So you’re intending to buy a Rumson home or a Fair Haven home- great! Unless you’re able to buy the home entirely with cash, you’ll have to borrow money from a mortgage lender. The monthly payment you’ll be paying to the mortgage lender will include not just a portion of the principal and interest on the loan, but property taxes and insurance (PITI).
Mortgage rates are at or near historic lows right now, but that doesn’t mean you’ll qualify for the lowest rate. The mortgage rate you’re offered will depend on a number of factors, including the amount of down payment you intend to make, your credit worthiness, the number of years you’ll take to repay the loan, and so forth. Before you even start looking for a home, you should do two things: save as much cash for a down payment as you can, and find out what your credit rating is. You already know how much cash you have available, and how much more you can save every month.
The next step is to find out what your credit rating is, and to do everything you can to improve it. The better your credit rating, the lower the interest rate will be on your mortgage. Most lenders use a person’s FICO score to evaluate credit worthiness. FICO scores range from 300 to 850, with the higher the score the better your credit worthiness. Most mortgage lenders won’t issue a mortgage to someone whose FICO score is less than 640. The factors that make up a FICO score (and how to improve it) may be found here: http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx. Several credit cards now offer a free monthly update on your FICO score. If you don’t have one of those cards, you may always purchase your FICO score.
You’re entitled to a free credit report every year from each of the 3 major credit reporting agencies, Equifax, Experian and TransUnion. To learn more about the free annual reports, take a look at my January 16th post, “Time to Check Your Credit Report”: https://rumsonfairhavenhome.com/2016/01/16/time-to-check-your-credit-report-2/. The free reports are very helpful and I urge you to get a free report from one of the credit agencies every 4 months, but the free reports won’t give you a numerical FICO score.
Once you know what your FICO score is, go to a mortgage lender, tell them you’re thinking of buying a house in Rumson or Fair Haven, and ask them how much of a mortgage they’d be willing to give you. Tell them you’d like a “letter of pre-approval” (NOT a letter of “pre-qualification”). They’ll ask you for information about your employment, copies of recent income tax returns, and other information so they can do a thorough search of how responsibly you’ve used credit in the past.
There should be no charge for a letter of mortgage pre-approval, and you won’t be obligated to use that mortgage lender when you’re actually ready to apply for a mortgage (however, that mortgage lender will already have all of your information on file, so they may be able to issue a mortgage more quickly). Save your letter of pre-approval, because it may be helpful later on when you make an offer to buy that Rumson real estate or Fair Haven real estate (see below).
Mortgage lenders look at your gross monthly income, and have guidelines for what percentage of that monthly income they feel is prudent to spend on debt coverage. A common example might be 28/36- they’d approve you to spend up to 28% of your gross monthly income on a mortgage, and up to 36% on ALL of your debt (including auto loans, credit card payments, etc.).
Just because you can be pre-approved for a large mortgage doesn’t mean you should borrow the maximum amount that you can. Determine what monthly mortgage payment you’re comfortable with so you’ll still have money to spend on other things in your life. If you have the means, you might want to investigate a mortgage for a shorter period of time than the typical 30-year mortgage; the monthly payments will be higher, but you’ll save a lot of money on the interest you pay over the life of the mortgage.
On the other hand, you may find you’ll only be approved for a mortgage that’s too low to buy the house you were thinking about. Then you have to decide whether you should wait until you’ve saved more money and improved your credit worthiness or lower your target price range. Rumson real estate and Fair Haven real estate is available in many price ranges, and there’s nothing wrong with looking in other neighboring towns as well. I like a site called citi-data .com: http://www.city-data.com/ as a great place to learn all sorts of things about any town in the country.
When you’re ready to submit an offer on that Rumson house you’ve found, realize that other potential Buyers may be interested in the same Rumson house. A Seller is interested not only in the dollar amount being offered, but the likelihood that the potential Buyer will be able to buy the house as proposed. A Rumson real estate Seller probably will be happiest with a Buyer who is willing to pay cash and who has no property to sell first. Second on the list would be a Buyer who has no house to sell and who is pre-approved for a mortgage. This would be followed by a Buyer who has no house to sell but who doesn’t have a letter of pre-approval; then a Buyer who has to sell their present home before buying the subject property in Rumson; etc.
A Seller may also be interested in closing on the sale as soon as possible, and may lean towards a Buyer who offers a lower price but a quick closing. This is why in addition to getting the letter of mortgage pre-qualification, it’s important that you deal with a mortgage lender who is willing and able to close within say 30 – 45 days. Some mortgage lenders are routinely able to do this, while others habitually take longer and fail to meet deadlines they’ve agreed to. Your Realtor can guide you towards local mortgage lenders who have performed well consistently in the recent past.
There was a lot of information in this post, and if any of it was confusing to you it would be my pleasure to discuss it in more detail. I always do this when I’m working with a Buyer client, because little details are important. For example, I recommend that a Buyer who has been pre-approved for a mortgage doesn’t add to their credit debt until after the closing. Although it might be tempting to buy new furniture for the house (or a new car, etc.), the mortgage lender will check your FICO score right up to the day of closing, and you don’t want to be faced with a situation where the mortgage lender suddenly lowers the amount of the mortgage they’re willing to give you.
Tomorrow we’ll end our series on the 5 “P’s” of Buying a Home by looking at the 5th “P”- Paperwork.
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