Getting a Home Mortgage & Getting Prequalified
Purchasing a home is one of the most important decisions you’ll make in your life, and it can be exciting and stressful. So, before you start driving around and looking for your dream house – get prepared and prequalified. Knowing what you want and what you can afford, and understanding what is required in the mortgage process will help you make a decision that’s right for you.
Here are some helpful rules of thumb to keep in mind:
Understand Your Credit Ability
Your first step is to obtain your free credit report. Check it for errors. Your estimated FICO credit score should be least 675, or better yet, over 700. If you have a lower score, your interest rate may be higher and it may be difficult to get an approval. If your score is low, we suggest that you work on improving your credit score before applying for a mortgage. Otherwise, your mortgage payment may be much higher.
Know Your Monthly Budget
The next step is to create a budget of your monthly income and expenses. Before you apply for a mortgage, you’ll need to gather pay stubs, bank statements and past years’ tax returns. Lenders will also ask to see your monthly expenses. This includes your outstanding debts. Large recurring monthly expenses (like an auto loan) may affect your chances of getting approved for a mortgage. Avoid taking on a new loan prior to applying for a mortgage.
How Much House Can You Afford?
Speak to the mortgage experts at New Horizons Credit Union to get pre-qualified for a mortgage loan which will help figure out how much you can afford and at what rate and term. A good guideline is that your total payment should be less than a third of your income. For example, if you and a co-buyer have a combined salary of $75,000 a year, you shouldn’t spend more than $25,000 a year (a little over $2,000 per month) on your home. Just make sure that you don’t let your excitement (or the suggestions of a real estate agent) convince you to buy a home you can’t afford.
Choosing a Mortgage
Not every home loan will be right for you. There are home loans for every type of borrower. Interest rates can be fixed or adjust over time. Down payments can vary from 0 to 20 percent. Some loans only need payment on the interest of the loan. Other loans can have a large balloon payment after a period of time. There are more loan choices than ever, which is why you must be careful to select a loan that works for you. Let New Horizons Credit Union’s mortgage experts guide and inform you so that you make the best choice for your ability and need.
Comparing Mortgages and Mortgage Companies - Buyer beware
Remember the phrase “buyer beware.” Whether you decide to finance with New Horizons CU or another financial institution or company. It’s your duty to understand the loan terms. They can be very complex. Do not be afraid to ask questions about things you don’t understand. Consider talking to a non-profit housing counselor. They can help you to understand your loan options. Your lender has a financial interest in selling you a loan. A housing counselor is neutral and can give unbiased advice. New Horizons Credit Union partners with GreenPath Financial Wellness to offer members such counseling.
Watch Out for Payment Increases
Avoid a mortgage that may cause problems with your budget in the future. For example, let’s say you are thinking about a 3-year adjustable rate mortgage that offers a cheap payment. It may be tempting. But you need to consider what your payment will be in three years. After 36 months, your rate will adjust and your payment could go up 25-30%. Will you be able to afford an increase like that? It’s always wise to consider a 30-year fixed mortgage. You are locking in an interest rate for 30 years. This gives you the comfort of a fixed principal and interest payment.
Calculate Your Monthly Payment
Understand that your monthly payment will be higher than the cost of your principal and interest payments. Additional variables such as property taxes, the cost of home insurance, private mortgage insurance (PMI), and any condo or association fees will increase the amount of your monthly payment. Again, a good guideline is that your total housing payment (including taxes and insurance) should be one third of your income or less.
Determine the Size of Your Down Payment
How much can you afford to put down in a lump sum? In today’s market, it is standard for the mortgage lender to require at least a 20-percent down payment for a conventional loan. VHA loans require a much smaller down payment (generally 3.5%), but the interest rate will likely be higher.
Buying a house is a big financial commitment. If you’re patient and disciplined about following the steps above, you’ll be well on your way to making a smart home-buying decision.
Exerts from GreenPath Financial Wellness, a business partner of New Horizons Credit Union. For more information, visit NewHCU.org.