Steps to Financing a
Home
Prepare
for the Purchase. Begin early to establish sufficient savings so that you can pay the
required 5% - 20% that lenders require for down payment. You may be asked by the lender to
provide bank statements as proof of sufficient down payment, so set up a savings account
well in advance of your house search.
Research Your Credit History. It is a good idea to check your
credit rating before applying for a mortgage in order to identify and resolve any
potential problems. National credit reporting agencies have been known to make mistakes in
their credit reports. Contact all three major credit reporting companies to be sure your
record is accurate.
Minimize Your Debt. Lenders often consider the amount of debt you
have a significant factor in determining how much of a loan to grant. A simple way to
improve your credit standing is to reduce the balances of credit card and auto loans.
Determine How Much You Can Afford. Assess the three most
important factors that determine how much you can afford to spend on a new home:
- down payment - most loans require a
down payment of between 5 to 20% of the home price. Offering a larger down payment may
qualify you for special loan packages.
- ability to qualify for a mortgage -
most lenders figure that your monthly mortgage payment should range between 25 and 28
percent of your gross monthly income. A credit report is also requested to verify your
debt repayment history and available credit.
- closing costs - typically range
between two and five percent of the loan amount. These costs are due in cash at the time
of closing.
Obtain Pre-Approval
for a Loan. Pre-approval from a Colorado lender is not the same as pre-qualification.
Pre-qualification means your income, assets, and present debt are estimated in an informal
way to help determine what price home you can afford to buy. Pre-approval by a mortgage
lender means you have successfully obtained a written commitment from the lender. A formal
application must be submitted and your financial information is verified.
Pre-approval is beneficial to you because it gives you leverage in negotiations. Sellers
prefer pre-approved buyers because they know their home sale won't be delayed or cancelled
due to the buyer's inability to obtain financing. In addition, pre-approved buyers can
sometimes lock in lower interest rates before they even find the house they want to
purchase.
Discuss Mortgage Rates. It is helpful to understand the different
types of mortgages and the effect different interest rates will have on your financial
situation. Review recent mortgage rate trends and discuss the implications of differing
rates with a lender to ensure that you are making a wise decision when locking in interest
rates.
With your pre-approval commitment in hand, you are ready to begin your search for a new
home.
