Getting mortgage pre-approval is a key step early in the home buying process. To qualify, you need good credit, a history of savings, and a ratio of recurring debt to gross monthly income of around 45 percent or less.
You can get one free annual credit report each year at www.annualcreditreport.com Scores range from 300-850. It’s best to have a credit score of at least 620 when applying for a loan and the lowest interest rates go to borrowers with a score of 740 or higher.
Lenders usually recommend looking for a home that is three to five times your annual income if you’ve saved enough for a 20 percent down payment and are carrying a moderate amount of debt. There are loan programs available with down payments of 3.5 to 5 percent and a few with no down payment. They carry the extra cost of mortgage insurance.
Whatever down payment you make, you’ll need other savings to cover closing costs, moving expenses and an earnest money deposit. Usually 1 to 3 percent of the sale price, the deposit can be thought of as part of the down payment since it’s applied to the price of the home when the sale closes.
Whatever mortgage amount your lender approves, only you can decide what monthly payment you’re comfortable with. In addition to mortgage principal and interest, you’ll need to budget for homeowner’s insurance, property taxes and any homeowner association fees. It’s also a good idea to set aside savings for repairs and maintenance. Your lifestyle is another factor to consider. Do you have an expensive hobby or a taste for travel, for example?
Posted in: FAQ for Buyers