If you woke up one day and randomly decided it was time to buy a house, but you need a mortgage, you’re probably not financially ready yet. There are a lot of steps you should take to ensure you’re not getting in over your head.
Start with checking out your credit score. While it’s not the only thing that lenders look at, it is a big part of it. The higher your credit rating is, the lower your interest rate is likely to be. You’ll also have a lot more options when it comes to choosing your mortgage.
Working on your credit score before you buy a house can save you thousands of dollars each year of your loan. Since the average mortgage is usually 30 years, that adds up.
Is it worth jumping right into house-hunting, or would the extra money you save by working on your credit rating be better spent elsewhere?
We all have our dream homes envisioned. When you’re shopping for a house, you probably don’t want to settle for anything less. But looking into alternative avenues might net you a much better deal.
Maybe the three bedroom, two bath, two car garage route was your plan. However, what’s available in the area you want could be out of your price range. Tweaking your search just a little might get you something comparable.
Going for a cheaper home can get you a lower interest rate, or at least ensure you pay less towards interest each month. If you must have a three bedroom, a manufactured home is a comparable option.
Today, manufactured homes are just as stable and durable as traditional houses. However, you get the benefit of being involved in a lot of the design process, on top of lower prices for more square footage.
3. Increase Your Down Payment
You’re going to need a down payment of some sort when you take out a mortgage. The more you put down, the more it benefits you.
For one thing, you’re taking out a smaller loan, so you’ll have lower mortgage rates. Win!
But it also has a ripple of effects beyond that. Lenders see you as less of a risk because you have more invested in your home. They’re more likely to approve you, giving you options instead of backing you into one unattractive rate.
One more thing, though. When you put down at least 20%, you usually don’t have to pay extra for mortgage insurance. This is an added layer of protection that’s required in case something happens and you default on your loan.
Saving money upfront will end up paying for itself in the long run. Either way, it’s money you’re spending. This way, it works for you instead of against you.
The average house mortgage is 30 years, but that’s not the only option. If you take out a shorter loan, you may pay a little more monthly, but a lot less overall.
Depending on the interest rate you are able to get, you might be surprised at the monthly premium difference. In some cases, it could be as little as $100, a small price to pay to have that hefty loan gone sooner.
Shorter-term loans also help you build equity faster. You’re paying more towards principal and less to interest. Since lenders see you as a lower risk, you’ll be able to find lower rates, too.
5. Pay Off Your Debt
In addition to your credit score, lenders look at your debt-to-income ratio. If you owe a lot of money, more than 36% of what you make, you’re considered a high risk.
It makes sense on the financial end. People who have a lot of bills are going to struggle to pay them all. Unexpected issues arise, and if you’re out of work, you’re not going to be able to pay your mortgage.
However, if you pay off your credit cards and other expenses before you apply for a loan, it’s a three-way smart move.
First, you have no more bills each month, especially those with high interest rates. Second, you can increase your credit rating, lowering your mortgage rates automatically. And finally, you decrease the debt-to-income ratio.
This financial move is perfect for house hunters, but it’s a goal that will take time.
Buying a house is an exciting milestone in your life, and one not to jump into lightly! If you’re prepared financially and you know you’re going to be able to handle the mortgage for your dream house, it’s more fun to search.
These tips will guide you to create a strategy to find, and afford, that perfect home!