Are you looking to buy a house? If you are, chances are you already have a list of things to look for in an ideal home. Things such as the room’s condition, the kitchen size, the location, and the proximity to a school may most probably feature in the list. And the list can be exhaustive. That’s good but not nearly enough.
Before you start thinking about all these things, you need to know the four most important things before buying a house. They are mortgage pre-approval, credit score, down payment, and debt-to-income ratio.
Down payment
The upfront cash you pay when you buy a house is called the down payment. In other words, it is the advance money you pay toward purchasing your home before you even start living in the house. Lenders offer several mortgage packages that have different down payment terms. So, there is no right or wrong down payment amount. Each house has a different down payment.
Denver property managers from Evernest, Mynd and Keyrenter can guide you on programs that include mortgages with down payment assistance, low-interest rates, and help with overall costs. Explore these options to determine how much to save for a home down payment. Your down payment requirement would depend on the type of loan you take.
Some other things to consider are your emergency fund, how much money you need for repairs, your home condition, your debts, and how long more for your retirement. If you are buying a house for the first time, explore all available assistant options that would reduce your down payment amount. These programs can assist you with a second lien or grants.
Mortgage pre-approval
Before looking at houses, apply for pre-approval with a couple of lenders. A mortgage pre-approval letter is an offer from a lender to lend you a specific amount under certain terms. Compare them and get the lowest fees and interest rates. Before buying your house, mortgage pre-approval determines how much you can borrow towards buying a house.
To pre-approve, lenders assess your income, credit score, and assets. Then they determine how much money to lend you and at what interest rate. A hard credit check is also performed to see how much you are indebted. To succeed in the preapproval process, you must provide your pay stubs and bank statements.
Even if you receive a preapproval letter, you must still apply for a loan before being granted because the letter only means that the creditor is vouching for the fact that your credit score is in good standing. It implies that you are a good customer for an additional loan. However, it is not guaranteed. The lender would still need more information about you.
Credit score
The credit score is a three-digit numerical rating that measures your likelihood of repaying a loan. Your credit score can make or crack your ability to obtain a mortgage. It determines the interest rates you are qualified for to buy your house. Learning your score gives you an idea of your standing with your lenders. It makes you aware that you need to strengthen your credit score.
A higher score signals that you are a low risk, which implies that you are more likely to repay the debts on time. Higher scores give lenders more confidence that you will fulfill your repayment obligations. With higher scores, you can even be qualified to get lower interest rates for your mortgage. But creditors also set definitions that consider good or bad scores.
Lenders use credit scores to determine the likelihood of you repaying your loans, mortgages, utilities, and rent. Lenders may also evaluate credit limits, interest rates, and loan qualifications. This assessment depends on the kind of borrowers that they need to attract. When doing so, lenders also weigh on the current events that could impact the scores.
Debt-to-income ratio
As a rule, keep your household expenses less than 25% of your gross monthly income. That implies that monthly mortgage payments, homeowner insurance, and property taxes should not exceed that threshold. This score is called the DTI, or debt-to-income ratio. It would help if you considered this when deciding which house to buy.
DTI is the portion of the income for debt obligations such as housing costs, car expenses, credit cards, student loans, and other payments. Thirty-six percent is good for qualifying for a home mortgage. Lower than that is better because then you can budget for emergency expenses. Your DTI tells how much you spend on loans versus how much you spend on household expenses.
Your total debt payments divided by your monthly income would give you your DTI. When applying for a home mortgage, the lender would require you to meet certain DTI scores so that they would know that your debt is within your budget. If you have a low DTI, that indicates to the lenders that you are less likely to default on your debts.
