typically 20 percent, may require that you have PMI (private mortgage insurance) added to the cost of your mortgage. By putting down 20 percent you can avoid this additional cost.
2. Check Your Credit Scores
Your credit score, along with income, will be the main determining factor for the type and amount of a mortgage you can qualify for. Generally, government-backed mortgages, such as FHA and USDA loans, have lower credit score requirements. You can often qualify for these with scores that fall under the "needs work" and "fair" categories. Private mortgages, such as through your bank, may require higher scores that fall in the "good" or "excellent" categories. Generally, higher scores also equate to lower interest rates.
3. Pay Down Your Debts
The debt to income (DTI) ratio can also affect the type and amount of mortgage you can get for your first home purchase. Generally, the lower your DTI the greater mortgage you qualify for. Generally, you want to keep your DTI amount below 20 percent, as anything higher can raise red flags with a lender that you may be only one or two emergencies away from a default. Paying down revolving debt, like credit cards, and reducing secured debts, like car loans, will help you qualify for the home you want.
4. Apply for Loan Pre-Approval
In today's housing market, you need to be prepared to move on a home quickly, otherwise someone can snatch it out from underneath you. To speed up the process, securing a loan pre-approval from your bank can help show sellers that you are making a serious offer. The pre-approval process is a shorter version of the final loan approval process. Your lender will check your income, credit history, and debts. They will then provide a pre-approval letter detailing the total loan amount you qualify for.
Contact a lender or real estate agent to learn more about the first-time homebuyer process.
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