Buying a new home can be complicated, especially if you’re a first-time homebuyer. In fact, a survey conducted by Homes.com found that 40% of Americans believe buying a home is one of the most stressful life events.
Despite these challenges, the low interest rate environment of the past 18 months has created historic opportunities for homebuyers. As a result, homeownership increased by 2.1 million in 2020, a notable uptick over the previous year.
If you’re thinking about buying a home, knowing the steps to take can help you eliminate the guesswork. Below, we break down what to consider and how to make the experience as seamless as possible.
Determine How Much Home You Can Afford
The first step in purchasing a home is determining exactly what type of home you can afford. This should take into account your current savings, your annual income, and your debt-to-income ratio (DTI)—the percentage of your income required to pay down existing debt.
A good rule of thumb is that your housing expenses should be around 30% or less of your annual income. For example, if your annual income is $50,000, your mortgage payments, property taxes, and homeowners insurance should add up to no more than $15,000 each year.
To get an accurate picture of your homebuying power, we suggest using a calculator that takes into account your credit score, monthly income, and your expenses.* This is a great way to simplify the calculation and ensure that you’re not missing any important information.
Get A Pre-Approval Letter
Next, it’s time to get your pre-approval letter. This lets realtors know that you’ve been vetted by a lender and that you’re eligible for a mortgage loan. To ensure that you’re getting the best rate, you may want to consider getting more than one pre-approval letter. It’s worth noting, however, that most pre-approvals result in a hard inquiry on your credit report.
If you do decide to get multiple pre-approvals, doing so within a 30-day period will minimize the impact on your credit score and count as a single hard inquiry. Alternatively, you can take this quiz to make the pre-approval process easier and get the best offer available to you.
Explore Your Mortgage Options
With your pre-approval letter in hand, it’s time to assess your mortgage options. Below are two types of loans you may want to consider:
- Fixed-rate mortgage loan: This type of mortgage loan has a fixed interest rate and can be a good option for those who want a set payment amount for the duration of the loan.
- Adjustable-rate mortgage loan: Adjustable-rate loans (also known as ARMs) start with a fixed rate which then resets periodically. These types of loans are generally best suited to those who are planning to stay in their homes for a shorter time and can afford any interest rate increases.
Mortgage points are another important factor. A way of reducing long-term costs, these points can be purchased at closing and each one is equal to 1% of your mortgage amount. Over the course of your loan, these points can add up to significant savings as each point will reduce your interest rate by 0.25%.
Once you have a better idea of your options, you can look for a lender who can offer you the best rate on your mortgage loan. One of the simplest ways to do this is through a platform that offers rate comparisons for different lenders.
Credit Karma is a great option. With side-by-side rate comparisons and reviews on top lenders such as Rocket Mortgage, loanDepot, and Better Mortgage, you’ll be able to get a clear sense of which lenders can offer you the best options. And since Credit Karma takes into consideration your income, credit score, and expenses, you can be sure you’re getting the best recommendations for your specific situation.
Whether you’re buying your first home or you’re ready for an upgrade, the homebuying process can be challenging. Credit Karma understands these challenges and offers a personalized experience designed to help you navigate the ins and outs of becoming a homeowner. This includes simplifying the pre-approval process via a soft inquiry that won’t affect your credit score. With tools and resources designed to help you make sense of mortgage rates and lender requirements, Credit Karma can help you streamline the process and close on your home more quickly.
* The homebuying power calculator is available to Credit Karma members. If you’re not currently a member, signing up is fast, free, and safe with no impact to your credit score.