You’ve seen the news that mortgage rates have gone up. Not to worry. The truth is, rates are still at historic lows. And while the market and lending landscape have changed, it won’t take much to get you on your way to that new home.
1. Assess and address
Do you know your DTI? If you haven’t even heard of DTI, you’re not alone. Your debt-to-income ratio, or DTI, is simply your total debt compared to your gross income. DTI has become increasingly important to lenders in determining your ability to repay a mortgage—perhaps even more than your credit score. A higher DTI means you may have too much debt relative to your income to take on a home loan. You can easily calculate your DTI to see where you stand. If your ratio seems high, start paying down your debt before you move forward.
2. Know more than your score
Knowing your credit history and score is another important factor in seeing how lenders view you. Get a copy of your most recent credit report to check for errors. Visit AnnualCreditReport.com and get a free report from each of the three credit bureaus. Review for mistakes, skipped payments, and collection accounts, and fix them before you apply. For a small fee, you can also find out your credit score. Scores range from 300-850. The higher your score, the better your ability to qualify for a loan. Lenders are closely watching your credit report from the time you apply until the time you close, even for slight changes. So this is not the time to apply for any new credit, rack up balances, or make late payments. It could stall or stop your new mortgage loan.
3. Get pre-approved. Get taken seriously
Pre-approval from a lender shows the realtor and seller you aren’t just window-shopping. Most sellers will require pre-approval to validate the contract on a home. Getting all your documents in order helps speed up the process when it comes time for pre-approval. Your lender may require more information to complete your loan application, but having at least the following ready: last two pay stubs/Leave and Earnings Statements (LES), W-2s/tax returns for the past two years, and two months of bank/stock statements.
Make sure the lender who pre-approves your loan is offering you the best deal—some lenders even offer a rate-match. Make sure they consider all of your factors to find a mortgage that’s right for you. Perhaps you’re a first-time homebuyer or an Active Duty military family with limited funds for a down payment—options such as VA loans or 100% financing make it possible to close on a home with no money down. Compare interest rates—even a half percentage point can lower your monthly payment and save you thousands of dollars over the life of your loan. This is also true of unnecessary or unexpected fees.
4. Inspect those Gadgets
In any market, a home inspection safeguards you against unforeseen problems that could occur down the road. A typical home inspection includes testing all electrical and plumbing, and evaluating the home’s roof, exterior structure and foundation. If major repairs are required, you can adjust the price or even walk away from the offer.
5. Close the Deal
Closing is the home stretch—the last phase in the buying process. You should be excited and proud! If you know what to expect, it will go smoothly. Some items often needed at closing include photo identification and copies of required insurance policies, including proof of payment. By law, buyers are entitled to receive a copy of their HUD-1 Settlement Statement, a document itemizing closing-related services and charges. Closing costs generally range from three to five percent of the total loan amount. Sometimes buyers can negotiate with the seller, in advance, to pay the costs associated with closing. Some lenders, such as Navy Federal, make $2,500 available to its members to help with closing costs.
Overall, now is an excellent time to buy. Yes, rates are higher, but they’re still great. Once you determine you’re ready to take the next steps, plan them. Being prepared can be the key to unlocking the doors of your new home.