Make 2020 the Year for Homeownership… Getting Your Financing Ready

Buying a home can be an exciting journey, especially when you’re becoming a homeowner for the first time. However, the process is often complicated and may seem overwhelming to new buyers. To ensure the path to homeownership is a successful and relatively smooth one, first time buyers should make their financial preparations well ahead of time. This includes checking your credit, researching down payment requirements and getting pre-approved for a mortgage.

Getting a Financial Check-Up: Evaluate Your Credit Score

Since you will most likely need a mortgage to help pay for your home purchase, it’s very important to pay attention to your financial well-being. One way to do this is to keep track of your credit score and credit report–two things that any mortgage lender will use to judge your application.

You can obtain a free credit report once a year from each of the three major credit reporting bureaus:

TransUnion: transunion.com
Equifax: equifax.com
Experian: experian.com

Checking your own credit report will not negatively impact your credit rating. When you check your own credit score it’s known as a soft inquiry and it does not affect your overall credit rating. The same can be said when a company or employer checks your credit as part of a background check.

When a financial institution runs a credit check to see if you qualify for a mortgage, line of credit or credit card, this is known as a hard inquiry. Hard inquiries can affect your overall credit rating; however, the effect is usually minimal. Your score may lower a couple of points after a hard inquiry but you should be able to recover those points within a fairly short period of time (as long as you aren’t continuously applying for credit and you’re making good financial decisions consistently, i.e. paying your bills on time, not using all of your available credit, et cetera.)

Starting the Mortgage Process: Getting Pre-Approved

Before you begin scheduling home viewings and interviewing real estate agents, it’s a good idea to have a firm idea of how much home you can afford. Getting pre-approved for a home loan not only helps you see how much borrowing power you have, it also makes you a stronger buyer in the eyes of home sellers. People who are selling their home are more likely to accept an offer from a pre-approved borrower versus a buyer who hasn’t done their mortgage due diligence. This is because they know pre-approved buyers have already taken the necessary first steps in securing financing.

Understanding Affordability: Down Payments and Monthly Payments

Once you’ve received your pre-approval letter from your lender, you may be ready to start searching for your dream home. Here are a few key points to keep in mind when evaluating a home’s true cost.

Down payment minimum: Does your loan require a minimum down payment? If so, can you realistically afford to pay it?
Private mortgage insurance: If you cannot afford to pay the minimum down payment, you will most likely be required to pay private mortgage insurance (PMI), an additional fee the lender charges to protect themselves in the event that you default on your loan. This means your down payment costs will be lower, but your monthly mortgage payments may be higher.
What will the payments be? Just because you get pre-approved for a certain dollar amount, that doesn’t mean you should borrow up to that amount. Remember, the more you borrow, the higher your mortgage payments will be. Determine ahead of time how much you can realistically and comfortably afford to pay each month and only consider homes that will allow you to stay within that range.
Monthly versus bi-weekly mortgage payments: Will you be planning to make your mortgage payment once a month or bi-weekly? Making bi-weekly payments can help you pay off your loan sooner and build equity faster. However, this may not be feasible for every borrower. Monthly payments may be more manageable for some borrowers’ situations.

These are just a few of the many financial aspects of buying a home, so be sure to do a little homework before you jump into a mortgage contract, and don’t hesitate to consult with your industry professionals if you’re unsure about anything. Remember, homeownership is a huge commitment that can have long-term financial effects, but if you navigate the process with patience, intelligence and the help of trusted mortgage and real estate professionals, you’ll see that buying a home can also have enormous long term rewards. Happy home buying!