What to Know Before Buying a House
Written by Dominic Black
Buying a home could help you escape annual rent increases, give you more living space, and let you build equity in an appreciating asset. But concerns about your ability to qualify for a mortgage loan may cause you to give up on the idea before your first open house tour. Fortunately, knowing just five things about the homebuying process could give you the confidence to break up with your landlord.
1. Checking your credit before applying for a mortgage could lower the overall cost of homeownership.
Your credit health is a key factor in mortgage loan approval. High credit scores give you access to programs with lower interest rates and more favorable repayment terms. While you don’t need perfect credit to secure a mortgage loan, having a credit score of 620 or higher is preferable.
Whether you’re concerned about a few negative marks on your credit report or you’ve never missed a payment, request a copy of your credit reports from AnnualCreditReport.com and review them for accuracy. Inaccurate information can lower your score just as much as accurate negative information. Follow each credit bureau’s dispute policy to have any errors removed from your report.
Paying down high credit balances and making payments on time can help further improve your credit score.
2. High credit card and loan balances could affect your eligibility for a mortgage.
Credit accounts with balances nearing their limit affect your credit score and your debt-to-income (DTI) ratio, a calculation mortgage lenders use to determine whether they believe your income can support a mortgage payment. Potential homebuyers don’t need to be debt-free to secure a loan approval, but carrying too much debt could contribute to a loan denial. Aim for a DTI of less than 36% to increase your eligibility for a variety of financing options.
Since your DTI compares your income to your debt obligations, adjusting at least one of these factors can help improve your ratio. Increase your income or pay off a portion of your debts before you apply for a mortgage to ensure the best possible outcome. Even if you’re unable to lower your DTI, you may still receive loan approval — but it might be for a lesser amount, require a larger down payment, and/or be assigned a higher interest rate.
3. Job and income stability is crucial, but not in the way you might think.
Credit scores help lenders assess your history of repaying past debt obligations as agreed. A review of your income and work history informs them of your present ability to repay the loan amount they may approve. You don’t need to forgo a higher-paying career or decline a new employment offer that comes with a pay increase to lock in a mortgage approval. However, you will need to explain an inconsistent income or frequent job changes if they’ve occurred within the past 24–36 months. Lenders are looking for assurance that you’ll continue to have the funds available to make mortgage payments should they approve your loan application.
4. Lender qualifications can vary widely.
Mortgage lenders review many of the same factors before approving a loan. However, different lenders may view each factor differently. Underwriting requirements, which borrowers must meet before a loan is disbursed, may allow one lender to weigh credit scores more heavily than DTIs, or vice versa.
5. Homeownership expenses extend beyond the monthly payment.
It’s easy to focus on loan qualification and forget that the costs of homeownership extend far beyond the monthly mortgage payment. In addition to a principal and interest payment, homeowners must budget for annual property taxes and annual homeowners insurance. These expenses can be added to the monthly mortgage payment and held in an escrow account so the lender can pay the appropriate entity by the annual due date. Depending on the neighborhood, there may also be homeowner association fees, which are typically paid separately from a mortgage.
Homeowners should also set aside at least 1% of the home’s purchase price in a designated savings account for repairs and routine maintenance. Adding this amount to the account each year could prevent a surprise expense from negatively affecting your finances in the future.
Gain the peace of mind that comes with being financially prepared to say no to another leasing agreement. Check on your readiness by obtaining a home loan pre-qualification. Speak with an LSB mortgage lender who can confirm how much loan you qualify for before you make a purchase offer on your dream home. Contact us at (800) 588-7551 today!