Buying a Home & Home Mortgage Loans Resources

When buying a home, there are several things you must consider beforehand. One of the most important things to do is review your personal finances and set a budget. 

There are numerous costs associated with a home purchase, such as the down payment and closing costs. As such, it is imperative that you are financially stable to ensure you can afford this investment.

During this process, it is also important that you perform a credit check. Without a good credit score, you may find it difficult to qualify for a mortgage loan and obtain a pre-approval. In turn, this will delay your home shopping process and may cause you to lose the home you want.

With this in mind, buying a home is a time-consuming task. For detailed tips on what you need to know before buying a home, review the sections below.  

How do mortgage loans work?

Homebuyers purchase mortgage loans as an alternative to paying the full cost of a property upfront. As with any loan, homeowners must pay monthly installments toward their loan that covers the cost of the property and the interest rate.

Typically, home loans have lower interest rates. However, the length of mortgage loans span much longer than other types of loans. Homebuyers have the option to get a fixed rate, which stays the same for the length of the loan, or an adjustable rate, which can change over time.

The process of getting a loan also involves putting a down payment of 10 to 20 percent of the property’s sale price. Many lenders allow buyers with excellent credit to pay no upfront costs or as little as 3.5 percent for a down payment. Additional costs associated with buying a home include homeowner’s insurance and property taxes.

Types of Home Loans

There are several types of home loans for which you can qualify. The loan you choose should be based on your financial situation. For instance, there are federal grants that allow homebuyers with scores at 580 and higher to qualify for loans. The U.S. Department of Housing and Urban Development (HUD) offers loans that are sponsored by the Federal Housing Administration (FHA).

It is important to note that recipients of HUD home loans must pay upfront mortgage insurance premium (MIP) due to the low down payments. Homebuyers must pay a portion of it at closing and the rest as an annual premium.

Why Credit Matters

Having a good credit score is imperative to buying a home. Mortgage lenders take on a lot of risk when they finance the full cost of a home because they have no guarantee that the borrower will pay it back. As such, they typically require homebuyers to pay a down payment.

If you intend on buying a home with no money down, this will require a very high credit score. This is because your credit score indicates how reliable you are as a borrower. The higher your score, the better loans and interest rates you will qualify for.

Furthermore, if a lender approves you for a down payment at zero percent, then you may also be eligible for additional savings, such as cash reward when closing on the property. However, if you have a lower credit, you will likely pay a high interest rate and down payment.

In order to buy a home without paying a down payment, you must work on reducing your credit utilization and improving your score.

Steps to Increase Your Credit Score

The first step in increasing your credit score is by checking your credit report. The report includes detailed information on your credit history, such as open credit lines, credit utilization ratio and late payment history.

Your credit score, on the other hand, is simply a numerical value that reflects the information listed in the report. As such, to fix the score, you must review the report first as that will provide the source of the low score.

Everyone is entitled to one free credit report annually from the three credit bureaus: TransUnion, Equifax and Experian. You can obtain your free copy by visiting the Federal Trade Commission’s website or calling them. There are also third parties who provide credit reports. However, they often charge for this service and may only provide a report from one of the credit bureauses instead of the three.

Once you obtain the credit report, verify that all the listed information is correct. If your report has inaccurate information, such as an account you do not have or a late payment, it is imperative that you report the error immediately.

Incorrect information can cause your credit score to drop and lead to you paying more for loans than you should. If everything is correct, see if you have any past due bills to pay that could be hurting your score.

To improve your credit score, there are several steps you can take. The first is paying all your bills on time. Making timely payments is the biggest factor influencing your credit score. The second biggest factor is your credit utilization.

A good rule of thumb is to only use 30 percent of your available credit. Using too much of your credit indicates to lenders that you are an impulsive spender.

The score you need to obtain a good mortgage loan will depend on the lender and several other factors. For instance, some lenders require scores that are at least 740 while others may accept 690 and higher. With this in mind, you should aim for a high credit score, as you will pay less for your home upfront and over time.

Note: If a lender denied your home loan application, he or she is required by law to send a notice explaining the decision. You also have the right to request one within 60 days of the denial notification, if you do not receive the notice. This notice can help you understand what factors influenced your application and how you can improve.