The prospect of becoming a first-time homeowner certainly is a time of excitement but there are a lot of other considerations that will be involved to make the time a stressful one. While the mortgage process itself can be complex and frustrating at times, the time period before actually applying for a mortgage loan can actually be the most critical for your home options, your wallet, and your overall financial stability.
Understanding the Pre-Mortgage Factors
The first priority consumers need to focus on when considering a home purchase is their own credit standing. Without a strong credit score and a reputable credit history, consumers have a much less chance of getting the home options they’d like to explore. The purchase price of the home may be set, leaving buyers with more limited options than they had anticipated.
Credit scores will also have an impact on the next 15 to 30 years of your financial life. The credit score you maintain dictates the rate of interest you will be charged on your mortgage loan. Even a point or two difference can mean you pay hundreds of thousands of dollars more for your mortgage than you would have with a higher credit score.
Here is a sample calculation on a $150,000 home:
4% @ 30 year term = $107,804.26
$150,000 mortgage { } $65,953.02 savings
6% @ 30 year term = $173,757.28
What’s a Good Score?
Mortgage lenders are now looking for excellent credit histories with credit scores of 730 and above before they will consider giving the best interest rates and terms on a home loan. Any score lower than 700 may incur a higher interest rate as imposed by the lender to cover potential default risks. Scores lower than 650 may prove to be too low for some lenders and as a result, getting approved for a mortgage without extenuating conditions may be difficult.
Mapping Out Financials
Boosting your credit score will mean that you need to have all of your monthly bill obligations paid on time and preferably in full consistently each and every month. It will be important to create and stick to a strict budget that allows financial obligations to be met, savings goals to be reached, and daily life to be accommodated. Lenders will be expecting a 20% down payment of the home’s purchase price. You will also need to have funds to cover closing costs and moving expenses. It would also help your credit score over time to reduce the amount of debt you have outstanding.
Establishing a budget early in the process of considering a home purchase is an ideal way to prepare not only for the home purchase process but also to get you accustomed to the new expenses owning a home will bring about. Besides the normal living expenses, homeownership will also require insurance premiums, repair and maintenance expenses, and property taxes. It is best to create a budget that will prepare you financially for the road ahead.
Money Well Saved
When you calculate the actual savings over the course of thirty years that a solid credit score will provide on a mortgage interest rate, you will be able to see many other areas where that money would be better spent. By repairing your credit before approaching a mortgage lender, you are able to keep more in the bank and have more options available to you including your choice of mortgage products, better insurance rates, and even a bigger selection of homes to buy.
Homeownership requires forethought and preparation. Hurrying into a mortgage without the financial securities required can ultimately lead to a life full of debt struggles, possible mortgage default, and a in general an unstable financial future ahead.
J.D. Roberts is a seasoned writer in personal finance, specializing in credit repair. You can find more of his articles located at CreditRepair.org.