If you think you are ready to buy a home, there are several things to consider before hunting for the perfect house.
You must know your credit score, explore different financing options and save up for a down payment. Even if you think you can qualify for a loan with no down payment, you can often get a lower mortgage interest rate by making a down payment.
The home-buying process will vary for each person, and may seem exceptionally complex for a first-time home owner. Understanding the basics can help you make an informed decision and connect you with your new home sooner. Keep reading to learn more about the home buying process and resources that may be available to you.
Although most people dream of owning their own home, it can be wiser to rent in certain situations. Many people underestimate the level of responsibility required to keep a home in good repair. This is especially true if you have rented for many years and are accustomed to a landlord fixing any problems.
If you do not have an emergency savings account to cover big repairs like a broken furnace or refrigerator, renting may be best. You should also consider how long you plan to live in your next home. If your job causes you to move often, renting may be easier than struggling to sell your home in an unknown housing market later.
When comparing the costs of renting vs. buying, remember to factor in the cost of mortgage insurance. If you do not have a down payment of at least 20 percent, you must pay for mortgage insurance. This protection for your lender can add $100 or more to your monthly payments.
For most people, finances play the biggest role in deciding whether to rent or buy. If you check your credit score and it is too low to obtain reasonable financing, you will most likely benefit from renting a home or apartment while you work on improving your credit rating.
Knowing your credit score is vital when buying a home. Once every 12 months, you may obtain a free copy of your credit report from all three major credit reporting bureaus. You may also contact these bureaus (Equifax, Experian and TransUnion) directly and view your credit report anytime, for a fee.
Some credit card apps include free weekly FICO credit score updates. If your credit score is low, you may have to make a higher mortgage down payment, pay a higher interest rate and possibly not get approved for any home loan. If you need to repair your credit rating, avoid falling for credit repair schemes.
The responsibility for improving your credit score is your own responsibility; no one can fix it for you. Over time, take these steps to improve your score:
Note that different lenders have different minimum credit score requirements. If one lender turns you down or only offers terms that you cannot afford, apply with another lender. Also be sure to check for any government programs that may help you buy a home.
Understanding the difference between mortgage pre-qualification and pre-approval is a necessary part of the home-buying process. Many people get pre-qualified for a mortgage and assume this equals loan approval.
This is not true.
Pre-qualifying is simply the first step, when a lender gives you an idea of how much of a loan you might qualify for based on information you provide. The lender does not check your credit report or charge a fee for this service.
In most cases, a pre-qualification letter is required before a real estate agent will show you homes or accept an offer on a property. Agents usually ask to keep a copy of your pre-qualification letter on file. While helpful, pre-qualification does not carry the same weight as having mortgage pre-approval.
Most lenders charge a fee for the more complicated pre-approval process. It includes a close examination of your credit record, your debt-to-income ratio and other aspects of your financial history. When you get pre-approved, you will usually have an idea of the required down payment and how much your monthly payment will be. This information can help you narrow down your home search.
A mortgage is the largest investment most people will make in their lifetime. A home loan allows you to buy a property without paying the entire cost up front. Most mortgages have repayment terms of 15 or 30 years.
Some borrowers choose a fixed rate loan, which means that the amount of interest paid each month remains the same for the length of the loan. Others choose an adjustable rate mortgage, which usually has lower interest payments at the beginning that increase over time.
Other costs to consider when choosing a home loan include taxes and homeowner’s insurance. Some people choose to pay these separately. Others enter into an escrow agreement with the lender. This means that property tax and insurance are included in the monthly payment and the bank pays them on time, on the borrower’s behalf.
The Federal Housing Administration (FHA) insures certain types of loans that can help people purchase a home even with low credit scores. Housing and Urban Development (HUD) loans are one example of FHA-insured mortgages.
Veterans of the United States Armed Forces may qualify for a VA loan that is insured by the Department of Veterans Affairs (VA). VA loans usually offer no-down-payment and other favorable loan terms that borrowers may not qualify for otherwise.