Potential homebuyers who have started to look at houses should take a moment to consider their finances. Without a good financial base, homebuyers can quickly get themselves into trouble after making a purchase. Some overestimate what they can get from a lender, while others cannot secure a mortgage at all.
It is important to pay attention to 4 key financial points when considering making a purchase.
The credit of homebuyers is going to be a major factor in their ability to make a purchase. Lenders want to see someone with good credit history so they know their choice to lend the buyer money is secure. There are many ways a person’s credit history is altered including: current debts, their history of payments, how long they have held accounts, their new debts, and if there is a mixture of debt types.
Credit scores that are low do not always mean that a person cannot get a mortgage. A low credit score will change what interest rate the lender will offer. With a higher rate on the loan, the buyer will have to pay more over the life of the loan.
Having a higher credit score is ideal for homebuyers. The better the score, the better the interest rate will be. Even a median score that is not great but is not poor will get a buyer a better interest rate. This is important to keep payments as low as possible.
Even though concentrating on credit is important, the down payment can be a game changer. Having a large down payment will make it much easier to purchase a house. With a higher down payment, a person can even look at slightly more expensive houses without needing to change how much they are borrowing.
On average, homebuyers try to put down twenty percent. There are many lenders that will take a lower amount than this, but that could mean the buyer needs PMI. Private mortgage insurance is put onto loans that do not have a significant down payment. This will cause monthly payments to increase.
A large down payment proves that the buyer has buying power. It shows the lender and seller that the buyer is financially secure. With a large down payment, the overall loan can be lower, which helps to push down monthly payment costs.
One’s debt and income also plays a major role in the mortgage process. No lender wants to allow a buyer to stretch themselves too thin. Financial stress often leads to unpaid mortgage payments and foreclosures.
The first debt to income ratio a lender will look at is called front-end ratio. This is what the housing costs will be divided by the monthly income. Housing costs will not only include the monthly mortgage payment but insurance, interest, taxes, and even PMI. Most lenders want to see a ratio that is below twenty-eight percent.
After calculating front-end ratio, they will look at the back-end ratio. This includes the existing debt divided by the monthly income. This ratio can be higher, but lenders aim to keep it under thirty-six percent.
While it may feel like a lender is working against the buyer, they are truly looking out for their best interest. A lender wants proof that a buyer is financially secure before they pile on a monthly mortgage payment. This proof is all part of the mortgage process.
Lenders will need to see documentation of a person’s assets. This will include documentation showing where the money for a down payment came from. It also includes a person’s savings or checking account. Any investments should be documented as well.
Finding a lender that will offer the best interest rate and loan terms is important for a buyer to have a low monthly payment on a mortgage. The financial security of a buyer plays a factor in what a lender can offer. A person must know where they sit with their credit score, current debts and what their overall income is. This information will show their financial security and their ability to put down a down payment.