Preparing for your first mortgage can be a stressful time. Being able to put yourself in the right position to buy the ideal house and then navigating the mortgage landscape can be a massive upheaval in your life, your finances, and your state of mind, and that’s even when things run smoothly. After all, a mortgage is a massive debt to take on, and if you’re not in the best financial position, it could be one of the worst choices you might make in life.
But enough with the fear and worry, embarking on the journey to purchase your first home is a thrilling adventure that brings with it a level of excitement like no other. When you finally sign the last of the paperwork, and you get the keys in your hand, the next life phase begins, and it’s one you should most definitely relish. This journey is full of anticipation and joy, not just stress and worry.
This post offers tip prior to making your mortgage application to ensure you are ready to go and understand everything that is going to happen. Remember, you’re not alone in this journey. There are professionals and resources available to guide you through your responsibilities once you’re a fully-fledged homeowner, providing you with the necessary support and reassurance. You’re not in this alone, and there are people and tools to help you every step of the way.
Terminology
It’s never a bad idea to brush up on the lingo and legal terminology concerning mortgages and what they mean. Understanding these terms and how they matter to you and your mortgage can be empowering and lead to a clearer understanding of the process. Knowledge is power, and the more you understand about the mortgage process, the more in control you’ll feel.
Take a look at some of the more common and uncommon phrases you might hear, such as agreement in principle, which means that a mortgage company has provisionally accepted you for a mortgage, but it’s not set in stone. It’s best not to view houses unless you have an agreement in principle in place.
Equity, which is how much you value your house holds, is an important concept to understand. It’s the difference between the market value of your home and the amount you still owe on your mortgage. As you pay off your mortgage, your equity increases.
Other terms, including conveyancing, amortization, quitclaim deeds, liens, closing costs, and more, will all be terms you might come across during the mortgage process. So ensuring you know what they all mean and are confident you understand them and your role in each one will help set you up for success.
Debt-to-Income Ratio
You need to seriously examine your debt-to-income ratio to ensure you are in the best financial position to take on a mortgage and avoid being knocked back. Your debt-to-income ratio is how much of your income is consumed by your debts. Typically, the maximum ratio accepted by some lenders can be as high as 43%; however, 36% and under is more acceptable and will boost your chances of being accepted for a first-time mortgage.
Lowering debt levels prior to starting your mortgage application is advisable; keeping your credit score as high as possible will serve you well. While 620-670 is considered acceptable, having your score over 670 is optimum for approval.
Avoid taking on large sums of unnecessary credit. Ensure you are paying off things like credit cards in full and not letting interest and balances build up. Don’t take on huge car loans that go into your income, etc. Being sensible with your credit score, keeping debt levels low, and not taking out bad credit will help you when preparing to take on a first-time mortgage.
Understand The Different Mortgages and Assistance Available
There are multiple types of mortgages you can apply for as a first-time buyer, as well as assistance programs to help you up the property ladder. Understanding the different types of mortgages available and how they impact your payments and total costs will help you make the right decisions. Knowing which first-time buyer assistance programs you can qualify for will help with getting the best deal possible to afford your home ownership dreams.
Housing Choice Voucher Ownership can be a good option for you if you have a low income and want to buy your own home. VA Loans are specifically for veterans wanting to buy a home and can be worth considering if you meet the criteria and have served in the military.
Down Payment Assistance Programs can help with covering your down payment and closing costs, as these sums can be considerable. HomeOne Mortgage allows for a down payment of around 3% and is only available to first-time buyers, or you might qualify for one of the other federal first-time home buyer programs.
Ensure you understand each rule and criteria before proceeding with your application. That way you get the right support and assistance and know what to expect as you progress. The more informed you are, the better decisions you will be able to make.
In addition, you need to understand the differences between fixed-rate mortgages and adjustable-rate ones. Fixed-rate mortgages might have higher payments, but these are set for the duration of the mortgage, while your monthly payments can fluctuate with an adjustable-rate mortgage.
Fees, Costs, and Down Payments
It’s important to understand and be comfortable with all of the costs that you will need to pay upfront so you can save for them. Closing costs can really rack up and, in some cases, total 5% of the cost of the home you’re purchasing. You need to pay these costs out of pocket, and your mortgage doesn’t typically cover them.
While you can get assistance with these costs, it’s essential to understand what you will need to pay for when taking on a mortgage. Realtors fees, surveying and conveyance costs, insurance, appraisals, attorney costs, escrow deposit, commissions, underwriting fees and more are included in your closing costs and can be substantial.
Be aware that these costs are on top of your down payment so you can fully prepare your finances to afford them. Buying a house isn’t cheap, in more ways than one.
Budget
When applying for your first mortgage, the affordability of the mortgage payments is often the focus, and for good reason. However, it is also a good idea to consider the big picture as a homeowner. There are many aspects of owning a property to consider when determining your budget.
Some top things to budget for are homeowners insurance, rates, property taxes, repairs and maintenance. Also, HOA fees if you move into an HOA area, utilities, appliances, and upgrades to the property for things like windows, a new HVAC, or a roof. These are all things you will need to be confident you can realistically afford to take on with your income outside of your mortgage amount.
Unlike renting, these costs are not absorbed by someone else for a single monthly payment. You will be required to pay them, so budget correctly so you can afford living expenses once you take on the mortgage.
Many people worldwide dream of becoming first-time home buyers. However, making that dream a reality is tricky, especially in an economy where finances are squeezed and lending criteria are harder to meet than ever before. These tips can help you prepare properly for this stage in your journey.
Top photo by Andrea Piacquadio via Pexels.