Deciding to buy your first home is exciting – and a little overwhelming. There’s a lot of ground to cover and much to learn before you can hold the keys to your new front door. The first step is to learn everything you can while creating a personal mortgage plan.
Don’t worry; no one takes the time to learn the ins and outs of applying for a mortgage until they’re ready to buy their first home. But you don’t need to become a mortgage expert, and you don’t have to navigate the journey on your own.
Read on to find out how you can learn what you need to know and who can help you along the way.
START BY FINDING EXPERT GUIDANCE
When you’re preparing to buy your first home, the best first step is to find a trusted mortgage professional to work with – as soon as possible. Mortgage advisors play an essential role in your home buying team by helping you create a personalized mortgage plan.
They’ll educate you about what’s involved in the mortgage process, provide reliable information, and answer all your questions.
When you contact them to schedule the first meeting, the advisor will ask you to bring along certain financial documents they’ll need to review. This meeting will give the advisor an overview of your finances so they can prequalify you. They’ll look at your income, ask about your savings, and some general questions about your credit when you meet.
The prequalifying meeting is an informal review that doesn’t require pulling your credit report. At the end of the session, you’ll have a general idea of the types of loans available, an approximate amount you qualify for, and a specific plan for the next steps to take.
It’s also a time for the mortgage advisor to identify any financial areas that may need extra attention before moving forward. For instance, you may need to reduce your consumer debt or increase your savings. All of this is part of creating your mortgage plan.
There’s no pre-determined outcome for a pre-qualifying meeting. Feel free to dive in as deep as you’re comfortable with any questions or concerns. There’s so much information to absorb you may want to save some of your questions for the second meeting. Your mortgage advisor will follow your lead.
BUT HOW MUCH CAN YOU AFFORD?
When your mortgage advisor determines the loan amount and home purchase price you qualify for – they aren’t telling you how much you can afford. Their analysis is based solely on the qualifying guidelines. But, knowing how much you can afford is essential for your overall financial security.
You may have a clear idea of the loan and purchase price that safely fits your budget. If not, try this practical step to help you narrow it down.
First, start by adding the monthly expenses excluded from the qualifying calculation. Many everyday expenses aren’t considered in the qualifying analysis, like childcare costs, life insurance premiums, school tuition, utilities, and food/fuel costs.
Add the mortgage payment you qualify for to these monthly expenses. A mortgage payment includes principal and interest (the actual mortgage payment), one month of property taxes, one month of homeowners insurance premium, and mortgage insurance (if required.)
Next, add any monthly payments for credit cards, student loans, and car payments to get a grand total. Include an additional amount for monthly savings. Can you afford the total amount monthly?
If the answer is an obvious no, review your plan with your mortgage advisor and adjust it to a more comfortable level.
But if you’re not sure, try saving the difference between your current monthly living expenses and the amount with the mortgage payment for several months. This will allow you to “try on” the higher monthly cost and see if you can comfortably make the payment. And the bonus from doing this experiment – you’ll increase your savings.
NEXT STEP: THE FORMAL PRE-APPROVAL
After getting comfortable with how much you qualify for and can afford, it’s time to meet with a real estate professional. You’ll want to preview homes that fall within your price range in the neighborhoods you’re considering. You’re not looking for the perfect home at this point, just gathering information to help you make your final decision.
Taking the time to question and review everything is helpful for first-time buyers. But, before you’re ready to find and write an offer on your dream home, you need to go through formal loan pre-approval. This step might lead to another review and revision of your plan with your mortgage advisor.
To do a full pre-approval, your mortgage advisor will gather all the required documentation and submit a complete loan file for underwriting. There’s a critical difference between preapproval and full loan approval – the property appraisal is required once you’re in contract to purchase a home.
A property appraisal can’t be done until you’re actually in contract to purchase a home. Without a purchase contract or appraisal, the underwriting process focuses on your finances and credit.
Once an underwriter completes their review (underwriting) of your loan file, you’ll have an official pre-approved letter for a specific loan and home purchase amount. Now, when you make an offer to buy a home, you can include this letter. This is a powerful tool for buyers in highly competitive markets.
When sellers receive multiple offers, they try to choose the one with the highest probability of successfully closing. Their dream buyer can pay all cash and doesn’t need a loan. But a pre-approved buyer is almost as strong as a cash buyer because most of the underwriting process is already completed.
Once in contract, the file has only a few remaining loan steps (appraisal, homeowners insurance review, and final underwriting). This makes your pre-approved offer stand out in a seller’s market. It can also be a benefit in a less competitive housing market.
A full pre-approval in a less competitive housing market gives you negotiating options with the seller. This includes negotiating for a lower purchase price or for the seller to cover part of your closing costs. Either way, with the bulk of the mortgage process already completed, you’ll have less stress while waiting for the last pieces of the loan to come together.
KEEP YOUR FINANCES STABLE UNTIL AFTER CLOSING
During the time you receive your pre-approval and then eventually the full loan approval through to closing, make sure you follow the following tips so your qualifying factors do not change as that could affect your approval status.
- Stay away from big expenditures that would dip into funds designated for closing or reserves
- Do not open any new credit accounts or have anyone run a credit inquiry (new car, etc.)
- If possible, do not switch jobs, even if the change means a higher salary
- Stay up to date on all your monthly payments
- Avoid moving money around, no large deposits that can’t be legitimately sourced
When preparing to purchase a home, the best tools are:
- Knowledgeable professionals on your team.
- A personal mortgage plan (including an affordable loan and purchase price).
- A full pre-approval to back up your offer.