Buying your first home can be both exciting and overwhelming. This guide will help you with the basics of successfully purchasing your dream home whilst taking some of the anxiety out of the unknown.
Know Your Credit Scores
Your credit scores are known as FICO scores. Know this number. This reflects your creditworthiness and purchasing power for lenders.
Do this before you secure funding since you will need this as part of your pre-approval process. There are many companies out there that can provide you with this free service. This will be the springboard for understanding your financial health before moving onto budgeting.
What Your Scores Mean
Scores range from 300 to 850. There are three major credit reporting companies: Experian, Transunion, and Equifax. Do credit score pull that comprises all three companies.
The higher your number, the better the interest rate, terms, and loan products you will be able to choose from. Look at each entry to make sure there are no inaccuracies or discrepancies. If there are, make sure to clean this up with the credit reporting company before beginning the loan pre-approval process.
670 or above is considered good credit.
What’s Your Creditworthiness?
Add up your credit cards, car loans, child support, alimony, federal tax liens, etc. Then add your net income each month. This will form your debt to income ratio and be your creditworthiness.
Conventional loans with the best chances of approval should be no more than 45%. In short, your debt obligations should be no more than 45% of your net monthly income. The lower this number is, the better your creditworthiness.
How Much Down Payment Do You Need?
Conventional loans typically require a 20% down payment. You will want to include this in the health of your financial picture.
If you do not have the 20% cash in hand for a down payment, there are other options as well, such as private mortgage insurance and down payment assistance programs. But it will cost you more in terms of a higher interest rate or higher monthly payment.
How to Get Pre-Approved
A pre-approval letter is typically done on the same day. Your lender will be asking you some of the basic questions stipulated above before he can write you a pre-approval letter.
He will also be pulling your credit report when you are trying to get a pre-approval letter, so you want to make sure you have checked it previously for errors or discrepancies.