12 things you need to be ready to purchase a home
It’s been long enough. You’ve been renting a place or living with a friend or relative. Now you’re ready for a space to call your own.
However, buying a home takes a bit of thought and preparation. There are some things you need to consider before you can turn that key. Century National Bank wants you to be ready to take that big step into homeownership. Here are a dozen steps to take prior to closing the deal:
Review your credit. Mortgage lenders use your credit score when evaluating your creditworthiness, but more important than the score is the content in the credit report. For instance, make sure you don’t have outstanding collections, you’re paying debts on time and the amount of revolving credit you’re using is generally below 30 percent of your total credit available. Having those items under control will have a positive influence on your credit application request.
Dispute credit report inaccuracies and finalize them. Inaccurate information reflected on your credit report should be resolved before the loan process can be completed. Check your credit report well before you apply for a mortgage so any inaccuracies are corrected prior to applying for a loan.
Calculate what an affordable payment will be for you. Some people who apply for a mortgage don’t have a housing price range in mind. That’s determined by your debt-to-income ratio, and 43 percent is the highest recommended ratio you should reach. Here’s an easy way to think about it: Are you already paying rent? Would you say it’s a comfortable amount, too high or can you handle a higher payment? If your rent is too high, you likely want a mortgage that can offer you a lower monthly payment. Having that starting point helps you work with a lender to determine how much house you can afford. You’ll want to ensure you can cover your regular monthly living expenses as well as the expenses that go into owning a home, such as property taxes, homeowners insurance and, potentially, private mortgage insurance.
Determine how much money you can put down. When you know this, other things become clear. If you put down less than 20 percent of the loan, you might pay private mortgage insurance (PMI), which reduces a lender’s risk if something happens and you can’t pay back the loan. While there are no-money-down programs available, there often is an expectation that serious homebuyers have some money to put down, even if it’s less than 20 percent. If you put down 20 percent or more, you don’t have to pay PMI unless you get a Federal Housing Administration loan. You will pay PMI on the life of that type of loan.
Know how long you plan to be in the home. If you only plan to be in the home five years or less, that might affect what type of loan makes sense for your situation. An adjustable-rate loan – which often has a lower upfront fixed rate that converts to an adjustable rate when the fixed-rate term ends – could be a better choice when you know you’ll have a smaller window of ownership. With little equity in the home up front, generally buyers can expect to do no more than break even in five years when they sell after factoring in realtor and closing costs. If the housing market drops, you could find yourself underwater, meaning you owe more on the house than what it’s worth.
Get prequalified for a mortgage. Realtors often ask buyers to be prequalified before submitting any offers. You’ll need to share how much income you make and allow the lender to pull your credit report to evaluate your eligibility for the prequalification.
Build up an emergency fund. You can’t call a landlord to come fix something when you own the home. It could be something small and inexpensive, but are you prepared to replace the roof, furnace or air conditioning system? Factor those unexpected costs in when figuring your monthly mortgage payment so there are some extra dollars available. When you have enough equity in the house, you can tap that through a home equity line of credit to pay for expensive repairs. But until then you’ll need to save cash or use a credit card.
Know the loan process. The bank is like a prequel to the home-buying process. As mentioned earlier, most realtors prefer buyers talk to a lender to get prequalified for a mortgage before making an offer. After that, the bank is essentially out of the picture until a home goes into contract. However, when you narrow your search down to a few properties, we’re always willing to calculate specific payments based on a property’s annual taxes. Once a contract is in hand, we order an appraisal and title work for the property and collect documentation from our clients to verify income and assets to ensure there aren’t any unusual circumstances that might delay the process. Then we underwrite the mortgage so the purchase can close.
Know where your documents are. To get a loan, you’ll need:
- One month of the most-recent pay stubs for each person listed on the mortgage.
- Two years of W-2 statements. If you’re self-employed, a year-to-date profit-and-loss statement and two years of signed business tax returns with all pages.
- Two years of the latest federal tax returns.
- The most recent investment or retirement account statement.
- Current statements for any debts being paid off.
- Two months of bank statements.
- Contact information for your homeowner insurance provider.
- A signed contract to purchase the home.
Know your loan costs. Everyone who applies for a mortgage receives a three-page Loan Estimate, which identifies what it will cost to have a mortgage over the first five years and the estimated closing costs. Federal law requires the Loan Estimate to be provided within three days after receiving a completed credit application, but our bank often provides it in less time, which allows you to make an informed decision more quickly before signing anything. If there are any fees or costs listed in the Loan Estimate you don’t understand, our experienced local lenders are here to answer your questions.
Ask about discounts and home-buying programs. There are excellent programs that offer down-payment assistance for applicants who meet the eligibility requirements. Maybe you’re a nurse, a recent college graduate, a firefighter, an educator, a veteran or buying in a rural area. You could benefit from having low to moderate income or buying homes in certain areas. It never hurts to ask to see if you’re eligible.
Know what’s included in your mortgage payment. Your payment is generally made up of principal, interest, taxes and insurance. Early on you pay more in interest than in principal. That relationship shifts over time and you begin to build equity in the home. Property taxes and homeowner’s and private mortgage insurance can be included in the mortgage payment, which a lender will hold in an escrow account until those items need paid. Homeowners may opt to pay the taxes and insurance separately, paying a lump sum to have a lower monthly mortgage payment.
When you’re prepared for the home-buying process, it can make getting into your dream home quicker and easier. Our experienced team is always ready to personally guide you through the mortgage process and answer any questions you might have.