Your first home is a significant financial commitment, with your mortgage playing a huge part. For example, you can get a traditional mortgage or you may qualify for a loan backed by the Veterans Administration or the Federal Housing Administration. Since you'll be paying on your mortgage for around 20 to 30 years to come, you'll want to know as much as possible about your options.
You must prepare an accurate budget so you know how much you can afford to spend on your monthly mortgage payment. Generally, your loan payment shouldn't exceed 28 percent of your income before taxes each month. Your budget will show you how much you currently have left after bills and rent, and you can use those figures to help you decide what you can afford to pay. Loans also come with points, which represent the different charges you pay for getting the loan. A lender charges origination points to cover their administration costs, for example. Each point represents one percent of the loan amount. So if your loan is for $100,000 and you're charged three points, you're paying $3,000.
Lenders will look at your financial situation, including your current savings and debts, as part of the approval process. You may need to pay down debts and save for a down payment and closing costs to qualify for the loan amount you want. Down payment requirements vary by lender but often range from 5 percent to 20 percent of the home's purchase price, while closing costs range around 3 percent to 4 percent. Check your credit reports with the major bureaus for negative entries, such as debts in collection, that will impact your credit score. You'll need to pay off any old debts and dispute any incorrect entries to clean up your report before you apply.
You'll need to research the different loan types to know what's available. A fixed-rate mortgage has a stable interest rate, while an adjustable-rate mortgage changes periodically. If you get a balloon mortgage, you'll have lower payments than you'd have on a traditional loan, but the loan term is short and you'll have a large lump sum payment due at the end. Balloon mortgages are used when the buyer plans to refinance the loan before the end of the term. On interest-only loans, you pay only the interest part of your loan for a set period of time, such as the first year. After that period expires, your payments go up to include both interest and principal. So you'll have lower payments at the start of the loan than you'd have on a traditional mortgage, but higher payments later.
Your lender will request a lot of documentation from you regarding your income, debts and assets. Gather the paperwork together beforehand so you don't slow down the loan process or miss any of the lender's deadlines. The exact paperwork you'll need varies by lender but commonly includes W-2 forms, income tax returns from the last tax year, bank account statements and proof of other assets, such as a mutual fund statement. Before you go to meet the loan officer, ask for a list of document requirements.
You'll need to shop around various lenders to get the best rate and terms available to you. Apply for a pre-approval instead of a pre-qualification. A pre-approval is a longer process than a pre-qualification but will help you negotiate with sellers. The lender evaluates your credit and financial circumstances for a pre-approval, and you'll get a commitment from the lender that shows you're approved for a loan up to a specific amount. A pre-qualification carries less weight with sellers because it's just a statement from the lender indicating you might qualify for a loan based on your financial information alone.
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