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4 Things to Know Before Buying a Home

House hunting is an exciting time—looking at flooring, picking out decorations, and choosing a dream home can make home buying look easy. But when it comes to mortgage, buyers can get discouraged and overwhelmed by the paperwork. We’ve put together a detailed guide to help you know what to expect before applying for a mortgage.

1. Check your credit: Run a thorough credit check to make sure all information is accurate

  1. Ideally, you should check your credit at least six to 12 months before applying for a mortgage. This allows time to improve a low personal score if necessary.

  2. To get your credit file, contact each of the three bureaus separately, or order all three copies from AnnualCreditReport.com. You’re entitled to one free report from each of the bureaus every year.

2. Figure out DTI (debt-to-income) ratio: Determine your DTI to see what you’re qualified for.

(Fannie Mae)

  1. Your debt-to-income (DTI) ratio is the percent of your monthly gross income that goes toward debt repayment. Mortgage Advisors use this percentage to gauge affordability.

  2. Ideally, you want to keep your credit utilization ratio below 30 percent when applying for a mortgage.

  3. Some mortgage Advisors allow a higher DTI, but only when a borrower has “compensating factors,” such as a high credit score or a large cash reserve.

  4. To improve your DTI ratio, pay off as much debt as possible before applying for a mortgage. This includes credit cards, auto loans, student loans, and other loans.

  5. You don’t have to be debt-free to purchase a home, but less debt can increase purchasing power.

  6. Check out Bankrate's Debt-to-income calculator to better understand where your DTI stands.

3. Save money: Having money saved for a down payment will make it easier for your application to be approved

  1. Today, the majority of mortgage programs require a down payment. This amount ranges from a minimum 3% to 5% for a conventional loan, and a minimum 3.5% for an FHA home loan—so if you pay $200,000 for a house, you’ll need at least $6,000 to $10,000 as a down payment.

  2. A down payment isn’t required with some VA loan or USDA loan programs.

  3. If you purchase a home with less than a 20% down payment, you’ll likely pay mortgage insurance to protect your lender in the event of default.

  4. Usually, you are also responsible for closing costs — which are roughly 2% to 5% of the loan amount (or $4,000-$10,000 on a $200K loan).

  5. When applying for a mortgage loan, your advisor will ask for copies of your bank statements to confirm you have enough in reserves for your down payment and closing costs.

  6. If you don’t have enough cash, some mortgage programs allow borrowers to use documented gift funds to cover all or some of their mortgage-related expenses.

  7. There are also multiple down payment assistance programs (DPAs) in every state. These offer grants or loans—often, forgivable loans—to qualified home buyers who need help with their down payments.

  8. So if you need a little extra help with the out-of-pocket costs, DPA is definitely worth looking into.

4. Determine your budget: Know how much you’re willing to pay

  1. Before meeting with a mortgage advisor, use an online mortgage calculator to estimate affordability.

  2. Once you know what you’re able to afford, our mortgage advisors can help you estimate how much to save for your down payment and closing costs.

  3. For example, if the calculator says you’re able to afford a $250,000 home, aim to save a minimum $12,500 for your down payment and perhaps another $5,000 to $7,500 for closing costs.

  4. Mortgage calculators vary. Some estimate your monthly payment based on the home price, down payment amount, interest rate, loan term, and other monthly mortgage expenses like homeowner’s insurance and property taxes. Other calculators estimate affordability using information you provide about your income and current debt payments.

  5. Mortgage calculators are only estimates. You’ll still need to contact a mortgage advisor to learn how much you really qualify for.

Follow these steps to make the mortgage process simple and stress free, so you can focus on all the fun parts of home buying.

For more information on mortgage programs, or to find an advisor that works for you, contact Panorama Mortgage Advisors.

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