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6 things to do before applying for a mortgage

Acquiring a home not only represents something tangible that is your own, but is also an asset that typically increases in value over time. The equity created in home ownership comes in handy if you later when you retire, or if you want to fund a business.

The first step in the path to home ownership usually involves obtaining a mortgage from a financial institution. Applying for a mortgage can be a little daunting the first time. This guide walks you through the steps of preparing to get a mortgage, and your first home.

  1. Save for a down payment

It is a good idea to start saving well before deciding what type of house to buy or even where. Nearly all mortgage loans and lenders require some amount of cash as a down payment. The amount you’ve set aside for this will determine the kind of mortgage you qualify for. It will also impact how much you can afford to borrow for a home.

Down payments can vary from 3% to 20% depending on the type of loan you choose and are qualified for. However, you should be aware that with a smaller down payment, you’ll likely be required to pay for mortgage insurance, and your loan application will be subject to greater scrutiny.

Here are several loan types that allow a smaller down payment amount:

home loanFHA: The Federal Housing Administration offers 3.5% down payment mortgages through participating lenders. FHA loans are also easier to qualify for and have slightly lower rates than conventional mortgages.

GSE-backed loans: Fannie Mae and Freddie Mac are both currently insuring 97% loan-to-value loans. That enables lenders to offer 3% down payment mortgages to qualified buyers.

USDA: Home buyers in rural and suburban areas may be able to qualify for home loans offered by the U.S. Department of Agriculture. USDA loans offer low rates and 100% financing.

VA: Eligible veterans, as well as active duty service members and their families, can qualify for Veterans Administration loans. A VA mortgage requires no down payment or mortgage insurance.

  1. Clear up your credit report

As part of this process, you should know your credit score. Many borrowers start out with less than stellar credit. Maybe you were late on a student loan payment, or just don’t have much credit history. Don’t despair. There are steps you can take to repair and improve your credit. This article will help you repair and improve your credit.

  1. Calculate what you can afford

Consider Your Income. Many banks will require that your monthly costs can’t exceed a percentage of your income (for example 28%). That means if you earn $50,000 per year, your total monthly housing costs should not exceed $1166 (28% of your monthly income). Using a mortgage calculator you can use this number to figure out how much you can afford.

If you are a two-income family, both incomes can be used to determine the percentage of your monthly housing cost.

Consider Your Debts. In addition to your income, if you have recurring debts, the total monthly payments on existing debt plus new payments for your mortgage may not be allowed to exceed a certain threshold (for example 41%). Using the example above that would mean that if your monthly debt payments are in excess of $541 per month (bringing your total debt of $541 + $1166 = $1708 or 41% in total)

  1. Decide what type of home and where is right for you

Think through your lifestyle over the next decade. How big is your family? What neighborhoods are you willing to consider? Are schools a factor? Is a single-family home a requirement or is a condo an option? For some home buyers, living in a specific neighborhood is the most important factor above all else. For others, features of the home itself are take precedence. In a perfect world, you’d find the ideal home, in your neighborhood of choice, at a price you can afford, but realistically, most people will have to make some compromises.

Make a list of the features you want in a home–number of bedrooms, a fenced yard, granite countertops, a garage, etc.–and then rank them in terms of priorities. Decide whether the house or the neighborhood matters more to you, or whether you’re willing to make a longer commute in order to own a home with a larger lot.

Communities have their own unique flavor. Check out our Locations page, where you can view characteristics of 15 area communities in Otter Tail County and beyond. There is information on schools, recreation, lakes and more, but if you have other questions just give us a shout!

  1. Compare mortgage lenders

Before you start the search for your first home, it is a good idea to research mortgage lenders. Ask your realtor for a recommendation, but also check local banks. Often an area credit union may offer a competitive rate. To compare national mortgage companies, you can get a quote from a service like LendingTree.com. One percentage point difference in your loan rate translates to thousands of dollars over the life of the loan, so shop around!

Be brutally honest on your application to get a reliable quote. Mortgage quotes can vary based on your down payment, credit history, income, assets, and debt. All information will be verified, so being as accurate as you can will save time in the process.

  1. Get pre-qualified

Once you have selected a mortgage company and completed an application, request a pre-qualification letter. This document is essentially a promise from the lender that you’re qualified to borrow up to a certain amount of money at a specific interest rate, subject to a property appraisal and other documentation.

In today’s competitive housing market, it is not uncommon for a seller to receive multiple offers on their home. Having a pre-qualification letter in hand could be the difference a seller selecting your offer over another.

Obtaining a mortgage loan in order to buy a home will take time and effort, but the payoff is the security and comfort of owning your own home. When you are ready to take the leap into home ownership, give us a call- we would be happy to guide you every step of the way.

 

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Tips for a First-time Home Loan
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Tips for a First-time Home Loan
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Before you start the search for your first home, be prepared to apply for your first mortgage loan. These six tips will help you be ready to get your great home, even in today's competitive market.
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Homes and Lakeshore- Keller Williams Realty Professionals
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