7 Reliable Steps to Finance Your Dream House
Are you hoping to buy your first home sometime soon? If you have never purchased a home before, this might seem like a daunting task. But if you approach financing your dream house step by step, you too can become a homeowner.
Here are seven reliable steps from the top real estate agents Bellevue, WA, home buyers turn to for advice.
1. Save for a Down Payment
Before you start doing anything else, you can and should start saving for a down payment. The more money you can put down in purchasing a house, the lower your mortgage will be.
While there are some zero-down and low down payment mortgage programs, some down payments start at about 10 percent. It’s not uncommon to see down payments all up to 20 percent.
You should plan on a minimum of 3.5 percent with an FHA (Federal Housing Administration) loan. These do have a loan limit, however.
While you’re saving for your down payment, you can also start socking away cash for things like closing costs. These may or may not be rolled into your mortgage loan, homeowners insurance, and moving expenses.
Ways to save extra money include:
• Asking for a raise or additional hours at work
• Taking a second job or doing freelance work
• Changing jobs to one with a higher salary
• Selling belongings you no longer need
• Paring down expenses and eliminating luxuries
• Moving in with family to cut or lower rent payments
You might also be able to borrow the down payment from a family member.
2. Figure Out Your Mortgage Budget
As you start to save, you can begin to determine how much house you can afford and what your mortgage budget would be. You can figure this out with a few common mortgage payment schemes, like fixed mortgages of 30, 20, and 15 years.
You can talk to a real estate agent to help you figure this out. You can also use an online mortgage calculator or app.
3. Investigate Mortgage Options
Once you get close to your down payment goal and have a handle on your budget, it’s time to start looking at specific mortgage programs to see which one will work for you. There are thousands of mortgage lenders out there. These include brick-and-mortar institutions, online lenders, and unconventional private lenders.
A good place to start is the bank where you have a checking and/or savings account. They may know you in person already if you regularly visit. And if you do wind up getting a loan through them, it will make monthly payments and other financial arrangements much easier because it’s all in-house.
If you feel limited by the lenders near you, you can try a mortgage broker. For a fee, a mortgage broker can connect you with a loan from a different source. They have access to lenders you may never have heard about.
Until you’re more ready to look at houses and may actually need a mortgage, you don’t want to apply for a loan yet. You simply want to inquire about what kinds of loans they offer for your income and credit rating.
4. Improve Your Credit Score
The terms you get on your mortgage loan will be determined in large part by your credit score. Most mortgage lenders like to see a score of around 720 in order to give favorable terms on a loan (low interest rate, resulting in lower monthly payments).
Your credit score (aka FICO score) is issued, along with a detailed credit report, by each of the three US credit bureaus. Each bureau may have a slightly different score for you and somewhat different information on your report, but they shouldn’t vary greatly.
You can get a free credit report any number of ways, although you may have to pay for a credit score. Some credit card companies give you a monthly credit update, and there are services you can subscribe to. It may be worth doing that during the time you are applying for a mortgage because it’s so important.
Your credit score and report are assessments of your creditworthiness -- your ability to pay back a loan in a timely fashion. The algorithms used to calculate your credit score are complicated.
To make matters even more confusing, mortgage lenders may use a different home loan-related version of your credit score that is only available to them. Essentially, though, your score is a reflection of your payment history, your current available credit, and your current debt.
There are many ways you can improve your credit score in the months leading up to your mortgage application:
• Don’t apply for excess credit cards, store cards, or other loans (like car loans).
• Don’t cancel any existing credit cards, since you want to keep your available credit high.
• Pay down the balances on current credit cards and other loans.
• Make sure any old debts or collections are paid up.
• Check your credit report for errors and ask the credit bureau to remove incorrect information.
• Ask a parent or sibling with a stellar credit history to add you in name only as an authorized user on one of their cards (you get the benefit of the additional available credit without the temptation of spending).
5. Keep an Eye on the Market
Meanwhile keep an eye on the real estate market. Look at neighborhood and home price trends in your area and where you’d like to live. Check the news for information about national patterns in mortgage lending.
You can also ask your bank to inform you of any new mortgage programs that might be right for you. Further, top real estate agents in Bellevue, WA can direct you to all sorts of excellent resources.
Another option is to window shop houses in your price range to see what your budget will buy. When looking at homes for sale in Bellevue, WA, do a deep dive on things like location, area amenities, home features, and size for comparison.
6. Put Your Documents in Order
Your mortgage lender will need documents in order to process your loan when you do eventually apply for a mortgage. It’s a good idea to get the paperwork ready ahead of time. That way, when you do find a home you love, you can move quickly.
Documents you may need include:
• Proof of income, like a paystub
• Tax returns
• Bank and financial asset statements
• Landlord references
7. Get Pre-Qualified, Then Pre-Approved
When you’re ready to start house hunting in earnest you want to be able to jump on properties you like and not risk losing them. Most sellers today won’t even consider an offer from a buyer who is not pre-approved for a mortgage. This means you have filled out a trial application with a lender and are likely to be approved if you apply officially.
Before giving your information to a mortgage lender, you can do a dry run of the pre-approval steps via the pre-qualification process.
This doesn’t involve anyone pulling your credit report or having access to your income information. It’s simply a great way to make sure you’ll pass the pre-approval screening with flying colors before you actually apply.
Finding the best homes for sale in Bellevue, WA doesn’t have to be a confusing process. If you follow the steps above, soon you’ll join the homeowner club, and you can share your advice with novice friends like a pro.