Buying your first home is an exciting process. You'll have the power to renovate, paint, and modify the property in any way you see fit and truly make it your own. A house can also be a valuable monetary investment if the real estate market in the area continues to climb over time.
However, as a first-time homebuyer, it's rarely possible to pay the entire value of the house upfront, which means you'll likely need a mortgage to help you account for the remainder of the balance. Seeking approval for a mortgage before you start browsing homes is one of the best things you can do to make your home buying experience simple.
Here are a few reasons mortgage preapproval will help you:
- You'll have an accurate sense of how much money a lender would plausibly give you and how much mortgage payments will be.
- By establishing early on what you can afford, you'll be able to streamline your home search to properties you can actually afford.
- You'll be more appealing to sellers because you have solid financial backing from the onset.
So, how do you get approval for a mortgage? In New Jersey, real estate can be quite costly, and as such, it can be difficult to convince lenders to assume the risk of a first-time home buyer, so you'll want to come prepared. Here are a few of the things you'll need to do:
Know Where Your Money Is Going
It's important to know your monthly income in comparison to your monthly expenses. Do you have a student loan or car payment that already demands a large percentage of your monthly income? A lender will look at the ratio of income to debts and use this to assess your financial health. In some cases, it can be beneficial to hold off on your home purchase and finish paying off prior debts to improve your credit first.
If you are self-employed, or your income fluctuates, you may need to provide your last two tax returns so that they can calculate an average that more accurately reflects your income.
Establish A Budget
Once you know your monthly income and your monthly expenses, it's important to establish a budget. How much can you feasibly dedicate to a mortgage payment each month? Remember, a mortgage can last several years, so it's important you set a budget you can afford through good times and bad ones. Some mortgage advisers recommend 35% of your monthly income as the absolute maximum.
Save For The Down Payment
Ideally, you want to offer a seller the largest down payment you can reasonably give them. A down payment of 20% or higher will help you avoid having to purchase private mortgage insurance, and it can help you get a better interest rate on your mortgage. In the long run, having a healthy down payment will save you plenty in the long run.