Making the decision to buy a house is not simple. In addition to the actual purchase, there are other things you need to take into account. If you do have the luxury of time to perform the required actions to guarantee that you select all the appropriate options, below we will detail a strategy to make your home purchase simple in six months or more.
HOW TO PREPARE FOR A HOME PURCHASE
THE HOME BUYING PROCESS
Prepare for the down payment and closing costs
When you have saved enough money for a down payment, you are genuinely prepared to purchase a home. You can choose the size of the house you want, but regardless of the cost, it is better if you put down at least 20% of the purchase price.
This is because of private mortgage insurance (PMI). To protect their business and protect themselves in the event that you default on your loan, mortgage lenders will charge you a PMI cost. To be clear, the lender is the one who is insured, not you as the borrower. However, this only goes for those who borrow more than 80% of their house’s purchase price. If you make a minimum down payment of 20 percent, you don’t have to pay PMI. Once you already have 20% equity in the home, the logic is that you are now more invested in ensuring you eventually pay in full.
There are some mortgages that do not demand a down payment, but they are more difficult to qualify for and will result in higher monthly debt payments. There will still be closing charges even if you are fortunate enough to be approved for a loan with no down payment. Although they differ from lender to lender, normally closing costs are between 3 and 6 percent of the house's purchase price.
Decide how much you will need to save in order to have enough money set aside for the down payment and closing charges. Making a game plan is the second component of this process, which will enable you to raise this specific amount in time for your purchase.
Check your credit report
Your credit score is a crucial factor in your mortgage application. It will determine the required down payment and the type of mortgage loan you can get, regardless of the home's price.
In some cases, you may not have a credit score at all. Credit reporting agencies calculate your score based on your debt payment history. If you have never owed money or had a credit card, there will be no information in your credit report. Therefore, once you believe you are financially ready to buy a home, the next step is to obtain your credit report.
There are three major credit reporting agencies: Equifax, Experian, and TransUnion. When you apply, the lender will obtain your credit scores from all three agencies, which may not report the same score under your name. In such a scenario, the lender will discard your highest and lowest scores and refer to your middle score for the application. If you only check your credit history based on one agency's report, you may be surprised if your application is rejected.
It is essential to check all three of your credit scores regularly.
Shop around for the best lender
Since you have the benefit of time, it would be advantageous to conduct thorough research.
Many borrowers tend to skip the step of comparing and contrasting lenders, which limits their exposure to the array of options available. Without knowledge of the full spectrum of choices, it's impossible to determine whether you're getting the best terms for your unique situation.
The objective is to obtain the most value for your investment. Just as a serious home buyer will explore all the available homes on the market, a serious borrower who wants to save money will search for the best lender with the most favorable terms and rates.
Get a pre approval letter
Once you have selected a lender to work with, it's natural to want to dive right into the house-hunting process. However, having a preapproval letter in hand can give you more confidence when talking to real estate agents.
When you're pre-approved, it means that you've submitted most of the requirements and a loan officer has reviewed your application and deemed you acceptable to their company. However, the loan isn't yet approved, as the lender hasn't yet reviewed information about the house. Mortgage lenders need to evaluate the property before providing you with a mortgage loan.
So why are pre approval letters important? In general, house sellers prefer buyers who can pay in cash. Buyers who need a mortgage are less attractive to sellers because the process takes longer and may delay closing the deal. In a competitive market, you'll need to persuade the seller or agent to choose your offer over other buyers', and having a preapproved loan can help build confidence and increase your chances of success.
Another advantage of a mortgage pre approval is that it helps you determine your home-buying budget. After the preapproval process, the lender will inform you of the amount they're willing to lend. With this information, you can limit your choices of houses to look for in the market, ensuring you stay within your budget. Choosing a more expensive property could result in rejection, so it's important to stay within the lender's limits.
Note that pre approval letters are usually valid for a maximum of 120 days. After that, the document expires, so you'll only have four months to search for a house if you want to use the same preapproval letter.
Finally start scouting for your dream home!
Finally, you can purchase a house once you have completed these steps.
The house-hunting process is undoubtedly the part that most people look forward to, and for good reason! When you step into a house, you get to imagine your future and consider several possibilities. Additionally, you may be able to travel a bit in your search, and you will certainly learn a lot.
Just remember to enjoy this once-in-a-lifetime experience and make the most of it. Leave no stone unturned, so you won't have any regrets.
MORTGAGE APPLICATION TIPS
Pay down your debt
Having greater buying power can lead to a more affordable mortgage. If you find that your gross monthly income is insufficient to cover the upfront costs and mortgage payments, it may be time to reflect on your finances.
Perhaps it's time to negotiate a raise with your employer or explore career opportunities that align with your goals. Additionally, consider a side hustle to supplement your income.
When applying for a mortgage, lenders will examine your debt-to-income ratio (DTI), which is the percentage of your income allocated towards monthly payments for credit cards, car loans, or student loans. A high DTI may decrease your chances of getting approved for a mortgage. However, there is no need to worry as you can work on improving your DTI over time.
To begin, focus on increasing your income. This can be done through multiple methods, such as finding new sources of income or taking steps to improve your job prospects. With more cash on hand, you can ensure that you meet all of your monthly payments and reduce your debt before applying for a mortgage. By lowering your debt and increasing your cash reserves, you can reduce your DTI and improve your chances of getting approved for a mortgage.
While this process may require effort, it is achievable with the right mindset and determination. Countless people have successfully navigated this process, and you can too!
Boost your credit score
To improve your chances of getting approved for a loan, you'll need to take steps to boost your credit score, in addition to considering your income and DTI. Even if you're already satisfied with your score, a lot can happen in six months that can impact your credit history.
During this time, it's best to avoid opening any new credit or loan accounts. Every time you apply for credit, your score takes a hit, and each point is valuable to you right now.
Once you have a copy of your credit report, take a moment to put yourself in the lender's shoes. Ask yourself, "What information in this report could make me look bad?" For instance, did you miss a payment on your credit card or do you typically carry a balance?
Review every line of your credit report for errors, and if you find any, contact the bureau to have them corrected. This is your right. If you don't find any errors, take note of areas where you can improve and make a commitment to paying all your bills on time and in full over the next six months.
Talk to a mortgage broker
The loan application process can be overwhelming for many home buyers, and it's completely understandable. You need to communicate with a real estate agent, a loan officer, and go back and forth several times to meet your requirements. To add to that, there's always a chance that you won't be approved, or you won't get the deal you're looking for.
If these concerns resonate with you, a mortgage broker can provide you with assistance. These professionals are experts in the field of home loans and lenders. They have established relationships with various companies and are well-informed about the best offers for your profile.
It's ideal to check out all the lenders available when choosing one. However, this requires a significant investment of time and effort, which you may not have. Additionally, when you apply with a lender and undergo a credit check, it's considered a "hard inquiry," which can lower your score by a few points. It is important to note that only one "hard inquiry" is made in the span of 3 months when seeking pre-approval from multiple lender.
Mortgage brokers can easily find the best lender for your situation. They will inquire about your needs, goals, and credit history only once before finding the ideal lender for you.
Naturally, hiring a broker comes at a cost. You need to determine the value of your time and assess whether the fee is worthwhile. In some cases, you must pay the broker directly. In other cases, the lender is the one who provides a commission to the mortgage broker. This is something you can discuss with any mortgage brokers you consider.
Completing at least half of these steps will put you on the path to owning your new home in just six months. Enjoy the search for your forever home and best of luck!
