Don’t build yourself a mortgage mountain. It’s fine to want the best home you can afford, but be certain that it is comfortable affordability. Although you may find certain mortgage lenders who will stretch your qualification ratios (the ratio of your total mortgage payment to your total income), the traditional ratios–the mortgage payment as 28% of your income and the total of your mortgage payment plus your monthly debt payments as 36% of your income–are good basic guidelines.
Get your budget under control. Spending some time reviewing your budget (or developing one if you don’t already have it) and sharpening your money saving skills can bring big rewards later. A coordinated budget allows you to get the most home for your money without strapping yourself while eliminating wasteful spending.
Prepare to pay off small debts. Having 3 credit card balances, for example, one with a $125 balance, a second with a $165 balance and a third with $275 balance will only cloud the picture. Even though the total is only $565, all 3 will have minimum payments, credit lines, etc. If possible, prepare to pay them down to $0 balances.
Begin to gather documentation. It is not necessary that you have all items on hand before you apply, but there are a number of documents you will need eventually and the approval process will go much smoother if you begin to gather them now. Examples: W-2’s and income tax returns from the last few years (especially if you are self-employed), copies of pay stubs, a copy of your credit score (you can get a free copy of your credit score here), records of any child support or alimony (either going out or coming in) and bank statements for all accounts (checking and saving) for the last several months.
Don’t forget about closing costs. In addition to your down payment, you will need to reserve funds for closing costs. Depending on the type of loan and your location, these costs can range from 2-5% of the mortgage amount, will be paid in cash at the closing and cannot be borrowed funds.
Compare. There are lots of sources for mortgage funds–be sure to make comparisons. Your local bank or credit union, mortgage brokers and Internet resources such as Quicken Loans –where you can get up to 4 loan offers. Be certain to compare terms, down payments and loan types.
Consider points when comparing. Your total mortgage cost will be determined by 3 factors: The interest rate, the term and the amount of points. For a discussion on points, see the guest article written by Randy Johnson, author of How to Save Thousands of Dollars on Your Home Mortgage.
Get educated! Securing a mortgage is not all that complicated, but if you approach it blind, mistakes can be very expensive! Get as much information as you possibly can…whether from friends or relatives that have secured mortgages recently, from books and articles from authors such as Randy Johnson.
Consider a 15 or 20 year term. Many home buyers make the assumption that a shorter term will boost their payments out of reach. Unless you make the comparison, though, you may never know if a 15 or 20 year (if available) term could have been affordable. See a comparison of a sample loan. If you are concerned about committing to the higher payment of a shorter term, try this tactic: Mortgage the home with a 30 year loan but have the lender develop a 15 and a 30 year amortization sheet for you. Then, do your best to pay the mortgage at the shorter term payment. It will do wonders for your equity position!
Adjustable Rate Mortgages (ARMs). If you are certain that you are going to be in the house for a short time (less than 5 years for example) strongly consider an Adjustable Rate Mortgage (ARM). You will take full advantage of the lower intital rate and not be as concerned about rate increases since you will have moved when they begin to take effect. Tailor your ARM’s first adjustment period to the time you will be in the house.
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