Owning a home is still very much a part of the American Dream. But for some, it can feel like it’ll always be a dream deferred. With the costs of (and demand for) real estate continuing to climb and wages stay stagnant, it may seem like you’ll never be able to achieve your goal. But while it’s still a seller’s market right now, mortgage interest rates for buyers are quite favorable. And if you do your due diligence, you may be able to secure a mortgage loan that will allow you to purchase your very first house. With that in mind, here are five mortgage tips that first-time buyers will want to keep in mind.
Strive to Improve Your Credit Score and Debt-to-Income Ratio
Lenders want to obtain some peace of mind before they give approval to a potential borrower. That means you need to reduce any risks that a lender might be afraid to take on you. After all, if they approve a mortgage loan and you don’t make good on your payments, that results in a major loss for the lender. So you’ll want to do everything possible to pay down debts and improve your credit score prior to applying for a mortgage. Since the average American has about $38,000 of debt, that may not be an easy feat. You may need to hustle for a couple of years or rethink how you pay back your loans in order to see positive results. But if you can improve (or even establish) your credit score and manage your debt-to-income ratio, that will allow lenders to view your mortgage application in a more favorable light — especially if you follow the next tip, too.
Save As Much As Possible For a Down Payment
Lenders want to know that you’re a safe bet, which is why showing your financial responsibility is important. But it also helps if you have a more significant amount of money you can put toward a down payment. While it’s possible to obtain a mortgage loan by putting only 5% or 10% down, you’ll usually increase your chances of approval if you’re able to pay at least 20% of the home’s purchase price in the form of a down payment. Not only will a lender be more likely to approve your loan, but you’ll usually be able to negotiate better terms for your loan as a result. For instance, your monthly payments may be more manageable or you may be able to pay off your loan more quickly. If you can afford to make a larger down payment on your property, you’ll make things easier on yourself in the long term.
Don’t Borrow Beyond Your Means
At the same time, you need to know exactly what you can afford — and resist the urge to borrow beyond your means. Just because you receive approval for a substantial loan doesn’t necessarily mean you should accept that approval. If you feel taking on that debt will end up hindering your ability to obtain financial stability, it may be better to renegotiate the terms of the loan or even limit yourself to more affordable properties. Even if you qualify for an impressive mortgage loan, you need to know how much you can feasibly afford to pay and be careful not to overextend yourself. Otherwise, you could make a major mistake that might end in foreclosure or bankruptcy.
Plan For Additional Costs
Keep in mind that the costs of buying a home don’t end with your down payment or monthly mortgage payments. You’ll also need to budget for things like home inspections, closing costs, commissions, repairs, and more. And since 13% to 20% of the population moves each year, you may also know how important it is to set money aside for moving expenses and furnishings. When applying for a mortgage, you’ll also need to remember that interest fees and mortgage insurance can really add up. Don’t get so focused on the payment terms of your loan that you forget the bigger financial picture associated with homeownership.
Explore Multiple Lenders and Mortgage Options
It can be discouraging and time-consuming to be rejected for a mortgage loan. But remember that not every lender will be the right fit for you. Although 78% of recent buyers find their real estate agents to be useful sources of information, that doesn’t mean that every agent will be able to provide you with what you’re looking for. It’s the same with lenders. That’s why it’s a good idea to shop around for both the right lender and the right mortgage. Some mortgage brokers will be in business with wholesale lending banks, so they can shop around for the best loan on the homebuyer’s behalf. Some mortgage options are better for those with bad credit, while longer loan terms may be more appropriate for some folks. Instead of accepting the first mortgage you’re offered, do your homework and don’t be afraid to submit multiple mortgage applications. Providing that your applications are all submitted within a certain period of time, you won’t hurt your credit score by shopping around a bit. Make sure to find a lender who understands your unique concerns and who can provide you with a loan featuring amenable terms.
Making the decision to buy your first home can be exciting, but it can also be quite stressful. While mortgage financing can help you realize your lifelong dream of homeownership, it can also complicate matters. Refer to the tips in this post to ensure you feel confident when applying for and accepting a mortgage loan as a first-time buyer.
