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Getting Home Mortgage Ready in 3 Simple Steps

September 12, 2018




Don’t wait until you’re ready to move to start preparing financially to buy a home.

 If you’re like the vast majority of home buyers, you will choose to finance your purchase with a mortgage loan. By preparing in advance, you can avoid the common delays and roadblocks many buyers face when applying for a mortgage.

 The United States Federal issued new mortgage guidelines, which went into effect at the beginning of the year and raised the standards for mortgage applicants. The requirements may seem overwhelming, especially if you’re a first-time buyer. But we’ve outlined three simple steps to get you started on your path to approval.

 It’s never too early to start preparing to buy a home. Follow these three steps to begin laying the foundation for your future home purchase today!

 

 Vista Living Room - Estates 9-5STEP 1: CHECK YOUR CREDIT SCORE

 Your credit score is one of the first things a lender will check to see if you qualify for a loan. It’s a good idea to review your credit report and score yourself before you’re ready to apply for a mortgage. If you have a low score, you will need time to raise it. And sometimes fraudulent activity or erroneous information will appear on your report, which can take months to correct.

 There are five factors that impact your credit score: history of payments (35%), debts (30%), credit length (15%), new inquiries (10%), and diversity (10%).1

 Credit scores range from 300 to 900. A higher credit score will help you qualify for a lower mortgage interest rate, which will save you money.2

 Our preferred lenders can help provide you with a free credit score, as well as with any suggestions they can make to help get you mortgage ready. 

Pictured Above: The Vista Living Room, Legacy Community 

 Minimum Score Requirements

 Generally speaking banks and other traditional financial institutions have the strictest requirements. Most like to see a credit score above 700, however if you have a score below 600 you may still be able to secure a loan through a credit union or private lender. With lower credit scores, expect to pay a higher interest rate and additional fees.

Increase Your Credit Score

 There’s no quick fix for a low credit score, but the following steps will help you increase it over time. 

Make Payments on Time

At 35 percent, your payment history accounts for the largest portion of your credit score. Therefore, it’s crucial to get caught up on any late payments and make all of your future payments on time.

 If you have trouble remembering to pay your bills on time, set up payment reminders through your online banking platform, a free money management tool like Mint, or an app like BillMinder

Avoid Applying for New Credit You Don’t Need

New accounts will lower your average account age, which could negatively impact your length of credit history. Also, each time you apply for credit, it can result in a small decrease in your credit score.

 The exception to this rule? If you don’t have any credit cards—or any credit accounts at all—you should open an account to establish a credit history. Just be sure to use it responsibly and pay it off in full each month.

 If you need to shop for a new credit account, for example, a car loan, be sure to complete your loan applications within a short period of time. The credit bureaus attempt to distinguish between a search for a single loan and applications to open several new lines of credit by the window of time during which inquiries occur.

Pay Down Credit CardsAspen exterior dusk 9-5

When you pay off your credit cards and other revolving credit, you lower your amounts owed, or credit utilization ratio (ratio of account balances to credit limits). Some experts recommend starting with your highest-interest debt and paying it off first. Others suggest paying off your lowest balance first and then rolling that payment into your next-lowest balance to create momentum.

 Whichever method you choose, the first step is to make a list of all of your credit card balances and then start tackling them one by one. Make the minimum payments on all of your cards except one. Pay as much as possible on that card until it’s paid in full, then cross it off your list and move on to the next card.

 

Debt

Interest Rate

Total Payoff

Minimum Payment

Credit Card 1

12.5%

$460

$18.40

Credit Card 2

18.9%

$1,012

$40.48

Credit Card 3

3.11%

$6,300

$252

                                                              Pictured Above: The Aspen, Estates Community

Avoid Closing Old Accounts

Closing an old account will not remove it from your credit report. In fact, it can hurt your score, as it can raise your credit utilization ratio—since you’ll have less available credit—and decrease your average length of credit history.

 Similarly, paying off a collection account will not remove it from your report. It remains on your credit report for seven years, however, the negative impact on your score will decrease over time.     

Correct Errors on Your Report

Mistakes or fraudulent activity can negatively impact your credit score. That’s why it’s a good idea to check your credit report at least once per year. The Transunion score and report posts instructions for disputing errors on your report.

 While it may seem like a lot of effort to raise your credit score, your hard work will pay off in the long run. Not only will it help you qualify for a mortgage, a high credit score can help you secure a lower interest rate on car loans and credit cards, as well. You may even qualify for lower rates on insurance premiums.

 

 Vista Exterior Entry - EstatesSTEP 2: SAVE UP FOR A DOWN PAYMENT AND CLOSING COSTS

 The next step in preparing for your home purchase is to save up for a down payment and closing costs.

Down Payment

When you purchase a home, you typically pay for a portion of it in cash (down payment) and take out a loan to cover the remaining balance (mortgage). 

 The minimum amount you'll need for your down payment depends on the purchase price of the home.

PURCHASE PRICE

MINIMUM DOWN

$500,000 or less

●     5% of the purchase price

$500,000 to $999,999

●     5% of the first $500,000 of the purchase price

AND

●     10% for the portion of the purchase price above $500,000

$1 million or more

●     20% of the purchase price

 

 It’s important to note that these are the minimum requirements for securing a mortgage. If you're self-employed or have a low credit score, your down payment requirements may be higher.

 Generally speaking, the higher your down payment, the more money you will save on interest and fees. For example, if your down payment falls below 20 percent, you will be required to purchase mortgage loan insurance, which will cost you between 0.6 to 4.5 percent of the overall mortgage amount.

If you don’t have the minimum requirements for a down payment, the Department of Housing & Urban Development has two programs that can help make housing more affordable. These are the FHA Loan Program (Federal Housing Administration) which is a great choice for first time home buyers, and purchasing a HUD home (a previously foreclosed upon FHA home). Learn more about these programs and your eligibility options from USA.gov (https://www.usa.gov/mortgages#item-212877)”

                                      Pictured Above: The Vista Entry: Heritage Grove Community 

 Current Homeowners

If you’re a current homeowner, you may have equity in your home that you can use toward your down payment on a new home. We can help you estimate your expected return after you sell your current home and pay back your existing mortgage. Contact us for a free evaluation!

 Closing Costs

Closing costs should also be factored into your savings plan. These typically include legal fees and other administrative fees associated with the purchase of your home. Closing costs typically range between 1.5 to four percent of the purchase price.

 If you don’t have the funds to pay these outright at closing, you can often add a portion to your mortgage balance and pay it over time. However, you’ll have a higher monthly payment and pay more over the long term because you’ll pay interest on the fees.

                               

 STEP 3: ESTIMATE YOUR HOME PURCHASING POWER

 Once you have the required credit score, savings for a down payment and a list of all your outstanding debt obligations via your credit report, you can assess whether you are ready and able to purchase a home.

 It’s important to have a sense of how much you can reasonably afford—and how much you’ll be able to borrow—to see if homeownership is within reach.

 Your gross debt service ratio (GDS) and total debt service ratio (TDS) are the two primary measurements mortgage companies use to determine how much they are willing to lend you.

trends to watch 8-13-1

Gross Debt Service Ratio

Your GDS ratio is the percentage of your income that would go toward housing each month, including principal, interest, taxes, heat and 50 percent of condo fees (if applicable).

 To calculate your GDS ratio, a lender will add up your expected housing expenses and divide it by your gross monthly income (income before taxes). The maximum GDS ratio most conventional lenders will accept is 32 percent.

 Total Debt Service Ratio

The TDS ratio takes into account all of your monthly debt obligations: your expected housing expenses PLUS credit card bills, car payments, child and spousal support, and any other debt that shows up on your credit report.

 To calculate your TDS ratio, a lender will tabulate your expected housing expenses and other monthly debt payments and divide it by your gross monthly income (income before taxes). The maximum TDS ratio most conventional lenders will accept is 44 percent.

Home Affordability Calculator

To get a sense of how much home you can afford, visit the Canadian Real Estate Association’s Affordability Calculator at https://www.realtor.ca/Residential/calculator.aspx?tab=3.

 This handy tool will help you determine how much you can afford to borrow depending on your income, debt, property taxes, condo fees, heating costs and interest rate. It also offers a projection of your monthly mortgage payment. Add the “maximum mortgage” estimate to your down payment amount to find out your total home purchasing power.Avalon dusk 9-5

 When you enter the interest rate be sure to use either The Federal Reserve’s published rate. Our preferred lenders will also publish current mortgage rates for a variety of loan options. Want to learn more about how rates are determined? Investopedia has a great explanation here.” https://www.investopedia.com/ask/answers/who-determines-interest-rates/

 If the monthly cost estimate is significantly higher than what you’re currently paying for housing, you need to consider whether or not you can make up the difference each month in your budget.

If not, you may want to lower your target purchase price to reflect a more conservative TDS ratio.

(Note: This tool only provides an estimate of your purchasing power. You will need to secure pre-approval from a mortgage lender to know your true mortgage approval amount and monthly payment projections.)

Pictured Above: The Avalon, Legacy Community

 Can I Afford to Buy My Dream Home?

 Once you have a sense of your purchasing power, it’s time to find out which neighborhoods and types of homes you can afford. The best way to determine this is to contact a licensed real estate agent. We help homeowners like you every day and can send you a comprehensive list of homes within your budget that meet your specific needs.The majestic exterior

 If there are homes within your price range and target neighborhoods that meet your criteria—congratulations! It’s time to begin your home search.

 If not, you may need to continue saving up for a larger down payment … or adjust your search parameters to find homes that do fit within your budget. We can help you determine the right course for you.

Contact our preferred lenders today! 

                                                     Pictured Above: The Majestic, Legacy Community 

 

 START LAYING YOUR FOUNDATION TODAY

 It’s never too early to start preparing financially for a home purchase. These three steps will set you on the path toward homeownership … and a secure financial future!

 And if you are ready to buy now but still aren’t sure if you meet the minimum requirements, don’t get discouraged. You may be able to secure a loan through a credit union or a private lender. We can point you in the right direction and help you achieve your home or financial aspirations!

 Want to find out if you’re ready to buy a house? We are happy to help! Contact us for assistance on reviewing your options and determining the ideal time to begin your new home search.