Buying a home is a significant step. With so much at stake, both financially and emotionally, you must be prepared for the process of fitting the house into your life — as well as fitting your life into the house.
If you need a mortgage to buy a home, take the task of finding a mortgage as seriously as any other task related to homeownership. The mortgage process might seem intimidating, but you can boil it down into five categories:
1. Make sure your credit is good
After you tackle those, do your best to get that credit score as high as possible. Pay your bills on time, remove any errors you find in your credit report, and pay down your debt.
The higher your credit score, the easier you will find it to find a mortgage lender, get a good interest rate, and get other loans.
2. Figure out how large a mortgage you can afford.
Look hard at your expenses and income, and decide how much you can pay monthly on housing.
Purchasing a house requires some one-time costs. The most notable is the down payment, but you also need to pay mortgage closing fees, legal fees, and moving expenses.
In addition, be aware that the cost of a house is more than the mortgage. If your down payment is not large enough (typically, if it’s less than 20 percent of the purchase price), you will have to get mandatory private mortgage insurance (PMI). You have to pay recurring costs such as utilities, property tax, home insurance and maintenance.
3. Find a mortgage lender
Banks are a popular lender for mortgages, but other options include mortgage companies, credit unions, insurance or trust companies and private lenders.
Shop around. Find out what rate a lender is willing to offer you. Be sure you also ask about administrative fees the lender charges as part of a mortgage agreement such as legal fees, title insurance, and mandatory property and home appraisals.
The amount of extra fees might be the factor that decides which lender you choose.
If you are a first-time home buyer, the Federal Housing Administration has programs that allow you to get a mortgage at a lower rate and with a smaller down payment. Note that not all lenders participate in FHA mortgage programs.
4. Find a mortgage rate
Interest rates on mortgages vary from lender to lender (though they’re all affected by the federally designated interest rate). You should also consider current fluctuations in mortgage rates. One option is to hire a mortgage broker, who will do the looking for you.
Different types of mortgages exist, too. In addition to the traditional fixed-rate mortgage, there are adjustable-rate mortgages and interest-only mortgages (though this last option is not always a good choice, even if it seems appealing at the outset).
5. Get preapproved for a mortgage
When you apply for preapproval, you have to go through the same paperwork as you would for an actual mortgage. A preapproval, however, is useful because you can find out how much your lender is willing to lend you.
Furthermore, home sellers will feel more comfortable dealing with you if you are preapproved. During the preapproval process, you may also decide you don’t like your lender, and you can leave the lender to get a preapproval with another one.
The bottom line
These five activities may take some time, but taking care of them before you start looking for a home puts you more in control of the mortgage process. They might also stop you from leaping into a home purchase before you are ready.
The five steps will make you feel more relaxed as you do your home shopping, and make it more enjoyable as well.