Well, it looks like you have already started step one in the home buying process, research! It can feel daunting once you begin to realize the different aspects of purchasing a home. The good news is lenders and realtors are great resources to help you get into your dream home. With knowledge and the right people by your side, you will be able to close on your first house with confidence. Here are our tips to help you from start to finish.
Buying a home may not even be on your radar, but it is never too early to get your credit score in shape. You can improve your credit score by paying off existing debt. To calculate your debt-to-income ratio, you add up all your monthly debt payments, which includes installment debt, revolving credit debt, and your new mortgage payment (which includes principal, interest taxes and insurance and any HOA fees), and then divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out. For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2,000 ($1500 + $100 + $400 = $2,000). If your gross monthly income is $6,000, then your debt-to-income ratio is 33 percent ($2,000 is 33% of $6,000).
Evidence from studies of mortgage loans suggest that borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments. The 43% debt-to-income ratio is important because, in most cases, that is the highest ratio a borrower can have and still get a Qualified Mortgage.
Making on-time monthly credit card payments and making more than the minimum payment due, as well as keeping your balance below 30% of your credit card limit, is also imperative in increasing and maintaining good credit.
However, be wary about opening new lines of credit and taking out other large loans, as this can cause a dip in your credit. Having a higher credit score will help you qualify for lower interest rates and ultimately save you money in the end. Boosting your credit can take anywhere between a few months or a about year, depending on if you have severe derogatory credit events or if you are paying down balances, so get started today. Contact lenders to obtain a preapproval and get more advice on what program will be the best for you.
Work towards building your nest. The sooner you begin saving for your down payment, and the unexpected, the smoother your home buying process will be. Start by knowing how much house you can afford. You may want to use a mortgage calculator to determine what the total payment will be on your mortgage and make sure your mortgage payment and other debt payments won’t be more than 43% of your gross monthly income.
Putting more towards your down payment and having a higher credit score can help you secure a lower interest rate and lower monthly payments, as you will start out with higher equity in your home. Other benefits include being able to avoid costs such PMI (private mortgage insurance), which protects the lender if you default on your loan. To avoid mortgage insurance, shoot to save for a 20% down payment.
Conventional loans offer a 3% down payment with restrictions. One program requires at least one borrower to be a first time homebuyer and the other program has income restrictions.
Research the possibility of VA, FHA loans that allow you to be eligible for a mortgage without a little or no money down payment or with other restrictions.
Another thing to keep in mind are closing costs. Closing costs can range from 3–5% of the home’s purchase price and often include fees for a credit check, appraisal, underwriting, title search, and lender fees, just to name a few. However, if these fees feel out of reach, there are resources to help make your dream home become a reality!
Also, look to see if some parts of your closing costs are negotiable. There are many down payment assistance programs that may be available in your area. If the seller is looking to move out quickly or the market is not currently particularly competitive, the seller may be willing to pay for part. Alternatively, you could ask your lender if they could pay some of your closing costs. Plan for a higher interest rate if you choose this option.
Now, that was a ton of information, and it is understandable to feel a little overwhelmed. We are here to help you get on the right track! To get the most comprehensive information and feel the most secure, consider taking an online homebuyer education class. In a homebuyer education class, you will learn about the entire home buying process further, so there will be no surprises from the beginning to end. Find an experienced lender to work with to advise you more about your financial concerns and other aspects of purchasing a home.
There are also several Homebuyer Education courses that can help you learn more about the financial aspects of purchasing a home. In these courses, you will come to find that you are not alone in this journey and that thousands of others have the same questions and worries you do. Housing courses can also help you find and get approved for Down Payment Assistance Programs (DPA).
DPA programs allow you to have all or some of your down payment covered by a forgivable or deferred second loan. Some DPA programs come in the form of a grant that does not need to be repaid. These options are great for first-time homebuyers who don’t believe they have the savings to purchase a house. Compare the different DPA programs available to see what you might qualify for.
One example is the nationally acclaimed Chenoa Fund program. The Chenoa Fund program offers 3.5% down payment assistance that gets paired with an FHA first mortgage. This assistance comes in the form of a second lien, can be forgivable or repayable, and covers the entire down payment. The Chenoa Fund program also offers down payment assistance for FNMA conventional loans at 3.5% of the purchase price. Assistance for conventional loans comes in the form of a 10-year fixed rate mortgage with an interest rate 2% higher than the first mortgage. Visit Chenoa Fund’s DPA program page for more information on these programs and their requirements.
While the process may not always be straightforward, it is worth it and gratifying. Most importantly, you don’t need to go through it alone. Contact an On Q Financial mortgage consultant who can further help guide you through your biggest investment so far. The good news is that, if you familiarize yourself and follow these steps, you will be in great shape when the time comes to pick out your first house, and don’t be surprised when you start to find it fun! Get in touch with an expert today.
*Not offered in North Carolina.
The following loan scenario is only an example. Actual amounts, fees, and rates vary depending on each individual borrower’s situation and additional factors. Loan scenario is based on a fixed 30-year Conventional loan with a purchase price of $200,000, 3% down payment equaling $6,000, Interest rate of 4.000%, and APR of 5.155%. Additional estimated funds due at closing $6,302. Approximate monthly payment of $1,338. Loan scenario does not include additional costs/fees associated with monthly mortgage expenses such as HOA fee. All amounts shown are estimates and will vary for each loan. Rates and fees are subject to change at any time. This is not a commitment to lend or extend credit. Loan approval is subject to applicant’s qualification for a loan program. These are two separate programs with different guideline restrictions & area limitations.
Please contact your Mortgage Consultant for specific information/details regarding the programs mentioned. Information is subject to change without notice. On Q Financial does not guarantee that each applicant will receive a loan. On Q Financial, Inc. is an Equal Housing Lender. NMLS 5645
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