Prospective homebuyers have several decisions to make before becoming homeowners, including where to live, what type of home to buy and how to finance the purchase with a first mortgage. One of the first steps every renter should take, even before looking at property, is to consult with a reputable lender.
A lender will tell you how much you can borrow based on your income, your assets and your debt-to-income ratio (monthly obligations compared to monthly gross income). Prospective buyers should also consider their own personal spending plan to determine an appropriate housing payment.
While most lenders will approve a mortgage that consumes a maximum of 31 percent of your monthly gross income, homeowners may want to spend less depending on their other current or projected expenses. For example, if you plan to have children and want one parent to reduce working hours, you will be better off with a mortgage payment that you can comfortably cover on a reduced income.
A lender will review your credit score as well as document your income and assets. Most often, it takes a credit score of 720 or higher to qualify for the lowest mortgage rates. Borrowers with a lower credit score will be charged a slightly higher interest rate, which will impact monthly payments. A mortgage calculator can show you the difference between payments at varying interest rates. Additional interest rate increases may be incurred for purchasing a particular property type such as a condominium.
When comparing mortgage rates, make sure you know what your entire housing payment will be. In addition to paying principal and interest on your home loan, you will also need to pay property taxes, homeowners insurance and possibly homeowner or condominium association dues.
Before qualifying for a first mortgage, borrowers will need to demonstrate their ability to save money for a down payment and closing costs as well as to pay their bills responsibly.