Buying your first home may easily be the biggest purchase of your life thus far. Remember how complex and confusing it was when you bought your first car? That's nothing compared to the level of preparation that comes with buying a house.
Fortunately, many homeowners have been in your situation before, and there are tons of resources available to help you along the way. As is the case with any difficult road, it's a lot easier if you know what to expect. With that in mind, here are some tips to help you as you approach your first mortgage.
Know What You Can AffordIt's easy to get wowed by options that are out of your price range, which may lead to borrowing too much money, which may then lead to foreclosure. Needless to say, you don't want that. The common rule of thumb is to allocate a maximum of 28 percent of your gross household income to your house payment. For example, if your annual household income is $80,000 (or roughly $6,600 a month), your house payment shouldn't exceed $1,850 per month. In most cases, abiding by this rule may keep your mortgage payment within your financial means, and it may keep you from overshooting and ending up with a house you can't afford.
Minimize Your DebtIn addition to the 28 percent rule, there's another factor to consider. Your overall household debt — your mortgage, car payment, student loans and credit cards — shouldn't be more than 36 percent of your gross household income. Using the above example of an $80,000 household income, your debt payments — including your house payment — should be less than $2,375 on a monthly basis. Again, the goal is to ensure that you aren't taking on more than you can manage. By maintaining a manageable debt load, you can budget yourself properly for the future.
Clean Up Your CreditEven if you have never missed a payment in your life, it's a good idea to obtain copies of your credit reports and review them for errors. Why? Because one in every five people could have an error on their credit report — and that error may be dragging your credit score down. You'd hate to prepare for years to buy a house, only for the entire process to be derailed because of a potential error on your credit report. Carefully review your credit reports and get any issues cleared up well before you apply for a mortgage.Along with reviewing your credit report, you should also take a look at your credit score. Your credit score is a huge factor in your ability to qualify for a mortgage, and a poor credit score may significantly jeopardizing your chances of getting approved. The fastest way to improve your credit score may be to pay off credit cards with high balances that are close to their credit limits, and to keep those balances low, if not fully paid off. Ideally, the balances on your credit cards should be less than 30 percent of your credit limits.
Save Your MoneyWith all external factors addressed, it's time to look inward. It's obvious that houses are expensive, and that you'll need all the money you can get in order to successfully buy a house. Still, the importance of saving money cannot be overstated. Every little bit helps, and even the money that doesn't go towards a down payment is useful.
In fact, some experts suggest that putting all of your savings into a down payment is a bad idea. Stashing some money away in an emergency fund can be very helpful, especially when the inevitable costs associated with household maintenance start popping up. Having this backup funding may reduce a lot of the stress that comes with owning a home, and it could give you peace of mind as you enter the mortgage application process.
Put a Freeze on Your SpendingYour credit report and credit scores are fluid entities. In other words, they measure everything you've done and everything you're currently doing. Actions such as adding debt and applying for new credit can have a significant impact on your credit score. In many cases, this can be the difference between approval and denial. Be sure to cap your credit-related activities a few months before you apply for a mortgage so that you won't have to deal with any surprises when it's time to go house shopping.
Research Mortgage Assistance ProgramsThe resources available to new homebuyers aren't limited to articles about what to expect when applying for a mortgage. The federal government has several programs in place to assist first-time homebuyers. These programs provide a variety of benefits, including a required down payment of just three percent, help towards closing costs, and much more. Additionally, there are state-specific assistance programs, and some employers have programs of their own that can help you out. Look into these programs before you apply for a mortgage; you may find that a little research can take you a long way.
It's never fun to do all the work necessary to buy a house. However, being smart and getting your affairs in order can make the actual process of applying for a mortgage and getting pre-qualified infinitely easier. Doing all the hard work now makes looking for and moving into your dream home that much more enjoyable.