preparing for future home ownership or refinancing your current mortgage
tips for building credit and saving for a home mortgage
A good budget plan begins one or two years before a buyer makes an offer. Here are four tips for anyone who plans to become a homeowner:
1. build strong credit
When it comes to securing a loan at the best mortgage rate, credit is key. Focus on improving and maintaining your credit score. A healthy score will help you to qualify for an affordable mortgage rate.
Where to get the credit score:
Request a free credit report at AnnualCreditReport.com. Everyone should check their report for accuracy and fix any mistakes. It can take time to correct errors.
How to raise your credit score:
To improve credit score, apply for share-secured credit cards and credit builder loans, pay off past-due bills, pay every bill on time and reduce balances to less than 50 percent of the credit limit on every account. It’s best to have three credit accounts, such as a car loan, student loan or credit card, for one year or longer. Too many credit inquiries or new accounts can be negative, because this could indicate someone who is about to take on a lot of extra debt.
Beware the pitfalls:
Paying bills late or missing a payment, can stay on your credit report for a long time. Every consumer should establish three lines of credit such as an installment loan and a credit card or two, keeping the balance low and paying them on time, in order to generate a strong credit report.
2. demonstrate ability to save
Create a simple budget and set a savings goal. Lenders want to see that pattern of savings and buyers will need anywhere from 3% to 20% of the purchase price of a home for a down payment. Automatic transfers from your paycheck may make this easy.
Practice making house payments:
Consider saving a “virtual” mortgage payment today as a way to build up savings and learn how to budget for actual mortgage payments down the road.
3. reduce debt
While buyers increase their savings, they should also reduce their debt. Lenders want to see that you are managing your debt and keeping your credit card balances low.
Keep an eye on debt-to-income (DTI) ratios:
DTI ratios are an important element in a loan approval. This ratio compares minimum monthly payments on all debt to gross monthly income.
4. get educated
BlueOx Credit Union will help you develop a plan to fit your lifestyle. It can be valuable for our members to know if they qualify for a mortgage. We can help you formulate a plan to help in that process.
budgeting for a home mortgage
When it comes to homebuying, everyone knows the critical rule: Don't purchase more house than you can afford. But what constitutes "affordable" will differ from one buyer to the next, depending on their lifestyle. Figuring out the sweet spot of affordability requires more than getting a preapproval letter from a mortgage lender, however. First-time buyers tend to shop on the amount a lender is willing to advance them, not taking into account other expenses. That sets them up for financial hardship and even a potential foreclosure if they can't afford the monthly payment.
- Setting a homebuying budget involves more than seeing if you can swing a mortgage payment.
- To determine if a home is affordable, calculate your entire debt-to-income ratio: all your monthly expenses divided by your gross income. Keep in mind that items such as utilities, cable and cell phone expenses are not factored into the debt-to-income ratio, but should be considered when developing a budget.
- Homeownership involves a variety of ongoing costs, including homeowners' insurance, property taxes and repair/upkeep expenses.
- Affording a home means being able to make at least a 20% down payment on it; otherwise, you'll incur costly private mortgage insurance.
the 25% rule can get you started
One of the easiest ways to calculate your homebuying budget is the 25% rule, which dictates that your mortgage shouldn't be more than 25% of your gross income each month. The Federal Housing Authority is a bit more generous, allowing consumers to spend up to 31% of their gross income on a mortgage. But don't forget that, if you have other debts, you must consider them, in addition to the mortgage payment, to determine how much you can truly afford.
Mortgage lenders look at this overall figure—a prospective borrower's debt-to-income ratio—when determining if they will lend money. Let's say your monthly mortgage payment is $1,000 a month and your other expenses are $1,000, so overall, your monthly obligations come to $2,000. Now let's say you have a gross monthly income of $6,000. That puts your debt-to-income ratio at 33%.
homeowning expenses beyond the mortgage
Getting pre-approved for a home loan is an important first step in the homebuying process, but it is only one consideration. A mortgage isn't the only recurring expense: homeownership comes with a lot of other ongoing costs, which buyers need to anticipate. These include homeowners' insurance, utilities, repairs, and maintenance costs. Maintenance alone can add up: The lawn needs to be cut, the snow has to be shoveled and the leaves raked. Buyers also have to consider property taxes.
All of these costs, as well as the other regular outlays, have to be included when determining how much home you can afford. These expenses can add greatly to the monthly budget, making a home that seemed affordable on paper, pricey in reality. A $1,500-per-month mortgage payment may be palatable, but add $1,500 in monthly expenses, and suddenly your obligations have doubled.
down payment should dictate the purchase
Generally, lenders want homebuyers to be able to pay at least 20% of the purchase price in cash. If they can only make a down payment below that amount, they can still get a mortgage, but often must also shoulder the extra expense of private mortgage insurance (PMI). Paying PMI means their monthly mortgage payment will go up by anywhere from 0.5% to 1% of the loan amount.
How much you pay in PMI will depend on the size of the home, your credit score and the potential for the property to appreciate, among other things. If you can't swing $60,000 down on a $300,000 home, shoot for at least 10%. The more down payment, the less interest you'll pay over the life of the loan, and the smaller your monthly mortgage payment will be, even if you are hit with mortgage insurance.
The amount you saved for the down payment should also influence the house you buy. If you have enough to put 20% on one home but 10% on another, the cheaper home will give you more bang for your buck.
Buyers also have to set aside money for closing costs, which can amount to between 2% and 5% of the purchase price, depending on which state you live in.? If you are purchasing a $200,000 home, you could pay between $4,000 and $10,000 in closing costs alone. The less you have to finance in the loan, the lower interest you will pay over the life of the loan, and the sooner you'll see a return on your investment.
choose a property you can handle
When considering the affordability of the home, first-time buyers have to consider the state of the property and the size. After all, large isn't always good, especially if heating and cooling it breaks the budget. A quaint home sitting atop a picturesque hill may be a dream come true, but shoveling that long, steep driveway during the winter months could be a costly nightmare. So could that 3,000-square-foot fixer-up, which seems super cheap until you have to start renovating every room in the house. Look at utility bills for the properties you're considering—and have a construction expert estimate what fixing it up could cost. If you're planning to do it mostly yourself, be realistic about what you can handle, both in terms of skill sets and time.
the bottom line
Homeownership is still the American dream, but it can quickly turn into a nightmare if you miscalculate your purchase. First-time buyers, in particular, have a lot of wants, often more than they can actually handle. They must make sure that the house they purchase is affordable by considering more than just the monthly mortgage payment. Without some upfront calculations, they can find themselves house-rich but cash-poor, leading to all sorts of financial pain. Take time to cost out your dream before you sign for it.
getting pre-approved and required documentation
1. the loan application
The first thing you’ll do when applying for a mortgage is complete a federally required mortgage application, in which you will need to provide the following information:
- Full name, birth date, Social Security Number and phone number.
- Marital status, number of children and ages.
- Residence history for at least two years. If you’re a renter, your rent payment is needed. If you’re an owner, all mortgage, insurance and tax figures are needed for your primary residence and all other properties owned.
- Employment history for at least two years, including company name(s), address(es), phone number(s) and your title(s).
- Income history for at least two years. If you receive commissions, bonuses or are self-employed, you must provide two years of bonus, commission, or self-employed income received. Most lenders average variable and self-employed income over two years. Social Security award letter or any other retirement/pension income (if applicable).
- Asset account balances including all checking, savings, investment and retirement accounts.
- Debt payments and balances for credit cards, mortgages, student loans, car loans, alimony, child support or any other fixed debt obligations.
- Confirmation whether you’ve had bankruptcies or foreclosures within the past seven years, whether you’re party to any lawsuits or you co-sign on any loans.
- Confirmation if any part of your down payment will be borrowed.
2. required documentation
Next comes the step of verifying all of the information provided in the application with documentation. A lender will provide a checklist based on your specific profile, but you can generally expect the following:
- Written (or sometimes verbal) authorization for your lender to run your credit report.
- Letters of explanation for credit inquiries, past addresses and any derogatory information on your credit report.
- If you’ve had a bankruptcy in the past seven years, discharge papers are required.
- If any tax liens or other derogatory items on your credit report require further explanation, you’ll be required to provide full documentation for each instance.
- If you’re a renter with a private landlord, 12 months of canceled rent checks or 12 months of bank statements to show rent checks cleared on time. If you’re a renter with an institutional landlord, your lender can sometimes get them to complete a form confirming on-time rent payments in lieu of cancelled checks or bank statements.
- If you’re keeping your existing home and renting it out, you’ll need to provide a lease agreement and proof that the first month’s rent has been deposited into your bank account.
- If you intend to sell your existing home before closing on the new home, you’ll need to provide a listing agreement for the home, and it will need to close before your new home can close.
- Purchase/building agreement with signatures (if new purchase or construction).
- Plans and specification (if new construction).
- Copy of deed (if building new home on member’s lot).
- Copy of unexpired government-issued photo identification.
- Current homeowner’s insurance policy (if refinancing).
- Current statements for liabilities that will be paid off, including mortgage and/or home equity loan.
- Quote for homeowner’s insurance from insurance company of member’s choice (if purchasing or building).
- Copy of earnest deposit check and print out of the check deposit from the realtor.
- Pay stubs for at least 30 days.
- W2 forms for all jobs worked in the past two years.
- All pages of personal federal tax returns for the past two years.
- If self-employed or greater than 20 percent owner in a company, all pages of business federal tax returns for past two years.
- If self-employed or greater than 20 percent owner in a company, a year-to-date profit and loss statement for the business.
- Income from rental properties can typically only count if it’s on your tax returns. If rental income isn’t on your tax returns yet because the rental property is new, lenders may accept the income if your rental property down payment was 30 percent or greater. Ask your lender.
- If you’re divorced and receiving (or paying) child support or alimony, a divorce decree will be required, and this income typically must be scheduled for at least three more years from the time of loan closing.
- Most recent two months statements for all savings and checking accounts, as well as the last quarter statement for investment and retirement accounts. You must include all pages even if a page says “intentionally left blank” or you think there is no relevant information on certain pages.
- If you move money among accounts, you must provide all accounts even if you’re only using one account for the down payment, because the lender will review every line item on two months of full account statements and ask you to paper-trail large deposits and withdrawals.
- If you’re receiving gift funds, your lender will require all donors and receivers to sign a gift letter verifying the gift isn’t a loan. Some lenders want to see the donor’s accounts for verification of the donor’s ability to gift, and some only want to see the funds being received in your account. Gifted funds must be certified by the donor’s financial institution. And for further reference, here are specific rules for using gift funds as down payment.
- Other supporting documentation necessary to complete loan application processing.
Frequently Asked Questions
What credit score do I need to apply?
To qualify for a Home Mortgage at BlueOx Credit Union, maintain a minimum credit score of 620, have no outstanding judgments on your record, and have two active trade lines, as well as a solid two-year work history (or college and work history combined).
What are your current rates?
Closing costs are an important factor in determining the total cost of a Home Mortgage, in addition to interest rates. Please contact a BlueOx Mortgage advisor to review all of your options. For your convenience, view rates here.
How much of a down payment do you require?
BlueOx Credit Union offers Home Mortgages for as little as 5% down.
Do you do Mortgages for mobile homes?
Yes, on double wide mobile homes only on a fixed foundation and with proper documentation. Members must own the property that the mobile home is on.
Do you do Mortgages for out-of-state homes (i.e. vacation homes)?
BlueOx Credit Union does not do out-of-state Home Mortgages.
How do I apply?
For your convenience you may apply online here.
How long does the entire Home Mortgage process take?
The entire process from application to closing of a Home Mortgage takes approximately 30 days, depending on the documentation needed. Please note that title and appraisal work times may vary.
advantages of a BlueOx home mortgage
A Home Mortgage from BlueOx Credit Union will help you feel more comfortable about your future and you can trust our Mortgage Professionals to help you with your borrowing needs. We understand that buying a new home is one of the most important decisions you will make in a lifetime. BlueOx Credit Union has been committed to building relationships with our members and community by delivering outstanding member service and affordable financial solutions since 1936, and we promise that you’ll feel right at home with our personal service, great rates and generous terms. For your convenience, our Mortgage Advisors will help you customize a program that best suits your family’s needs. Enjoy all the comforts of your new dream home when you take advantage of our Home Mortgage Program today!
- Financed and serviced at BlueOx
- Make payments online or in-branch
- Quick, seamless and tailored to your needs
- Local, hometown, superior service
- Fixed-rate purchase and refinance options
- Free pre-approvals and low closing costs
- Competitive rates and flexible terms
Contact our Trusted Mortgage Advisors for an appointment at (269) 660-1310 or apply online today!
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