Buying a house is the dream of many, but poor planning can turn that dream sour in a heartbeat. As many folks have found out the hard way, the best mortgage advice is knowing what to expect before you sign. Here are a few tips to make the process of buying a home what it should be: a dream come true.
Basic Mortgage Planning
It’s fine to want the best home you can afford, but be certain that it is comfortable affordability. Although you may find certain mortgage lenders who will stretch your qualification ratios (the ratio of your total mortgage payment to your total income) the traditional ratios of a mortgage payment that’s about 28 percent of your income, and the total of your mortgage payment plus your monthly debt payments at around 36 percent of your income are good basic guidelines. Of course, many homeowners have entered a mortgage with less. When problems arise, however, those who stick with these ratios tend to come out on top in the end.
1. Mortgage Planning Is Easier With a Defined Budget
Your household budget can tell you a lot about which properties are a good fit and which are best left alone. The fact is, however, that many folks don’t keep a well-defined budget at all. Take a few months, save every receipt, and get an accurate view of what you spend. Most importantly, write it down. Once you have it all on paper, it is much easier to see how the cost of mortgage payments, insurance, and property taxes can fit into your normal monthly spending.
This kind of budget examination will make the process of mortgage planning infinitely easier and could also give you a better idea of where (or how) you should live to pay your bills and still put money aside. For example, you may find that too a large percent goes to gas to and from work or to a particular pizza shop down the block; setting up residence closer to work or out of your favorite restaurant’s delivery range could greatly reduce your monthly expenses.
2. Pay Off Small Debts
Another great piece of mortgage advice is to pay off your lesser debts before you sign, Having three small credit card balances will only cloud the big picture. Even though the total is small, all three will have minimum payments, credit lines, etc. Pay as many of these small debts down to $0 balances and you’ll have fewer monthly bills and may even raise your credit score.
3. Mortgage Planning and Document Organization
It is not necessary that you have every piece of mail you’ve ever received on hand before you apply for a mortgage, but there are a number of documents you will need eventually and the approval process will go much smoother if you begin to gather them now. Examples: W-2s and income tax returns from the last few years (especially if you are self-employed), copies of pay stubs, a copy of your credit report, records of any child support or alimony (either going out or coming in), and bank statements for all accounts (checking and saving) for the last several months.
4. Don’t Forget About Closing Costs
One often neglected step in mortgage planning is preparing for your closing costs. Depending on the type of loan and your location, these costs can range from 3-5 percent of the mortgage amount, will be paid in cash at the closing, and shouldn’t (or cannot) be borrowed funds. Closing costs are a small percent of the total house price, but are too big a chunk of change to ignore.
5. Compare Different Loan Options
An article on mortgage planning would be sorely neglectful if it didn’t tell you to compare different sources for your loan. There are lots of sources for mortgage funds; your local bank or credit union, mortgage brokers, and Internet resources are all available and should be considered. Be certain to compare equal terms, down payments, and loan types.
6. Consider a 15 or 20-Year Term
Most mortgage planning is done with a 30-year loan in mind, but if you can swing it, a shorter term mortgage will save you plenty. There are various choices out there when it comes to choosing a mortgage, so you need to be smart about which terms you choose. Many home buyers make the assumption that a shorter term will boost their payments out of reach, but unless you make the comparison, you will never know if a 15 or 20-year term could have been affordable. If you are concerned about committing to the higher payment of a shorter term, try this tactic: Mortgage the home with a 30-year loan but have the lender develop a 15 and a 30 year amortization sheet for you. Then, do your best to pay the mortgage at the shorter term payment. It will do wonders for your equity position.
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