Buying a new house, especially for first-time buyers, can be fairly intimidating. The process is complex, can be long, and is usually littered with more than a few obstacles. In fact, the buying process begins (or, at least should begin) well before the house hunting starts. Simply put, there’s some important preparation that should precede the actual buying. With that in mind, we offer these 3 things to do to prepare before buying a new house in Redlands.
1. Determine What You Can Afford and Save For the Down Payment
Probably the best first step to take in preparation for buying a new house in Redlands is to determine your budget, that is, what you can actually afford. “Setting a realistic budget for your new home will help inform what you can afford and how much you all-in costs will be.”
And that “realistic budget” must include not only the one-off cost of buying a new house, but also the recurring costs. The cost includes much more than the purchase price and resulting monthly mortgage payments. You need to factor into your budget such costs as:
- Property taxes
- Homeowners insurance
- HOA fees
- Maintenance and repairs
- Commutes to/from work
Another preparatory step is saving for the down payment. And, generally, the larger the down payment, the better, especially if you want to avoid paying for private mortgage insurance.
“To avoid private mortgage insurance or PMI, you’ll need to save at least 20 percent of the home’s purchase price for a down payment. Some lenders offer mortgages without PMI with lower down payments, but expect to pay a higher interest rate.”
If, however, you’re unable to save up 20% for the down payment (which is a big obstacle for many buyers), you do have options. These include FHA loans, USDA loans, and VA loans, as well as conventional loans backed by Fannie Mae and Freddie Mac. You can contact a Redlands agent at (951) 232-9704 to find out more about these lower-down payment options.
2. Get Your Credit in Order and Calculate DTI
The next thing to do to prepare before buying a new house in Redlands involves your credit, getting it in order or improving it, and calculating your DTI.
“Once you decide to buy a new home,” according to industry pros, “you’ll need . . . to check your credit history. This involves pulling credit reports from each of the three credit reporting bureaus (Experian, TransUnion, and Equifax) to better understand your credit score.”
This is important because your credit score impacts your mortgage eligibility, as well as your mortgage rate. “Most mortgage programs require a minimum credit score between 580 and 620.” But the higher you score, the better off you’ll be because a higher score will get you a lower interest rate, which can mean a savings of many thousands of dollars over the life of your loan.
You should also begin this process early. “Ideally, you should check your credit history at least 6-12 months before applying for a mortgage loan. This allows time to improve a low credit score, if necessary.” It also gives you time to find and dispute any errors on your credit report that may lower your score.
Another important and related consideration is your debt-to-income (DTI) ratio. This “is the percent of your monthly income that goes toward debt repayment. Mortgage lenders use this percentage to gauge your affordability.” Typically, lenders want a DTI ratio no greater than 36% to 43% (though this does depend on the specific mortgage program).
Here’s an example . . .
Suppose your monthly gross income is $4,000. With that income, a lender wouldn’t want “your monthly debt payments (including a future mortgage payment) [to] exceed $1,720. In this scenario, your DTI ratio would be “43% ($1,720/$4,000 = ).43).
Do be aware, though, that when certain “compensating factors” such as a high credit score or large cash reserves are in place, some lenders may be willing to accept a higher DTI ratio.
In any case, it pays to figure out your DTI ratio early when preparing for buying a new house in Redlands to allow time to improve it if you need to. “To improve your DTI ratio, pay off as much debt as possible before applying for a mortgage. This includes credit cards, auto loans, student loans, and other loans. You don’t have to be debt-free to purchase a home, but less debt can increase purchasing power.”
3. Get Pre-approved for a Mortgage
The third important thing Redlands home buyers should do to prepare before buying a new house is to get pre-approved for a mortgage loan. Doing so can give you a leg up and “jump-start the home buying process.” The main advantages of pre-approval are that you will know exactly how much you can borrow, will allow you to be perceived as a serious buyer, and will give you more negotiating leverage.
Keep in mind that pre-qualification and pre-approval are two different things. Pre-qualification is simply “a preliminary step where you provide the mortgage lender with basic information about your financial situation . . . The lender doesn’t verify this information, but uses it to determine whether you might qualify for financing.” Pre-qualification “doesn’t carry as much weight as a pre-approval letter.”
Pre-approval, on the other hand, “involves submitting a mortgage application and providing your lender with supporting documentation. This includes tax returns, paycheck stubs, W2s, financial statements, and a credit check. The underwriter reviews this information and determines how much you can afford to spend on a property. A pre-approval letter doesn’t guarantee financing, but it’s a lender’s way of saying they will likely approve you, provided you meet other loan qualifications.”
When you get pre-approved, then, you’ll know exactly how much you can borrow, which can save a lot of time when house hunting. In addition, as we mentioned, buyers will perceive you as a serious buyer, and you’’ have more negotiating leverage.
And Find a Local Redlands Agent
Finally, maybe the best thing you can do in preparation for buying a new house is to find and engage the services of an experienced local Redlands agent. With her thorough knowledge of the local market, you Redlands agent can be an invaluable asset. If buying a new house in Redlands is on your horizon, be sure to contact us today at (951) 232-9704.