Are you thinking about buying a home? You will probably have to apply for a mortgage. The idea of taking on more debt can be intimidating, but there’s no better time than now to get the ball rolling. Follow these tips so you can walk into your bank with a confident smile, and leave with approval for your mortgage.
Know Before You Go
Before you can buy a home, you have to know how much money you can spend. This takes a little legwork, but it’s worth it to make sure you’re knowledgeable about the situation so you don’t get duped into overspending or overcommitting. The first thing to look at is your current budget. If you have recurring outstanding loans (like a car or school payment), this could count against you when you apply for a mortgage. Do your best to pay these off before you apply.
A good way to estimate the monthly payments you can afford is to take 2.5% of your income. If you make $100,000, aim to spend about $2,500 a month towards your mortgage. Of course, this number will change depending on your circumstances. If you’re also paying student loans, car payments, or other bills, that will need to be factored into the amount you have to spend. Either way, do your research and know your maximum amount before you speak to a professional. That way, you’re less likely to end up agreeing to something that might not be financially feasible just because it sounds good in the heat of the moment.
You should also know your credit score. The government gives you a free copy of your credit history once a year. For an extra fee, you can obtain the exact number of your credit score. The higher your score is, the better, and you should aim for a minimum score of 640. If you have a lower score, you may need to wait a few months to re-establish your credit. Take several months to collect a down payment and make sure that you are on time with all of your bills. Then, check your credit score again to see if it’s gone up.
The third thing you should know is how much you are willing and able to spend on a down payment. If you don’t have at least 20%, you may be required to pay private mortgage insurance, which will add to your loan. If 20% seems like too much and you are desperate to purchase a home, try for at least 10% down. Remember, the more money you put down, the less you will have to pay in the long run!
If you want to learn more about how you can get a mortgage as unique as you, check out our Mortgage Center.
Get Some Help
If your parents, friends, or relatives can help you out, borrow money from them for a down payment, as they will surely charge you a lower interest rate than the banks will. Another alternative is to get a co-signer. This can be risky because if you do default on the loan, the lender can go after your co-signer for the full amount, and both of your credit scores will dip dramatically. However, it’s a good solution if you are self-employed or receive other income that for some reason the lender is not willing to consider. Do not ask someone to cosign a loan if you are not fully confident that you will be able to pay it off.
Wait
If you’ve done the math and it just doesn’t seem feasible right now, then wait! Home prices and mortgage rates are constantly fluctuating, and what is too expensive right now may be affordable in a few months. If you’re taking out a $290,000 loan, a drop from a 7% interest rate to 6.5% could mean that you’re paying a hundred dollars less each month. That can make all the difference in your budget. Plus, the extra time will allow you to make sure your credit score is great and to save extra money for that down payment.
Shop Around
No matter what you’re purchasing, whether it’s a mortgage, car or video game, you have to know the market. Sometimes loan officers will approve you for more than you expected. This doesn’t mean that you can suddenly afford to spend that much, however. Look at your income and expenses carefully, and determine exactly what you are looking for. If one lender is unwilling or unable to give you what you need, go to a second or third. As long as you are doing business with a reputable source, and you’ve accurately planned out your budget, you should be just fine. For more on mortgage services, find Horizon Bank online!