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Preparing for a Mortgage in a Rising Rate Climate
It might sound like a well-worn adage, but Benjamin Franklin truly captured the essence of success when he said, "By failing to prepare, you are preparing to fail." Preparation goes beyond just drawing up a plan. It's about arming yourself with the right tools and connecting with professionals who have the expertise to guide you through imminent challenges, ensuring you grab hold of every golden opportunity that comes your way.
Enter our team of local specialists! While to some, Residential Real Estate might seem like merely opening doors and penning contracts, the reality is far from that simplicity. It necessitates a deep understanding, staying on top of local market fluctuations, navigating the nuances of the mortgage landscape, and keeping a finger on the pulse of economic forecasts and inflation trends.
The exhilaration of setting forth on your homeownership adventure is undeniable. However, deciphering the maze of mortgage alternatives can often feel overwhelming. A Mortgage is one of the largest financial decisions in one's life, meticulous research and preparation stand paramount. Join us as we walk you through the pivotal steps in preparing to secure your secrets to success in homeownership.
review your credit report
In the United States, consumers are entitled to one free credit report annually from each of the three major credit bureaus: Experian, Equifax, and TransUnion. The official site to request these reports is AnnualCreditReport.com. Be wary of other sites that might claim to offer "free" reports but come with hidden fees or subscriptions.
The Basics: Verify you name, addresses, social security number, employer details, examine each account listed and ensure you recognize each one that all of the information listed is correct.
Check Accuracy: Begin by obtaining a copy of your credit report from major credit bureaus. Scrutinize it for errors or discrepancies and rectify them immediately.
Dispute Errors: Should you find inaccuracies or mistakes on your credit report it is vital to act immediately.
You can file a dispute online through the respective credit bureau's website. They are generally required to investigate and respond within 30 days. Correcting these errors can have a positive impact on your credit score, making it easier for you to secure a mortgage or even qualify for better rates.
Know Your Score: Your credit score will significantly impact the interest rates available to you. A higher score often translates to more favorable terms.
determine what you can afford
Determining how much you can afford for a mortgage is a crucial step before diving into the housing market. It ensures you live within your means and avoid financial strain in the future.
Evaluate Your Monthly Income
Start with your gross monthly income (before taxes and other deductions). If you have a consistent salary, this is straightforward. If your income is variable, such as for freelancers or commission-based workers, consider an average of the last 6-12 months or use your most conservative monthly estimate.
Understand the 28/36 Rule
A common guideline is the 28/36 rule, which suggests:
- Front-end ratio (housing ratio): Ideally, no more than 28% of your gross monthly income should go towards housing expenses, including mortgage principal, interest, property taxes, and insurance (often abbreviated as PITI).
- Back-end ratio (debt-to-income ratio): No more than 36% of your gross monthly income should be allocated to all debts, including your mortgage, car loans, student loans, credit card payments, etc.
Saving for a Down Payment
Ideally, you’ll want at least 20% of the home price. If you’re a first-time home buyer, it’s okay to only save 5–10%. But prepare to pay private mortgage insurance (PMI). Also, don’t forget to consider closing costs and moving expenses on top of your down payment amount.
To give you a clear picture of what this step looks like, here’s an example of how much money you’d probably need to save up if you were to purchase a $185,000 house or condo
How Much to Save ($185,000 Home) | Dollar Amount | Percentage of Home Price |
Down payment | $9,250–37,000 | 5–20% |
Closing costs | $5,550–7,400 | 3–4% |
Moving expenses | Around $1,850 | Around 1% |
Total | $16,650–46,250 | 9–25% |
The more you can put down upfront, the lower your monthly mortgage payments.
Consider Additional Costs
Beyond the principal and interest on your mortgage, remember to account for:
- Property taxes
- Homeowner's insurance
- Homeowner's association (HOA) fees, if applicable
- Maintenance and repair costs
- Utility bills
Use our Mortgage Calculator
When determining how much you can afford to pay for your home, you must consider your down payment amount, monthly expenses, credit rating, and income. Using this information, you can determine a comfortable price range. Until you know how much you can pay toward a mortgage each month, you can't effectively search for a home. You must also calculate your debt-to-income ratio to ensure that you are within acceptable limits.
Get Pre-Approved
Get in touch with one of our trusted partnering lenders to help you determine how much you can afford.
Asses Your Personal Comfort Level
What are you comfortable with? Consider your lifestyle, future financial goals, and any potential changes in your income or expenses. If you're not comfortable, take the time to asses and make changes so that this purchase is one you feel completely ready for.
Need to work on your finances?
There is no shame in taking some time to tighten up your finances, debt, income or repair credit. And in fact, you've come to just the right place. Check out these incredible resources we use ourselves. As a Dave Ramsey Affiliate and someone who has personally taught his classes I am a huge advocate for you to be in a financially sound place before making the biggest purchase of your life.
These resources are paramount, use them and let us know if you have any questions!
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We're Here to Help
Are you curious about what this means for you and your unique situation? We're here to help you understand and navigate this changing market.