8 Important Steps You Need to Take Before Shopping for a Mortgage
Shopping for a mortgage and home is the first step you need to take if you want to fulfill your dream as a homeowner. Buying a home is often overwhelming simply because you’re making one of the biggest financial decisions in your life. Before applying, it’s smart to educate yourself on the mortgage process and programs so that you can better understand your options.
Here are the important steps you need to take before shopping for a mortgage:
- Understand your credit – You’re not ready to shop for a mortgage if you still don’t know the difference between credit score and credit reports. Examine the free credit reports that you get from the top 3 credit bureaus and file a dispute if there are any errors. Your credit score, on the other hand, will determine the mortgage and interest rate a lender will offer you. Generally, lenders will give you a better offer if your credit score is in the mid-to-high 700s or above.
- Evaluate your spending – Because buying a home means additional expenses, you need to know if you can comfortably cover it on top of your current expenses. To get an idea of your spending, you may want to check your credit card and checking account for the past few months. Knowing how much you spend will help you predict a budget as a homeowner. You may use a simple spending tracker to record all your monthly expenses.
- Set a budget for future expenses – Your expenses will significantly increase once you become a homeowner. Aside from your monthly mortgage, you’ll need to set a budget to cover recurring home expenses, insurances, and home repair and maintenance costs. Decide to make some spending adjustments and budgeting to determine the amount you can spend on a new home.
- Determine how much money you can pay upfront – The down payment is the percentage of the home’s purchase price while the closing cost is the amount you need to pay for loan fees and other services rendered when buying a home. The two major upfront payments may drain your finances. When determining your down payment and closing costs, you may want to set aside a rainy day fund.
- Determine the price of the home you plan to buy – Once you have a good grasp of your finances, budget estimates and credit details, it’s time to determine the total cost of your dream home. When determining a home price, you need to know the average interest rate a lender will charge you. The Consumer Financial Protection Bureau has a simple calculator that you can use to give you an idea of what interest rates are available to you based on your information.
- Determine the timing of your purchase – Homeownership risks, employment, credit reports, current home prices and the price of your dream home are just some of the factors that can determine if you’re going to pursue the purchase. Some people delay buying a home if they think that their current employment may not sustain homeownership expenses in the long run.
- Consult with people who have homebuying experience – After doing your homework, it’s time to get real-life information from a few people whom you trust who have experienced buying a home. While mortgage loan officers and real estate agents are ideal sources of information, it’s also good speaking with friends or relatives as they may give you realistic expectations when buying a home and you can ask comfortably to ask them questions.
- Organize the documents you need for a loan application – Once you’ve determined that you’re ready to shop for a mortgage, it’s important that you compile all the information that lenders require for a loan application. Organizing your personal and financial information is ideal as you continuously look for a home to buy. A lender may also require additional information depending on your situation as a homebuyer.
Mortgage shopping can be overwhelming, especially if you’re a first-time homebuyer and you’re comparing loan estimates from up to three different lenders. Making a great purchase like homebuying needs a serious preparation to help you mitigate blunders along the way. Doing these steps before the actual mortgage shopping may give you a good understanding of what to expect as a homebuyer and eventually, as a homeowner. Some people work with a dedicated loan advisor to help them through the process and educate them with the best options.