A handy checklist to help you understand how to buy a home and how to get a home mortgage loan.
You've found a great realtor who has helped you find the home that's right for you, you've worked out what you will need to offer given the local market, and the realtor is ready to start negotiations on your behalf. Now the hard work really starts: how large of a mortgage are you going to need to be able to buy the house, and can you afford it? This guide helps you work through these tough issues.
Find a Down Payment
Particularly in today's economy, you are going to need to come up with a down payment before you can qualify for a mortgage. The size of the down payment will affect whether you qualify for the best mortgage rates, and even whether you qualify at all. A large down payment in relation to the value of the house you want to buy leads to a lower Loan to Value ratio (LTV) — a key ratio that lenders use to determine whether or not to offer you a home loan, and what interest rate they will charge you. If you are putting down less than 20% of the home price, expect to pay more for your mortgage, unless you get an FHA or VA loan.
Ensure Your Credit is in Good Standing
Another key figure used to determine whether you qualify for a mortgage, and at what rate, is your credit score (aka FICO score, so-called because it is produced by the Fair Isaac Corporation - FICO is the best-known and most widely used credit score model in the United States). Your credit score is driven by a range of factors, including whether payments on your existing debts have been on time, what percentage of your existing credit limits are being used (lower is better), and the average age of your existing debt facilities (older is better). If you have bad credit, you will pay more to borrow, or you will struggle to get a loan. If you have a credit score above 720 or so, you can expect to get the best rates available.
Don't know your score? You can fill out the short form on this page to sign up for a free credit score, or read more about getting a credit report and credit score.
Make Sure You Can Afford the Payments
If you are going to buy a home, it is critical to make sure that you can afford the payments over time. Is there room in your budget to tackle the mortgage payments month after month, in addition to property taxes and homeowners insurance? Make sure to account for maintenance costs if you are buying an older home, and put together a budget to make sure that the numbers work. Mortgage lenders want to make sure you can afford your monthly payments; they use the 'Debt to Income' ratio (DTI) as a measure for this. If the payments on your mortgage, plus taxes and insurance, plus the monthly payments you are making on other debts (auto loans, credit cards etc.) add up to more than a certain percentage of your income before taxes, it is likely that you won't qualify for a loan. Even if you do qualify, you may struggle to keep up with your payments.
Keep an Eye on the Appraisal
During the property/credit boom, a home appraisal was a formality - you could almost guarantee that if a home was selling for a certain amount, then the appraisal would come in near that value. Those days are gone, and many appraisals are now much more conservative. If the appraisal comes in a lot lower than the asking price, your mortgage offer may be withdrawn. Make sure to stay in communication with the appraiser and provide support for the asking price in the neighborhood in question.
Build an Emergency Fund
Lenders will ensure that you have readily accessible funds to cover at least two months of mortgage payments in case of emergency. Regardless, most financial planners recommend an emergency fund of 6-12 months of after-tax income in case the unexpected happens.
Find a Great Lender or Broker
The right lender or mortgage broker will take you through all of these steps and more. You want to find an experienced advisor who can provide competitive rates, and who is prepared to go the extra mile to coach you through the process. Bills.com's network of trusted lenders can help get you a great rate with good service.