Buying a home? Lay the foundation for success.
Buying a home is a big decision—but it’s almost always a good one. Building equity in a home is like a savings account you get to live in, not to mention the pride you get from having a place to call your own. But there are some steps you should take before you take the leap.
Give Yourself Credit
Your credit score does more than determine whether you qualify for a mortgage. It also helps determine the interest rate lenders will offer. Bottom line: it pays to strengthen your credit score as much as you can before you start the process. Fortunately, there are some simple steps you can take:
- Get a copy of your credit report from the three accredited credit bureaus—Experian, Equifax and TransUnion. See something that doesn’t look right? Dispute any errors that could be lowering your credit score.
- Pay your bills on time and keep credit card balances low.
- Keep credit cards open. You might think closing accounts would help, but in fact it increases the portion of available credit you use, which can lower your score.
- Track your credit score like you track your favorite sports team. There are a number of online services to help.
Down Payments Don’t Have To Be A Downer
Any way you look at it, you’re likely to need some kind of down payment depending on the type of mortgage (more on those later.) The bare minimum is likely to be 3.5% of the purchase amount of your home. The more you are able to put down, the more you are able to lower the loan amount and the interest rate on that–which translates to a lower monthly payment.
The easiest way to get started on a down payment is to set a monthly saving goal and stick to it. Add any bonuses from work and additional income to the pot. And try to reduce your spending so you’ll have even more to set aside. It won’t happen overnight, but if you stick to a plan it will happen a lot faster than you think.
What’s Your Type?
There are a number of different types of mortgages, and and it pays to find the right one for you. You may qualify more easily or get better terms with one than another.
A conventional mortgage is offered through or guaranteed by a private lender or one of two government programs: Fannie Mae or Freddie Mac. Conventional mortgage rates tend to have stricter lending criteria and higher rates than government-backed mortgages.
Federal Housing Administration or FHA loans are written by FHA-approved lenders and guaranteed by FHA. They require a lower down payment and typically have lower credit requirements.
A VA loan is a mortgage offered through the Department of Veterans Affairs (VA). They are available to veterans or their surviving spouses and active-duty personnel and allow a qualifying buyer to purchase a home with little or no down payment and no private mortgage insurance.
The U.S. Department of Agriculture offers 100% financing to lower-income residents of rural areas who are unable to obtain a conventional mortgage. U.S.D.A. loans are either guaranteed by the federal government through a commercial bank or made directly by the government.
Pre-qualified vs. Pre-Approved. Why not both?
“Pre-qualifying” means talking to a lender and giving them some basic information like your household income and debt. The lender will quickly be able to give you an idea of how much you’re likely to be approved for, so you have a price range to use when you’re house hunting. That’s a good thing to know so you don’t fall in love with a house that’s out of reach.
“Pre-approval” means a lender has done a more in-depth review of your financial situation and approved you for a mortgage of a certain amount. This is a great position to be in, because it means you’ll be able to make an offer on a home with certainty—a big plus in today’s housing market.
Close To Home
We hope this helps bring your dream home one step closer to reality. If you have questions, could use some help, or are ready to get started, FMS Bank is ready to help. And best of all, we’re right in the neighborhood.