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Deciding to buy a home is a big step. The list of factors to consider can be lengthy–neighborhood location, school districts, square footage, deciding between a Condo or a Co-Op; the list goes on. The most important factor is your financial picture.
You might be excited to look at homes or apartments online, or even stop by a few open houses. However, without getting your finances in check, you may not be able to make your home-buying dream come true.
If you are serious about buying a home, understanding your finances is a crucial first step. “Meeting with a mortgage expert and getting pre-approved for a loan puts you in a stronger position when you are ready to make an offer on the home,” says Sophia Constantinou, Vice President of Sales at Lyons Mortgage.
Your credit score is one of the ways a mortgage lender will determine your financial ability to pay your loan punctually, every month. Five key factors influence your score, each varying in importance:
While a low credit score doesn’t necessarily mean you won’t be able to qualify for the loan you want, it certainly impacts the kind of loan you’re eligible for. Interest rates for scores lower than 700 are likely to be higher than the lowest rate available — and that will make your mortgage more expensive.
On the other hand, a score of 740 or above could land you the best possible rate.
Regardless of how low your mortgage rate is, the ability to offer a sizeable down payment can measurably improve your overall buying power.
Why is this the case? “The biggest factor in determining your mortgage rate is your Loan-to-Value%, which is your loan amount divided by the purchase price or appraised value,” explains Stephen Casil, Vice President of Secondary Markets at Lyons Mortgage.
“Therefore having a larger down payment would result in a lower LTV which will make you be less risky to a lender and be beneficial to lowering your mortgage rate.”
Being able to supply 20% of the home sale price in cash can eliminate the need for private mortgage insurance and allow you to negotiate for a lower interest rate. Also, a higher down payment will lower the amount you pay over the life of your loan.
A higher down payment makes you more attractive to the seller, displaying that you are financially ready to make the purchase. In competitive markets like New York City, this will separate you from other buyers.
Your debt-to-income ratio can be a valuable number and it’s exactly what it sounds: the amount of debt you have as compared to your overall income.
This calculation is your total monthly debt payments divided by your total monthly household income.
For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2000($1500 + $100 + $400 = $2,000). If your gross monthly income is $6000, then your debt-to-income ratio is 33 percent.
Generally, you’ll want to keep it below 43, but the lower your DTI is, the greater the chance you will be able to get the mortgage you seek.
A lender’s primary concern is always whether the borrower will have the income coming in and the financial resources to make their mortgage payments.
During the loan process, you will be required to show documentation for where the money for the down payment is coming from. You will also present your savings and assets. The larger your savings, the more you can afford standard mortgage costs and fees.
Knowing the importance of these 4 factors and making necessary adjustments before home-shopping can put you in the best possible position and ensure that your bank account will be ready when the time comes to make a purchase.
Determining your buying power isn’t the most exciting part of the home-buying process, but understanding how your lender looks at your financial picture is crucial for every prospective buyer.