Home-buying can seem overwhelming for someone looking to buy their first home. That’s why we’ve broken down the process of how to prepare for a mortgage into these easy-to-follow steps. We’ve included everything from budgeting for a mortgage loan to first-time home buyer mortgage advice. It starts by figuring out where you stand financially, what kind of mortgage you might qualify for, what your mortgage options are, and the documents you’ll need.
Check Your Credit Score
Your first step to obtaining a home loan should be to check your credit score, as this has a direct impact on your ability to qualify for a mortgage and the interest rate you’ll receive. You can check your credit score and get free credit reports from each of the nation’s credit reporting bureaus at AnnualCreditReport.com. In the past, you could only do this once a year, but you can now check your credit every week.
Each bureau calculates its credit scores a little differently, so they’ll each give you a slightly different number. You should take a close look at your reports for any inaccurate information or signs of fraud. If there’s a discrepancy, you can contact whichever bureau lists that information to correct it. They are: Equifax, Experian, and TransUnion.
How to Improve Your Credit Score to Obtain a Mortgage
Your payment history accounts for 35% of your credit score, so paying your bills on time is crucial for maintaining a good credit score. Your credit utilization ratio accounts for 30% of your credit score. This refers to how much credit you have (such as credit cards) compared to your level of debt. Keeping your balance as low as possible on your credit cards, or paying them off, will help your credit score.
If you have any old credit cards that you don’t use very much, it can help your credit score if you hold onto them because they’re a part of your available credit. You may have to use them now and then keep them in good standing, but doing so can help your credit score.
Asking your credit cards to raise your limits could reduce your credit score a bit, but the impact would be short-lived as long as you don’t increase your balance. Higher credit card limits would help your credit score in the long run because they would increase your available credit and improve your credit utilization ratio.
You should avoid taking out new credit or loans for a while, such as credit cards or car loans, as this would negatively impact your credit score.
Figure out Your Debt-to-Income Ratio
To estimate your debt-to-income ratio (DTI), start by adding up all your monthly debt payments, including your estimated mortgage payments, and other obligations you would have as a homeowner such as property taxes, homeowner’s association fees (if required), plus child support, car loans, credit cards, etc.
Take your gross monthly income (your income before taxes and any other deductions) and divide this by your monthly obligations and debt payments to get your DTI.
Consider Your Mortgage Options
You have several options for a mortgage in the Traverse City area, depending on where you want to live, where you stand financially, and whether you’re a veteran.
Conventional Mortgages
A conventionally backed mortgage from West Shore Bank typically requires a credit score in the 620-640 range and a DTI of 43%. A down payment of 20% of the sale price is customary. A lower down payment would require private mortgage insurance (PMI). Depending on your credit score, your PMI may cost from 0.46% to 1.50% of your loan amount, which is added to the cost of your monthly mortgage payments.
USDA Home Loans
U.S. Department of Agriculture (USDA) home loans, also known as rural development loans, are available to low-income borrowers in designated rural areas. They do not require a down payment, but may require a guarantee fee of 1% of your mortgage and an annual fee of up to 0.5% of your outstanding loan amount that’s added to your monthly payments. You can verify your location’s eligibility online. A credit score of 640 and a DTI of 41% or less are typically required.
MSHDA Down Payment Assistance
The Michigan State Housing Development Authority (MSHDA) offers down payment assistance to first-time homebuyers who haven’t owned a home in the previous three years, plus repeat homebuyers in certain areas. Qualified buyers can borrow up to $7,500 statewide or up to $10,000 in select zip codes, including some of the communities we serve in West Michigan.
To qualify, applicants must attend a Housing Education class, and there are household income limits that depend on your location and family size. There’s a sale price limit of $224,500 statewide. A minimum credit score of 640 is required, or 660 for multiple-section manufactured homes.
Consider a Housing Education Course
Even if you’re not required to take a homeownership education course, it’s worth considering. It can explain how to buy a home and what you’ll need to know as a homeowner. Fannie Mae offers a free homeownership class. The Department of Housing and Urban Development (HUD) also has a list of housing counseling services available on topics that include buying a home.
Check the Marketplace
The average sale price of a single-family home in downtown Traverse City was $319,000 in February, according to Redfin, a 4.8% decrease from the previous year. Searching the real estate listings for the Traverse City area on Redfin, Zillow, and Realtor.com can give you a good idea of what’s available. You might also reach out to any realtors you may know to get an idea of what the market is like in the neighborhoods where you’d like to live.
Consider Your Mortgage Terms
You have a couple of things to consider when choosing a mortgage, such as the term (how long you have to pay it off) and whether you want a fixed or adjustable interest rate. Fortunately, we offer online financial calculators that you can use to compare your options and figure out your costs of different types of mortgages and other loans. You can also use our calculators to see what your borrowing costs and monthly payments would be depending on the selling price of the home and your down payment.
Why Choose a Fixed Rate Mortgage?
With a fixed-rate mortgage, your interest and mortgage payments remain the same for as long as you have the loan. You might choose loan terms of 15, 20, or 30 years. People typically choose a fixed-rate mortgage when interest rates are low, if they plan to stay in the home for at least seven years, and they want the predictability of fixed mortgage payments.
Why Choose an Adjustable-Rate Mortgage?
With an adjustable-rate mortgage (ARM), you would receive an introductory interest rate that’s set for a couple of years, and fluctuates after that depending on market conditions (lenders use the 10-year bond yield as a guide in setting mortgage rates). Your mortgage payments would also change, according to the interest rate. You might choose an ARM if you think interest rates are likely to fall in the future. Some people choose an ARM because they typically start with a lower interest rate than a fixed-rate mortgage, and they plan to move or refinance before that introductory period ends.
Save up for a down Payment
If you’ve never created a budget, now is the time to do so. Take a look at how and where you spend your money and look for ways to save. Even if you’ve already saved up for a 20% down payment, there could always be additional expenses to buying a home, such as moving costs, furniture, and any renovations you might consider for your new home. You might also have to outbid another buyer who may be interested in the home.
Gather Your Documents
While government-backed loans may have additional documentation requirements, these are what you’ll need for a conventionally backed loan from West Shore Bank:
• Your most recent pay stub
• W2s or 1099s from the past two years
• Tax returns from the past two years (if self-employed)
• Your most recent statement from the Social Security Administration
• Your most recent bank statement, to verify account balances
• Your most recent broker statement, if cashing in stock for a down payment
Obtain a Mortgage Preapproval Letter
A preapproval letter is a statement from your lender that indicates they would be willing to offer you a mortgage up to a certain amount and is typically good for 30 to 60 days. It’s not an actual mortgage, and it’s not a guarantee that you’ll obtain a mortgage. It’s simply a letter that you can show to sellers and realtors to indicate that you will likely succeed in obtaining a mortgage.
Sellers typically require a preapproval letter before they accept an offer on a home. The preapproval process can also be a way for you to spot any potential issues in your finances or documentation, so you can correct them.
Find a Home and Make an Offer
Websites like Redfin, Zillow, and Realtor.com can be a great way to find a realtor in Traverse City. You might also ask your friends and relatives to recommend someone. A realtor can help you find a home, offer advice on how to make an offer, and walk you through the entire homebuying process. Before you make an offer on a home, you might want to include a requirement that your offer is subject to the home being inspected by a qualified residential inspector. This is fairly routine in the home buying process, and it can save you a lot of headaches later. An inspector is trained to look for potential safety hazards or issues with things like the foundation, the plumbing, the electrical, and HVAC systems. The cost of a home inspection typically ranges from $300 to $500.
Apply for a Mortgage
Once you’ve made an offer on a home, and the buyer accepts, then you go through the formal process of applying for a mortgage. If you’ve already gone through the preapproval process, then your lender should already have most of the information they need to decide. You can see what kind of terms your lender is willing to offer. You may need to buy homeowner’s insurance before your mortgage and sale are finalized, and your lender will probably order an appraisal of the property to verify its value.
Contact Us about Obtaining a Mortgage
At West Shore Bank, we’ve been locally owned and managed since 1898, so we have a stake in seeing our friends and neighbors succeed. If you need additional advice on how to apply for a mortgage, please contact us or visit one of our locations in person. If you need additional mortgage planning tips and other financial advice, you can also check out our blog.
