When you’re shopping for your first home, applying for a mortgage can seem like a daunting task. Breaking the home loan process into small steps simplifies your tasks and puts you on the path to homeownership. This guide outlines the basic milestones of your mortgage journey.
1. Set a Budget
According to the U.S. Department of Housing and Urban Development, the first step to buying your first home is determining how much you can afford to spend. The answer to this question depends on your monthly income, your other expenses, your credit rating, the interest rate on your mortgage, and the amount you can afford as a downpayment. The Wall Street Journal recommends spending no more than 28 percent of your monthly income on a house payment. This figure should include not only the mortgage, but taxes, insurance, and other associated fees. Don’t forget to adjust your overall budget to account for the cost of utilities and upkeep.
2. Check Your Credit
Ideally, if you’re shopping for your first home, your credit is already in decent shape. To get the best rates on a mortgage, you’ll need to have a FICO score of at least 620 if you’re planning on working with a conventional lender. If your score is lower though, you still have options. Loans guaranteed through the Federal Housing Administration can be approved with a credit score of 580 if you have a downpayment of 3.5 percent of the cost of the home, or as low as 500 if you’re prepared to put down a deposit of at least 10 percent.
3. Shop for a Loan
To find the best mortgage for your specific situation, you’ll want to compare information from several lenders, including traditional banks, mortgage companies and brokers, and credit unions. Mortgages can have either a fixed or adjustable interest rate. Adjustable rate loans have changing interest rates and therefore changing payments, while fixed interest rates are the same for the life of the loan. You can often pay points on your loan at closing, which allows you to get a lower interest rate. Ask each lender about their fees, which may include but are not limited to underwriting fees, broker fees, and closing costs. You should also check to see if you qualify for any special loan programs. Each state has its programs for first-time homebuyers. You may also be able to access special programs depending on where you’re planning to buy a home, your profession, and other factors.
4. Get Preapproved
When you are satisfied with the terms offered by a mortgage lender, it’s time to get preapproved. You’ll need to supply the lender with the required information to review all your financial obligations, including credit report, pay stubs, bank statement, salary, assets, and debts. If you pass muster, they’ll supply you with a preapproval letter that you can use when shopping for a home. This makes you a serious contender if there are multiple offers on the property you’re interested in purchasing.