5 STEPS TO APPLY FOR A MORTGAGE
Buying a home is usually the biggest purchase you will ever make. Often, it can seem overwhelming while trying to navigate through the buying process. In this blog, we will outline five steps you can take to make home buying a little easier.
Reviewing your credit score and credit report.
Perhaps the first thing we should address is the difference between “credit score” and “credit report.”
Your credit score is a three-digit number that represents your overall risk at a glance. This score typically ranges from 300 to 850. Obviously, the higher your score, the better your credit is. But this is not the only determining factor when applying for credit. Most lenders will only use this as a starting point. If your score is within the range they are looking for, they move on to your credit report. If your score is too low, your loan request will most likely be rejected immediately.
Your credit report is a summation of your credit activity. This could include the types of credit you have or had in the past, along with your payment history. This historical report is what your credit score is based on. Your payment history, the amount of your debt, and the length of your credit history are the primary factors that establish your credit score.
Taking care of old and existing debt.
Paying down your outstanding debt is a must do when applying for a mortgage. The two most important items that you need to address:
1. Lower your debt to income ratio.
2. Cleaning old debt from your credit report.
You want to lower your debt to income ratio so that lenders can see that you have enough income to cover the mortgage, even when the monthly premiums fluctuate. A common misconception is that having a fixed interest rate means you pay the same amount each month. While the principal payment may not fluctuate, the taxes and insurance premiums will. So, you will need to take that into consideration.
Cleaning out your older debts is a requirement by almost every lending institution. What they are primarily looking for is closed accounts that still have an outstanding balance, such as old credit cards or revolving lines of credit. You need to pay these off before applying for a loan, or shortly thereafter.
Don’t forget about an emergency fund.
This is one that most people overlook and really shouldn’t. As with most purchases, once you take possession, you notice all the little quirks and broken items. Although the home inspector should have noticed most items, there’s always something that slips through the cracks. A window or door not sealed properly, a leaky faucet or slow drain.
If you only saved enough to cover the closing cost and down payment, you may find yourself scrambling for extra cash to fix these items out-of-pocket. Having an emergency fund can help with these unexpected costs. It’s best to have your emergency fund in an accessible and separate account from your mortgage and living expense accounts, such as a CNB savings account.
Most experts will suggest having an emergency fund that will cover all your living expenses for three to six months.
What’s your budget?
Before you start searching for your new dream home, you first need to establish how much home you can afford. Many people get this backwards and find their dream home first, only to realize that it’s out of their budget.
When you're looking at the monthly mortgage payment, don’t isolate it from the rest of your budget, but rather incorporate it as if it were another bill. Because that’s exactly what it will become. Don’t forget to include taxes, insurance, utilities, etc. You also want to add consideration to rising taxes and insurance premiums year to year. These fluctuations could mean a few hundred dollars more per month than what you initially expected.
You may want to work with a financial planner, realtor, or your bank to estimate how much you can safely afford to spend on your new home.
Down payments, closing costs, and fees.
The down payment is one of the largest upfront costs that you will encounter when buying a home. However, there are some options to reduce this. If your active duty military or a veteran, you may qualify for 0% down through a VA loan. Currently, the down payment rate for an FHA loan is 3.5% of the home’s value. Most conventional lenders will require 5% to 20% of the home value as a down payment.
The closing cost is one item that you may be able to negotiate. In some circumstances, the seller may offer to pay this expense or at least split the cost with you.
Fees are everywhere. Buying a home is no exception to that rule. Some fees or additional expenses could include broker fees, home inspection, title insurance, etc. Most of these are negotiable as to who pays what, the seller or buyer. So, don’t be afraid to make an offer on a house and include stipulations that the seller pays these or at least splits the cost with you as part of the deal.
Final Thoughts: Things to look out for.
As with any purchase, there are additional items to consider when shopping for a new home. The items below are all too commonly overlooked during the home buying process, but they warrant some serious attention.
New vs used home If you’re getting on in years, you may want to consider a new home instead of an older one that may need repairs soon. Newer homes usually come with new appliances that are fully covered under warranties.
If you’re young, full of energy and like a challenge, older homes, sometimes referred to as flip homes, could be a wonderful investment. You can get these homes relatively cheap, do the repairs and renovations yourself, and resale it later if you outgrow it.
Schools: If you have children living with you, or expect to, you should check out the local schools and see how they rate in a variety of issues.
Internet service: If you need high-speed internet, ask your soon to be neighbors what company they use and how satisfied they are with the service.
Utilities: Find out what utility companies provide services to your prospective home and what deposits or additional fees they may charge.
Neighbors (The good and the bad): Neighbors can make or break a deal in some situations. Try driving by at different hours of the day and evening to see what the activity is like. Is it quiet? Is it in a community that you would like to be a part of?
When you’re ready to take the plunge, check out CNB for your future home loan.
Disclaimer: The information posted on blogs and vlogs by City National Bank is for educational and entertainment purposes only and is not intended as a substitute for professional or legal advice. City National Bank will not be held liable for any loss or damage of any kind in connection with this blog.
