My homebuying series continues today! This series documents my experiences and tips for making the purchase of a new home go as smoothly as possible. In Part 1, I focused on what you can do to get the process started — everything from finding the house you want to choosing a realtor. Today, I will be focusing on the money side of things and helping you figure out this crazy process!
Buying a home will likely be the biggest purchase you ever make. If you’re like me, you don’t have enough cash sitting in the bank to buy it outright and will need to find financing. Navigating the lending process can be stressful if you aren’t prepared.
Here are a few tips I have found that will help you through the process:
- Get pre-approved. Banks and credit unions have their own mortgage departments. There are also independent mortgage brokers who compare rates with several lenders. If you don’t have a relationship with a lender, your realtor should be able to refer someone. Preapproval will require your lender to pull your credit report and scores and calculate your debt-to-income ratio in order to determine what loan amount for which you may be approved.
- Know your options. Your lender will discuss the different loan options available to you. Conventional loans require at least 5% as a down payment but often have lower fees and mortgage insurance. Government programs offer lower down payment options. FHA loans have a minimum down payment amount of 3.5% while Rural Development does not require any money down. These programs do have some fees associated with them.
- Prepare for paperwork. The underwriting process is very overwhelming for many people. You’ll be asked for lots of financial documentation such as tax returns and bank statements. You will also need to explain any large or unusual deposits going into your accounts. Be sure to discuss any deposits with your lender before making them. Don’t take it personally if you’re asked for enough paperwork to kill a forest worth of trees.
- Don’t take out any new lines of credit or make large purchases. This may effect your credit score and your debt-to-income ratio. These will be checked again prior to closing on your loan and you want to be sure you still qualify.
- Don’t forget about closing costs. Your lender should give you an idea of what you will have to bring to the table to close the loan. This typically includes things like the first year of homeowner’s insurance and other fees associated with your loan. You may be able to negotiate with the seller of the home to pay some of these costs.
- Prepare for taxes and insurance. The lender will need to know that their investment is protected in case something happens to your home. You will need to secure and maintain homeowner’s insurance as a condition of your loan. You will also see costs for property taxes, and if you put down less than 20% for a down payment you will have to pay for private mortgage insurance. All of these will be included in your monthly payment and be held and paid through an escrow account set up by your lender.
- Relax and Enjoy! Before you know it, you’ll be decorating your new home!