Residential Mortgages First-Time
As a first-time home buyer, there is no shortage of questions and applying for your first mortgage loan can be daunting. At Wellesley Bank we are here to provide resources and help first-time home buyers in any way we can.
Our Residential Lending Officers are here to answer any questions you may have along the way. Additionally we have resources available here for you too.
How much mortgage can I afford?
A standard rule for lenders is that your total monthly payment (principal, interest, taxes insurance and other monthly obligations) should not take up more than 45 percent of your income.
However, home affordability is about more than just how much you can borrow. You’ll also need to consider the following:
- Up-front costs such as down payment (Banks typically require at least 5% down)
- Closing costs like attorney fees, appraisal, credit report, tax service, title, recording fees and escrow deposits
- On-going expenses such as property taxes, insurance and repairs
Your income, credit history, the size of your down payment, and your employment and residence history are all factors in how much you could borrow. Depending on circumstances, the amount you could borrow may exceed the amount you can comfortably afford — so it pays to borrow cautiously.
How do I establish the credit I need to obtain a mortgage?
As a first-time home buyer, it can be difficult to prove credit worthiness, especially if you’re lacking a substantial credit history. The best thing you can do is pay your bills on time, whether it’s rent, utilities, cell phone bills or a car payment. You should also pay down credit card debt. All of these tips can help improve your credit score and make you a more attractive borrower. We will take into consideration alternative credit i.e.: utility bill, cell phone bill, 12 month rental history.
What will I need to pay up front?
Some costs associated with buying a home show up before you start making regular mortgage payments. These could include but are not limited to:
- Earnest money
- Down payment (paid at closing)
- Closing costs (paid at closing)
When purchasing a home, this is an initial deposit to be paid to the seller if your offer is in consideration, to put weight behind your intention to buy. If your purchase offer is among multiple bids on a home, the earnest money you put down (also known as a “good faith deposit”) may influence the seller’s decision-making in your favor.
You can often get the best mortgage rates by paying a higher mortgage down payment. Down payments can range anywhere from 5% to 20% or more of the total cost of the home. Paying mortgage points up front could also help lower your payments and interest.
Closing costs typically range from 2% to 3% of the loan amount. However, they can vary depending on your lender, location and property. Closing costs can include but are not limited to:
- Mortgage points
- Origination Fee
- Attorney’s fees
- Inspections and surveys
- Title insurance and title search
- Escrow deposit
- Recording fees (City/County/State)
These fees are disclosed to you within 3 days of receipt of a completed application.
Owning a home requires financial commitment beyond your monthly mortgage payment, including:
- Mortgage insurance (required for most mortgages with down payments less than 20%)
- Home owners insurance
- Property taxes
Make sure you’re taking all these costs into account when asking yourself, “How much home can I afford?” It’s important to be informed on all the costs involved and how much you can afford prior to committing to a home mortgage.
If you’re still saving for your first home, here are some additional tips that can help.
- Saving for a higher down payment could mean a lower APR and payments
- Maintaining a regular and reliable income improves your standing with lenders
- Combining stated income with a co-borrowing partner or spouse could be an advantage
- Consistently paying your bills on time contributes to a good credit score
- Limiting your monthly debt also helps improve your credit score
- Mortgage payments should not exceed more than 28% of your income before taxes (a standard rule for lenders)
Building sound finances and improving your credit rating before you buy will/could help you afford more home. It could also help you compete better in the market for the house you want, make it easier to handle the up-front costs of buying a home, and may make home ownership more fun and easier to manage.
Mortgage prequalification: A smart place to start
Prequalification can boost your confidence and could make house hunting easier. While this number is informative, keep in mind how much you may qualify to borrow is often more than how much you can afford to spend on your new home and still have money left over for the other important things in your life; like furniture for your new home.
Getting prequalified doesn’t require a commitment from you or the bank. It isn’t a true application but your credit history will affect your ability to qualify. If you have concerns about your credit history, talk to your Residential Loan Officer now to find out what loan options might be available to you.
When you get prequalified, you can request a letter stating how much you may be able to borrow, based on the information you provided to the bank. You can give this letter to your real estate agent to show you’re a serious homebuyer.
Contact a Wellesley Bank Residential Loan Officer to inquire about our First Time Home Buyer program with $350 credit towards closing costs.