If you are ready to buy a home, it is important to learn about the process of purchasing a home, your mortgage options and how your credit score will affect your mortgage.
In doing so, you will be better prepared for the home-buying process. While your credit score has a large impact on whether or not you can obtain finances to purchase a home, you may still qualify for a mortgage, even if you have a poor credit score.
There are several government programs available that assist homebuyers in getting approved for a mortgage and offer lower interest rates, even for those with bad credit.
The Step-by-Step Process of Buying a Home
Purchasing a home can take time and you will likely need to follow a step-by-step process before moving into the home of your dreams. By learning more about this process, you will find yourself better prepared every step of the way.
1. Determine How Much You Can Afford. While each financial situation is different, lenders will typically suggest that you look for a home that is within a price range between three and five percent of your annual income at a maximum. When determining the amount that you can afford, it is also worth considering your down payment amount. Most traditional mortgages will require a down payment of at least 10 percent of the home’s price.
2. Get Preapproved for a Mortgage. When you are ready to begin shopping for a home, you will need to meet with a lender, such as a mortgage banker, within the community. To get preapproved for a mortgage, you will need to complete an application and provide the lender with several financial documents, including proof of income. The lender will also perform a credit check to determine whether or not you qualify.
3. Get in Touch With a Real Estate Agent. Having a real estate agent can make the home-buying process far easier as agents can assist with the showing, negotiating and sale of the home. The agent’s job is to help you get into the home of your dreams and make sure that the sale of the home goes smoothly. Once you have purchased your new home, the real estate agent is paid by the seller of the home.
4. Shop Around and Make an Offer on the Home of Your Dreams. You should always take as much time as you need to find a home that you like as a home is a big investment. Once you have chosen a home that you wish to purchase, your real estate agent will assist you in making an offer and negotiating on the price of the loan.
5. Work With Your Mortgage Banker to Select Your Loan. This step is often simple, so long as nothing has changed for you financially since you were preapproved for a mortgage. However, your lender may offer several types of mortgages for you to consider. Your lender will also assist you with much of the paperwork involved with the purchase of a home.
6. Closing the Sale. When purchasing a home, a closing date will be agreed upon. At closing, everyone involved with the sale or purchase of the home will complete additional paperwork to transfer ownership of the home. After the closing date, it should only take your lender a couple of business days to fund your loan and provide payment to the home’s seller. After, you will be ready to move into your new home.
Learn How to Take Advantage of First-Time Homebuyer Federal Grants
Several federal programs provide financial grants, reduced eligibility requirements and better loan terms for first-time homebuyers who wish to purchase a home. Local and federal grants can assist in reducing, eliminating or paying a portion of your down payment.
FHA loans are a popular option for first-time homebuyers, especially those with a poor credit score. While the FHA does not provide you with a mortgage directly, the FHA insures your loan to reduce the risk to the lender, thus, enticing the lender to provide reduced eligibility requirements and more advantageous loan terms. FHA loans can also reduce down payment requirements.
USDA loans offer several advantages when purchasing a home within a qualifying area, including the potential elimination of your down payment requirement. While USDA loans typically require a higher credit score in comparison to FHA loans, the credit minimum difference between these two loan types is minimal.
If you are a veteran, you may qualify for a VA home loan, which is a type of loan that is partially insured by the Department of Veterans Affairs (VA). These loans can be purchased through an approved lender and, in most cases, eliminate the need for a down payment. VA loan benefits also include reduced closing costs and the elimination of any penalty for paying your home loan off early.
Understanding Your Mortgage, Your Credit Score and You
Before applying for a mortgage, it is important to take the time to check your credit score, and if need be, improve your score to increase your chances of approval and obtain better loan terms. If you have a poor credit score, you may be denied a mortgage or only be offered high-interest-rate mortgages.
Alternatively, you may also qualify for a government loan program if you are a new homebuyer. For example, FHA loans require a minimum credit score of 580, far lower than the minimum scores commonly required for traditional mortgages.
You can access your own credit report by purchasing your report through one of the major credit reporting companies. They are Equifax Transunion and Experian. Once every 12 months, you can also obtain one free credit report from one of the credit reporting agencies. Additionally, other credit reporting websites allow you to access your reports more frequently at little to no cost.
Learn About Resources for Accessing Your Credit Information
Find Out How to Get a Mortgage Loan
Mortgage loans are crucial in the home-buying process, as most Americans cannot afford to pay the entire cost of a home upfront. This type of loan generally has lower interest rates in comparison to standard loans and paid upon for a set period, typically 30 years.
When reviewing mortgage loan options, you will want to determine whether an offered mortgage includes a fixed or adjustable interest rate. If your mortgage has a fixed rate, you will pay the same amount of interest throughout the life of your loan. If you have an adjustable-rate mortgage, your interest rate will fluctuate with lower rates generally appearing at the start of the loan.
Unless you qualify for a government loan program, you will need to provide a down payment as part of your purchase. Down payment requirements are generally 10 percent of the total cost of a home but may be higher or lower. If you have a high credit score or if you are applying for a mortgage that is backed by a federal loan program, your minimum down payment amount may be reduced.
Tips on Maintaining Finances while Home Shopping
- Pay Your Debts. Aside from your credit score, lenders will examine your credit score in order to determine if you can get a mortgage. A high debt ratio can lower your chances of receiving a mortgage or getting a lower one.
- Save Money. Because mortgage loan requirements can change over time, it is important to have that money available when apply for the loan. Mortgages involve several fees, so saving your money and cutting down on expenses can help you afford a new home.
- Be Clear on What You Can Afford. It is crucial to not allow lenders to tell you what you can and cannot buy. When you get pre-approved, lenders will look over all your financial information. But they do not factor in daily, mundane expenses. Thus, remember to keep within your budget.