Know where you stand.
Before you start looking for a home, you need to know your maximum housing price. By calculating this early in the process, you won't waste time looking at houses out of your price range or get your heart set on a home you can't afford. To do this, you need to calculate your debt-to-income ratio
by comparing your gross monthly income to your monthly debts.
As a rule of thumb, mortgage lenders typically use 36-percent as the guideline for how high your debt-to-income ratio should be. Another guideline is to limit housing expenses to 28-percent of your gross monthly income.
Consider getting pre-qualified before you begin shopping. By providing basic financial information to a mortgage lender, you'll receive an idea of the mortgage amount for which you qualify. You can use this information to narrow down your home search and show sellers you're a serious buyer. However, this is not a guarantee of a loan, as it does not take into account your entire financial situation.
Choose the mortgage that best meets your individual situation.
Now that you know how much you can afford, it's time to start thinking about the type of mortgage that will meet your risk tolerance and financial situation. The two most popular mortgages available are fixed-rate mortgages
and adjustable rate mortgages
(ARMs). Each one has its advantages.
- Fixed-rate mortgages
- Are ideal if you plan to live in your home for a number of years
- Provide consistent payments and unchanging interest rates
- May be a wise choice if interest rates are expected to rise
- Are ideal if you plan to live in your home for less than three years
- May be a wise choice if interest rates are expected to go down
- May be less expensive than a fixed-rate mortgage over time, if interest rates remain steady or decrease
Shop around for the best mortgage.
Once you've identified the type of mortgage that's right for you, you'll need to look at the loan's interest rate. The lower the interest rate, the less money you'll pay over the life of the loan. With this in mind, even the smallest difference in rates can have a huge impact on your pocketbook.
But interest rates aren't the only numbers to look at. The loan's annual percentage rate (APR) includes the interest costs and other fees charged by your lender. Request an itemized APR from each lender, so you can make properly compare your loan options.
Also, look at the features of your loan – caps, prepayment penalties, and lock-in terms – and be sure to pick a lender who is responsive to your questions.
After you've selected your lender, you'll want to get pre-approved to demonstrate to sellers that you're ready and able to make a purchase. This process is much more thorough than the pre-qualification process and involves completing a good portion of the loan paperwork.
Lock in the best interest rate.
You've settled on a mortgage, a lender, and you've found the house of your dreams. Now what? Because it can take awhile to close on your new home, you should consider locking in your interest rate. With a rate lock, your lender guarantees a specific interest rate for a specific period of time, generally 30 days (though locks are also available for 15, 45, or 60 days).
Close on your new home.
When closing time arrives, you should be ready for an avalanche of paperwork. Ask your mortgage lender for a copy of the HUD1 Settlement Statement
before you close and review the document carefully. If there are any significant discrepancies between the Settlement Statement and your Good Faith Estimate
, ask your lender for an explanation.
Be sure to bring a check to the closing table to cover your closing costs, sign all the proper paperwork, and get ready to move in.
Keep your eye on your mortgage.
Stay abreast of interest rates even after you close on your home. Changes in your financial situation may allow you to pay off your loan faster or you may wish to refinance your mortgage to take advantage of lower interest rates. Additionally, if you have an ARM
and interest rates have increased, you may want to refinance to a fixed-rate mortgage
and reduce your payment.