It’s not that you hate renting, but you hate renting. At one time, it may have worked for you. But now that rental rates are sky high, you’re ready for a change. The big change. You’re ready to buy a home.
Cool. Now what?
Now comes the money part. Home buying is one of the biggest financial commitments you’ll make in your life. And unless you have the wherewithal to pay cash, chances are, you’ll need a mortgage.
It’s not a friendly word. But getting a mortgage doesn’t have to be an awful experience, especially if you know what to expect before you start. Here are some tips on how you should prepare to buy your first home.
Smooth out your credit
Credit is one of the most important factors lenders weigh when deciding if you can get a mortgage. It gauges your ability to repay a loan and plays a critical role in determining the kind of loan you qualify for, the interest rate you get and how much you’ll pay in closing costs.
A higher credit score results in a better loan. Even if your credit isn’t stellar, you can get a mortgage. Just know you may get a higher interest rate, which means higher monthly payments.
If you’re in no rush to buy, consider putting in some work to improve your score, whether that means paying off debt or disputing negative or incorrect information on your credit report.
Lower your DTI
Speaking of debt, lenders look at that, too. Before approving you for a mortgage, lenders evaluate your DTI, or debt-to-income ratio. It’s a percentage showing how much debt you have in relation to income. If your debt significantly outweighs your income, lenders figure you’re juggling too much debt to take on more (side note: most borrowers don’t qualify for a mortgage if their DTI is above 43 percent).
A good way to lower your DTI is to pay off outstanding debts — car loans, medical bills, anything that’s rent-to-own — so your debt load is lighter.
Save for your down payment
Affording the down payment is one of the most challenging aspects of home buying. For years, the golden rule was that you should put down 20 percent of the total cost of your home to avoid paying private mortgage insurance.
Twenty percent is a lot. For example, if you want a home that’s $250,000, you should have $50,000 ready to put down. That’s a hefty chunk of change many people can’t afford. Fortunately, there are a number of loan programs nowadays that allow buyers to put down as little as 3 percent (that’s$7,500 on a $250,000 home). If you’ve ever served in the military or plan to live in a rural area, you may not need to make a down payment at all.
Just in case, you should be prepared to put something down so your lender knows you’re serious about buying.
Collect your paperwork
Lenders want documentation. Lots of it. That’s because they hate risk and want to ensure you have the means to repay the money they’re lending you. They’ll ask to see your:
- Proof of income & employment (paystubs, W-2s, tax returns)
- Proof of identity (a driver’s license or Social Security number)
- Proof you have funds to pay a mortgage (bank statements)
Those are just the highlights. Lenders could request more paperwork, including past rental checks, gift letters from family or friends helping you with the down payment, a list of your debts and assets or proof of any additional income.
Shop for lenders
Just like you comparison shop to find the best sofa set for your living room, you should comparison shop for your mortgage. LendingTree’s online marketplace lets you shop and compare top mortgage offers from hundreds of lenders, and then pick the one with rates and terms best for you. While you’re at it, get loan estimates from different lenders so you can compare rates, fees and closing costs each lender will charge. Then, negotiate for the best deal.
Save for future costs
Once you’re approved for the mortgage and find the home you love, you’ll need to pay for the array of fees and expenses lenders charge for giving you a mortgage. These are your closing costs and they can comprise up to 5 percent of your home’s sales price (i.e., a few thousand dollars).
Also, keep in mind that your home is now 100 percent your responsibility. When the pipes leak, you have to fix them. When the gutters clog, you have to clear them. That, on top of paying property taxes, utilities, insurance and, potentially, homeowners association dues.
It doesn’t hurt to start saving now for later.
For more on the home buying process, check out LendingTree Academy, a free resource packed with helpful financial information, taught by actual LendingTree employees.