When you start talking about home ownership, friends and family will probably start giving you advice. It is very likely that a great portion of that information is simply mortgage myths. Here are some things to be aware of when starting the mortgage pre-qualification process:
If you are easily covering your monthly rent payments (especially if you are renting a house), plus have money left over for vacations or a new car, you can probably afford a mortgage. You should speak with an experienced mortgage professional, such as Dave Kevelighan, to help explore prequalifying for a mortgage to purchase a home. Don’t confuse this with a pre-approval. Prequalification is just a general idea of how much you can borrow to purchase a home, and pre-approval is when you supply all the details of your financials and credit report history to receive an automated approval of the amount a lender will all you to borrow.
20% Down Payment
20% down is the best scenario to purchase a home, which prevents having to pay for mortgage insurance. However, if you look into government lending like an FHA or a VA loan, the down payment could be as low as 3.5% on FHA, and $0 on VA. Obviously the more you are able to contribute to the down payment, the lower the mortgage payment will be. Lower down payments also mean you will need to pay for private mortgage insurance (PMI) to cover the lender’s extra risk in case a borrower defaults, but PMI is not required on VA loans with veteran eligibility.
There are many mortgage programs available to average credit score borrowers. One tip is when you first start thinking of purchasing that dream house, start paying down or paying off any credit debt. That includes credit cards, auto loans, and any other obligations that may increase your Debt-to-Income (DTI) ratio. You are entitled to a free credit report once per year. Take advantage of that, and check for any errors that can possibly be in the form of something you paid off that wasn’t recorded, or someone else’s bad debt that migrated into your credit report. Having a good history of paying debts timely makes you more desirable to lenders.
Renting is Better
Granted you don’t need to worry about mowing the lawn or snow removal, but paying rent is just giving away your money to someone else. Buying a home means you are building an investment. The equity, or value, of a house or condo increases with every payment into the principal. It’s very likely real estate values will be higher when you decide to sell, and that is when you realize how much of a profit you will make. Not only that, but you have the privacy of your own home.
Always Go with the Lowest Interest Rate
Interest rates are critical, but you also need to consider the amount of closing costs, pre-paids for property taxes & insurance, and other expenses such as HOA dues. It may be better to finance some of the closing costs into a slightly higher interest rate, so that you don’t need as much funds to close.
The bottom line is education. Go here for some of the best advice about home ownership. There are application forms for pre-qualification or pre-approval, along with a great deal of information about various mortgage programs. The website can also help dispel other myths, such as is it a bad idea to pay your mortgage off early, or how to deal with student loan debt. There’s also info explaining the different types of interest rate options such as adjustable rate mortgages (ARM’s) versus fixed rate mortgages.