Qualifying for your first mortgage shouldn’t be as intimidating as it sounds. Yes, you’ll be applying for probably the biggest loan you’ve ever applied for but it’s also a great way to start saving money for yourself in the form of real estate. Not many other loans work the way a mortgage does. By paying down your mortgage at the same time your home value increases you’re actually gaining more money than had you remained a renter.
So how do you begin?
You can start at home by running some preliminary numbers to see where you sit financially. Take all your monthly outgo including debt and fixed loan payments, not including any rent you may be paying. Divide this by your gross income per month. This should be no more than about 20%. If you include a mortgage in this amount, lenders like to keep the debt to income ratio under 38% if possible, however, there may be some programs that allow for more. All your debt, loans and mortgage payments including housing expenses like taxes, insurance, and interest should be less than 38% of your gross monthly income.
While this is a good place to start, it can be a foggy start as you just don’t know how much your monthly mortgage payment would be. But, if you check out some mortgage calculators, it should give you a vague idea of how much home you can afford based on the down payment and current interest rate. This too can vary greatly but it’s at least a tangible place to start from home.
Secondly, get a copy of your credit score and report. Lenders like to see credit scores of at least 680 but there may be programs that allow for a lower score. If your score is lower than 600, it would be wise to spend a few months and increase that score. Some easy ways of doing that are:
- Pay every bill on time
- Pay above the minimum payment
- Pay off credit cards but don’t cancel them (so it shows you have available credit)
- Pay all expenses on time
- Use a credit card for small purchases in order to pay off completely at every cycle
Doing this for a couple months should increase your score quickly. If there are any errors or mistakes on the report, have them corrected or if you can’t get them corrected, write an explanation letter to potentially void the error.
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There are some programs and loans that have very little and maybe even no down payment options, buying a home with zero money is just not smart. It’s important to have some money for an earnest money deposit to hold the home during the contract phase and for other incidentals like home inspections and closing costs. A good rule of thumb is to have at least 1-3% of the purchase price of a home before going in but your lender will also be able to give you a better idea of costs.
Apply for a loan. Once you have done all three of the above things, talk to a lender and shop around for the best loan. It’s okay to apply a couple times with lenders to find one you like, feel comfortable with and offers affordable rates for your needs. (You’ll notice I have not mentioned anything about looking at homes yet. If you find a home you love without doing the necessary financial work ahead of time, you may be deeply disappointed to discover you cannot afford the home.)
Your lender will offer you a loan estimate within three days providing you with the details of your loan including all expenses, projected monthly mortgage payment including taxes and insurance and estimated closing costs. This will also tell you services you can shop around for like inspections, surveys, and appraisals.
At this point, you should have a good idea of how much home you can afford. It’s time to talk to a real estate buyer’s agent to find the perfect house for your needs and budget. If you need a referral for that, I have worked with some awesome folks in the Lake Forest area and because we work together, our clients get the attention they need to close on the house they love.