It is always fun and exciting to shop for a home. However, the actual financing and buying can be so stressful. The need for more space coupled with lower interest rates has increased the demand in the real estate. Surging demand, on the other hand, has increased home prices and driven up bidding wars among potential buyers.
Top Things Home Loaners Should Know
Are you looking towards financing a home? It is advisable to do enough research to learn beforehand. When you know what you expect, it will make the process easier. It will also save you a lot of money in the long run. This article looks at 5 things you should know before taking a mortgage. You should not do anything before you have the most crucial information at hand.
What is the True Cost of your Dream House
When most individuals begin to shop for their dream home and how to finance one, they use mortgage calculators to establish the kind of house they can afford. However, it is worth noting that mortgage calculators are largely rudimentary at their best.
All you do is to put in the price of your home, interest rate, down payment, and the repayment period. Most calculators don’t consider the cost of homeowners insurance and property taxes among other homeownership costs.
Lenders may wish to collect some money upfront to pay for homeowners insurance and property taxes depending on your situation. Some financing institutions build these costs into the monthly home loan payments and make the payment on your behalf. It explains why you need to get the cost estimates beforehand.
The normal tear and wear on systems and appliances throughout the home is the other expense you will meet as a homeowner. When hunting for a house, you should look at the age of the house together with everything that is in it. Ask the realtor when the last replacement for appliances like the hot water heater, sump pump, furnace, etc.
You can find the cost of these appliances to be shocking especially if you have put in all your life savings. It explains why a few homeowners buy a policy for home warranty. Homeowners insurance will protect you against the unexpected while a warranty will protect you against unpredictable tear and wear.
The leading home warranties fall between 30 to 60 dollars monthly. You should also pay a flat-call fee to get a technician diagnose your problem. If your AC goes off, the home warranty corporation will pay for its repair or replacement.
Credit Score
Banks pay close attention to your credit score when assessing your home financing loan application. These scores mostly range from 300 to 850 but anything above 740 is regarded as very good. Most financial institutions need a score that is above 620 for conventional mortgages. If you have a lower score, you can qualify for the FHA loan.
Your credit score will ultimately affect how much the mortgage will cost and your interest rate. A tool like Credit Karma paints a picture of how credit worth you are. However, the scores that some of these platforms provide tend to be notoriously unreliable.
The reason is that most financial institutions prefer to go for the FICO score and not the Vantage Score that Credit Karma utilizes. The information that the three credit bureaus have is different and this leads to a variation in the scores.
However, these consumer-finance tools are still useful. The services will alert you any changes in your credit score and give you a chance to capture errors in reporting. You will also get real-time feedback on how your use of credit affects how credit worthy you are without hard inquiries.
When preparing to finance a home, start taking necessary steps to improve your credit score. Be keen to make timely payments of your credit card each month. It is advisable to pay off the entire credit card amount.
If your cards have pending balances, pay close attention to the ratio of the available credit that you are using. It is referred to as the CUR or credit utilization rate. If the combined limit of your credit card is $10,000 and your debt is $3000, you CUR are 30%.
Your ideal CUR should be below 10% even though financial experts advise you to keep using your cards. You can use the card for a particular bill then pay it off each month. Aim at paying down the balance to less than 30% of the credit card limit on the minimum. Never open new credit lines when planning to take a home loan and don’t close those old ones.
- How Much Down Payment is Needed
When shopping for a home, there is a possibility that you have been saving for it. The challenge with first-time homebuyers is that they often underestimate the amount they need for the down payment. Several factors affect the down payment requirements including your credit score, loan size and income.
If you pay less than 20%, the lender may require that you have mortgage insurance. However, this rule has certain expectations. If you are shopping in rural areas or are military, you may qualify for USDA loan or VA. These loans have the backing of the federal government hence don’t require a down payment.
- Debt-to-Income Ratio
Whenever you make a loan application, lenders assess your debt to income ratio. It refers to the proportion of your gross income that goes toward loan repayments. It comprises student loan debt repayment, credit cards, car payments, mortgage and child support.
An acceptable debt to income ratio varies from one lender to another and may range from 25% to 50%. To get yours, sum up your total monthly debt payments and get a proportion of the pre-tax monthly earnings.
- The Best Available Interest Rates
Financing homes calls for a high level of commitment. The 30 year fixed rate home loan is the most common mortgage in the market. However, you can choose a lower period like 15 years if you have the ability to repay. The applicable interest rate determines the full amount you will pay over the loan period.
Even though mortgage interest rates have been increasing, they are still relatively low. Therefore, it is still a good time for anyone who is planning to buy a home. However, the rates you are offered may vary slightly from the interest rates that you see. Shop around to see which lender gives you the best rates.
Final Thoughts
The process of financing a home seems to be a complicated one. However, you should not allow the whole exercise to be overwhelming. Whenever you are applying for a home loan, it is worth noting that knowledge is power. Your banker may not have enough time to explain to you the MODT Filling Procedure.
Therefore, do a lot of research to help you understand all the important factors that affect your mortgage. You need an understanding of the numbers to get your savings and credit score right. The process will become smoother when you have more information at hand. It will also help you to save a lot in the long run.