Understanding the Financial Process When Buying a New House

If you’re a first time homebuyer, you’ve probably realized that the process isn’t an easy one. To ensure that everything goes well, it’s important to prepare as much as possible beforehand.

When it comes to the financial aspect of buying a house, you should know what will be expected of you before you can get a mortgage and the keys to your dream home.

The first factor to consider when buying a new house? Your credit score.

“Your credit score is probably the single most important thing when applying for a mortgage,” said Chris Cahill, loan officer at Tidewater Mortgage Services. “It’s very important to monitor your credit closely and to obtain a copy of the report at least once a year to make sure it’s correct. The difference between a 740 score (high) and a 620 score (low) can be thousands of dollars in interest or more during the life of a mortgage.”

Before you apply for a mortgage (assuming you will be doing so), Cahill said to get a copy of your credit report months in advance, so you can check it for accuracy and know where you stand. If there is a problem in your report, you’ll have time to dispute it and fix your credit score before you get too far down the line.

A credit report check is necessary because all lenders use the borrower’s FICO score in determining whether a borrower qualifies for a mortgage, and what the interest rate will be. The higher the FICO score, the better the chance of qualifying, and the better the interest rate.

If your credit score doesn’t meet the minimum score requirements for a lender or program, you need to work on improving the score. “We offer a service through one of our credit vendors that does exactly this,” said Cahill. “There are ‘credit specialists’ out there, but you need to be careful with these, as they don’t always deliver on what they promise. A seasoned loan officer can assist greatly with this and make sound recommendations on how to improve a credit score.”

Once you’ve sorted out your credit situation, you need to then determine how much house you can afford. Ideally, you should be looking for something that allows you to pay your mortgage, expenses such as taxes and utilities, and continue to build your savings. According to the Credit Union National Association, home expenses should not exceed 28 percent of your gross monthly income.

Next, you need to begin saving for your down payment and closing costs if you haven’t done so already. Many overlook the fact that while they can opt to make a small down payment on a house, closing costs quickly add up; in some cases, closing costs can be triple the down payment.

As you save for your down payment and closing costs, you’ll want to build a healthy savings account as well. If your lender can see that you have three to five months’ worth of mortgage payments set aside, you’ll be a better candidate for a loan.

If you’re not sure if you can cover the closing costs, be sure to do your research and look for agencies that might be able to assist you financially. “Some local counties offer subsidies for first time homebuyers for closing costs,” said Frank Dowd, Licensed Title Agent and Founder of Associates Land Transfer Company (ALT). “It’s important to know about everything that’s out there that can help you buy a home.” To do so, Dowd said to research resources on the county level as well as resources on the Internet.

There’s also mortgage financing available from the U.S. Department of Agriculture. “It doesn’t have to be a farmhouse either; it’s more about income qualifications,” said Dowd. “Interest rates are unbelievably low through these programs.”

Although it may take longer than you hoped to buy a house, educating yourself beforehand will ensure you’re as equipped as possible.