mortgage made easy

IN TODAY’S BUSY HOME MARKET, BEING INFORMED IS MORE VITAL THAN EVER. THIS IS ESPECIALLY TRUE WHEN IT COMES TO GETTING A MORTGAGE. A LOAN IS THE FIRST STEP TO HOME OWNERSHIP, SO IT’S IMPORTANT TO KNOW A FEW THINGS BEFORE YOU SET OUT TO SECURE ONE. HERE IS SOME HELPFUL ADVICE TO CONSIDER AS YOU APPLY FOR A LOAN.

KNOW YOUR CREDIT SCORE

A credit score can make a big difference in how much home you can afford. For example, if you are applying for a 30-year mortgage on a $200,000 house and you have a FICO® score of 650, you can expect to pay over $25,000 more in interest over the life of the loan than someone with a credit score 680. To keep your credit score high, make sure you are paying all your bills on time and keeping credit card balances as low as possible. Also, keep current credit cards open. Closing a card will increase the portion of available credit you use, which can lower your score. Lastly, track your credit score. Many banks and credit card companies offer this automatically through their website or apps.

ESTIMATE HOW MUCH YOU CAN BORROW

Use an online mortgage payment calculator to estimate monthly payments for mortgages of different sizes. As you think about getting a loan, remember that your monthly housing payment (including taxes and insurance) should be no more than 28% of your pre-tax income, according to fool.com. Also, your total debt (including your mortgage payment) should be no more than 36% of your pre-tax income. The ratio that produces the lower payment is what the lender will use. Many lenders have more generous qualification ratios, but these are traditionally the most common. Just because you qualify for a certain amount doesn’t mean that

the monthly payments really fit in your budget, so make sure you don’t overextend yourself.

SAVE SAVE SAVE

There are quite a few costs associated with buying a home but here are the three main expenses you should be saving for.

DOWN PAYMENT This will be based on the type of mortgage you choose and the lender. Some conventional loans for first-time home buyers can be as low as 3% down while the national average is somewhere between 6% to 12%. However, if you put down less than the traditional 20%, you will have to pay private mortgage insurance (PMI). Down payments can be challenging to save, so use a down payment calculator to help you select your goal, and then set up automatic transfers from checking to savings to help you reach your needed amount.

CLOSING COSTS These fees and expenses are paid to finalize your mortgage, and typically range from 2% to 5% of the loan amount. Sellers can be asked to pay a portion of your closing costs, and you can save on some expenses, like home inspections, by shopping around.

MOVE-IN MONEY Moving is expensive (see our moving tips on page 46 for help getting those costs down), so you will need to have money saved for movers, new furniture, immediate home repairs, set up costs for utilities depending on your state or city, and a little emergency reserve in case you run into issues after you move in. Everyone knows someone who moved in and within days had to replace the water heater, so prepare for the unexpected.

EXPLORE MORTGAGE OPTIONS

A variety of mortgages are available with varying down payment and eligibility requirements. Here are the main categories: • Conventional mortgages are not guaranteed by the government. Some conventional loans targeted at first-time buyers require as little as 3% down.

• FHA loans are insured by the Federal Housing Administration and are designed for low-to-moderate-income borrowers. They require a lower minimum down payment and lower credit scores than many conventional loans.

• USDA loans are guaranteed by the U.S.

Department of Agriculture. They are for rural home buyers and usually require no down payment. • VA loans are guaranteed by the Department of Veterans Affairs. They are for active duty and veteran military service members and usually require no down payment.

GET YOUR DOCUMENTS READY

Now that you know how much you need for a down payment, the amount you can afford per month, and the kind of mortgage you might qualify for, it’s time to get your paperwork together. You’ll need to document your income, employment situation, identity, and more. It can be a good idea to start gathering the necessary documentation before you walk into a lender’s office.

Make sure you have these documents: • Recent tax returns

• Bank and brokerage statements • Pay stubs • W-2s

• Driver’s license

• Social Security card • Marriage license (if applicable), • Contacts from your employer’s HR department

GET A PRE-APPROVAL LETTER

This is an important piece of paper in this busy market and most sellers won’t even consider an offer that doesn’t have a pre-approval letter attached. A mortgage pre-approval is a lender’s offer to loan you a certain amount under specific terms. Having this letter shows home sellers and real estate agents that you’re a serious buyer, and that can give you an edge over home shoppers who haven’t taken this step yet.

Apply for pre-approval when you’re ready to start home shopping. A lender will pull your credit and review documents to verify your income, assets and debt. Applying from more than one lender to shop rates shouldn’t hurt your credit score as long as you apply for them within a limited time frame, such as 30 days.

BUY THAT HOUSE!

Now that you’ve secured your pre-approval letter, it’s time to house shop. This can be a daunting task as homes fly off the market in a matter of days and hours in some cases. Working with a real estate agent who has the expertise to navigate the city or neighborhood you’re trying to purchase a home in will make your experience much easier and much more enjoyable. For help buying a new home, or if you would like to sell your current home, contact the Realtor who sent you this magazine!