Buy a House? When Should You Take Out a Mortgage

Buying a House

Is Today The Day To Buy a House?

Everyone keeps saying that it is a good time to buy a house, and many people are taking advantage of low mortgage

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rates. You may be wondering, “Is it a good time for me to buy my house?”

Even if you decide to buy, what type of mortgage will you need? Are there steps that you should be following?

Keep reading to get the answers to these questions and more.

Steps To Buying a House

Buying a house is one of the biggest decisions that you will ever make.  You will be making mortgage payments for the next several decades. You will also be responsible for the care and maintenance of your property.

Homeownership, however, can be extremely rewarding as you make your house into the home of your dreams, providing you with a haven of joy and rest.

Assess Your Current Situation

If you are currently renting, then you need to see how your lifestyle will be impacted when you take on a mortgage.

For example, if you like to take vacations every year, will you still be able to do so? Or are you willing to scale back your other expenses to afford your house?

Save About 20 Percent For Your Down Payment

If you have a good idea of the price range for the type of house and area in which you want to live, then calculate what 20% of the down payment would be for a house in that area.

If the house price is $200,000, then 20% of the price would be $40,000.  Most experts agree that 20% is an ideal amount to put down.

Advantages of 20 Percent Down

Many lending agencies allow you to put down an amount lower than 20%. Statistics show that the average first-time homebuyer puts down just 7% for the down-payment.

Additionally, there are several lenders who allow you to put no money down or as low as 3% down.

There are, however, several advantages to having a 20% down payment:

  • You will have a smaller mortgage to pay off
  • You will reduce the total interest you pay over the life of the loan
  • Your monthly payments will be lower
  • It removes the need to pay Private Mortgage Insurance (PMI)

Check Your Credit

You will probably be taking out a mortgage loan to buy your home. Having strong credit is a key that opens many doors. Good credit determines the terms and amount of the loan.

Your credit score is determined by your FICO scores.

The highest possible FICO score is 850. The lowest possible score is 300.

When applying for a mortgage loan to buy your home, the higher your credit score, the lower the interest rate you will get. Most lenders for conventional loans prefer to see a credit score of 740 or above.

A score of 740 or above indicates to lenders that you are a good risk and the chances are very high that you will repay the loan.

If your credit score is in the 500-730 range, you can still qualify for a wide variety of loans.

Improve Your Credit Score

There are several steps that you can take to improve your credit score.

Build Your Credit File

If you do not already have several open and active accounts, then you should open an account with a major lender or credit card issuer. These major lenders report to the major credit bureaus and this can help your credit.

Pay Your Bills On Time

It helps to have a strong history of paying your bills in a timely manner. If you are in the habit of paying more than 30 days late, this can be reported to credit bureaus and will adversely affect your credit.

Pay Down Your Credit Card

Credit cards and lines of credit are known as revolving credit. Maintaining high balances on your revolving credit means that you have a high rate of use of this credit, and this hurts your score.

Resolve Your Past Due Accounts

Late as well as non-payment of your credit shows up on the credit report agencies. Call your creditors and see if you can negotiate lower payments and rates so that you can get caught up.

Keep Your New Credit Applications To A Minimum

If you are already struggling with your credit, applying for new credit results in a hard inquiry from the lender, and this negatively impacts your credit score.

Assess Your Debt-To-Income Ratio

Your debt-to-income ratio is one measure used by lenders to determine your ability to repay the loan that you are trying to secure.

You calculate your debt-to-income ratio by dividing your total monthly debt payments by your gross monthly income. Your gross monthly income is money you earn before your taxes and other deductions are removed.

Lenders are usually looking for a debt-to-income ratio of about 36% or lower. Lower ratios usually give you the lowest interest rates.

Some lenders are also willing to extend credit even if your ratio is as high as 43%. This is the maximum ratio that you can have and still get a qualified mortgage.

Research Possible Mortgage Lenders

One of the main things that you will have to do to prepare for the purchase of your new home, is to find a mortgage lender. A mortgage lender is an individual or institution that lends money.

A lender is usually a mortgage banker, credit union, or bank. They provide you with house purchasing advice, including information about the loans for which you may qualify.

Conventional Loans

Conventional loans are not backed by any U.S. government agency but are originated and then serviced by private mortgage lenders. These private mortgage lenders include banks, credit unions, and other financial institutions.

To qualify for a conventional loan, buyers typically need to be able to put down at least 3%, have a FICO score above 620, and a debt-to-income ratio between 45-50%.

FHA Loans

The Federal Housing Authority (FHA) loan is a government-backed loan. You need a FICO score of at least 580 to receive the maximum financing of 96.5% with a down payment of 3.5%.

With a FICO score of 500, you would have to put down at least 10%. This loan works well for those who have low credit or do not have large down payments.

VA Loans

The Veterans Administration or VA loan is for active-duty members of the military, veterans, and their families.

These loans do not require a down payment and have less rigid credit requirements. They do, however, have mortgage insurance premiums that cannot be waived on some loans.

USDA Loans

United States Department of Agriculture (USDA) loans are the third type of government loans and are for moderate- to low-income families looking to buy in rural areas.  A down payment is not required for these loans.

Adjustable-Rate Loans

As the name implies, the interest rates on these loans are adjusted or changed. These adjustments are based on an index, and changes are based on current market conditions.

Adjustable-rate loans tend to start with a lower interest rate than most fixed-rate loans. However, the adjustment could end up costing the homebuyer more in terms of the loan amount over the life of the loan.

Fixed-Rate Loans

Fixed-rate loans have the same interest rate over the life of the loan. This ensures that your monthly principal and interest remain the same, and enables you to formulate your budget better.

The interest rates on a fixed-rate mortgage are usually higher than those on an adjustable-rate mortgage. This results in more interest for the duration of the loan.

Fixed-rate loans are usually for loan periods of 15, 20, or 30 years.

Interest-Only Loans

Interest-only mortgages require you to only pay the interest on the loan for a determined period, usually between five and 10 years.

At the end of this time period, your monthly payments go up as you start paying your principal.

Interest-only loans allow you to save money at the beginning of the mortgage period. However, you do not build up any equity unless you are making additional payments towards your principal.

Additionally, your monthly payments usually double at the end of the interest-only period.

Making The Decision To Buy A House That Is Right For You

Buying a house is a decision that will impact your life for years to come. With interest rates low, and the real estate markets hot, this is indeed a good time to buy a house.

But the best time for you to buy is when you are ready. If you are ready to take the leap into homeownership, then here at RealFi, we are also ready to talk with you about the best mortgage options for your situation.

Give us a call and we will be there to help you to buy your house.

Also Please review these relevant articles  – First Time Home Buyers         How Soon After Purchasing My Home Can I Refinance?        RealFi Offers Quick Close Non-Qualified Loans  

Mortgage Rates Are Low, but How Long Can It Last?    RealFi Offers a Diverse Range of Residential-Non-QM-Mortgages

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