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A Guide to Getting Your First Mortgage: Here are 12 things newbie homebuyers should know before signing on the dotted line.

A Guide to Getting Your First Mortgage: Here are 12 things newbie homebuyers should know before signing on the dotted line.

To buy your first home, you likely will need a mortgage. In fact, before you even start looking at houses, you should look into your mortgage prospects.

If you have good credit, a healthy income and money in the bank, you’ll be able to secure mortgage preapproval quickly and proceed straight to the homebuying process. But if you have less-than-stellar credit, are self-employed or have little cash to bring to the table, you’ll want to start the process way before you look at houses – maybe more than a year before.

“You have to get a copy of your credit report,” says Don Frommeyer, chief executive officer of the National Association of Mortgage Professionals and a mortgage broker in Indianapolis. “You have to know what’s in there.”

The free credit report you can get annually, while it helps you identify problems, won’t show you the same credit score your mortgage officer will see. “The score is invariably higher than what you get when someone in the mortgage company runs it,” says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” and a mortgage broker in the San Francisco Bay Area.

That makes meeting with a mortgage officer (or two or three) at the start of the process crucial. In competitive markets, agents won’t even show homes to buyers without mortgage preapproval.

Be prepared to produce documents, and lots of them, starting with several years of tax returns and many months of bank statements. Lenders will want proof of your income, and they will want to know about all your debts. They also will want to know the source of any big deposits. If your parents give you money for a down payment, they will need to write a letter documenting that.

The other thing you’ll need, besides documents, is money – and lots of it. You’ll need money for your down payment, closing costs and more than a year’s worth of taxes and insurance payments, for a start. Lenders will also want to see that you have adequate reserves in case you lose your job or the furnace breaks down.

“What happens if you have to buy a new furnace?” Frommeyer says. “There are always added costs when you buy a house.”

Financial experts disagree over how much money you need for a down payment. While 20 percent is often considered a rule of thumb, you can buy a house with as little as 3.5 percent down with a Federal Housing Administration mortgage, 5 percent with a conventional mortgage or nothing down with a VA loan available to military veterans.

But the less you pay down, the bigger your monthly payment will be. Plus, if our down payment is less than 20 percent of the purchase price, you’ll have to pay private mortgage insurance or the FHA equivalent, known as mortgage insurance premium.

The PMI can add about $92 a month, for example, to $475 principal and interest payments on a $96,500 loan to buy a $100,000 house. With 20 percent down, the principal and interest payment on that house is only $373 a month, at 4.25 percent. FHA mortgages also require an upfront MIP payment equal to 1.75 percent of the purchase price.

You may also get a lower interest rate with a higher down payment. “The less you put down, the more expensive the mortgage insurance is and the higher the interest rate,” Fleming says.

Here are 12 things to know before getting your first mortgage:

Meet with a mortgage officer before looking at homes. This will help you determine whether you have credit problems that need to be solved first. It will also let you know how much house you can afford before you begin your search.

Pay off as much debt as you can first. This will help keep what’s known as your debt-to-income ratio down. Lenders look at your income and all your debts – student loans, car payments, credit card debt – to determine how much you can afford to borrow. If your total debt, with the new house payment, would be more than 43 percent of your income, you’re unlikely to get the loan. Some lenders may want a lower ratio.

Develop good credit habits way before you plan to buy. Missing payments on student loans or habitually paying your bills late will lower your credit score and make borrowing for a home impossible or more expensive. Once a bill goes into collections, it can take months or years to recover from the damage.


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