Home Financing Basics
The biggest part of the home buying process is figuring out the home financing basics. Budgeting for buying a new home is always a challenge, but we break it down for you into easy steps.
Know Your Finances
The first step in preparing your finances is to know your budget. Understanding how much you can afford to spend on a home is a big step. Once you’ve detailed your budget, you’ll want to obtain a copy of your credit report and score. Check that all accounts are in good standing and nothing is bringing your score down.
Pre-Approved vs. Pre-Qualified
It’s highly recommended to have a pre-approval or pre-qualification letter from your lender. Clients can opt to work with a digital or human lender. Human lenders are great for clients looking for a personal experience. This type of lender can be popular for those who have complex applications or lower credit scores. Digital lenders are gaining popularity for those who like to apply on their own time and remove any personal influence from their application process. Once you’ve decided on a lender, it’s important to obtain a pre-approval or pre-qualification letter before they start looking at homes.
The difference between a pre-approval vs. a pre-qualification letter is that a pre-approval is based on information provided to a lender in good faith. Pre-approval letters generally don’t include any verification of finances or income. With a pre-qualification letter, your lender has verified the information you’ve provided and run a thorough credit check.
Saving for a Down Payment
The larger the payment you put towards your home initially, the less you’ll be paying per month on your mortgage. It’s also important not to dump your entire savings into a down payment. The FHA formula says you should prepare to spend up to 31% of your income on a monthly mortgage, and have a debt to income ratio of no higher than 43%. Additional expenses to be prepared for are closing costs, legal fees and expenses, home improvement, and moving costs.