Buying a home is one of the biggest investments you’ll ever make. To make sure it’s not your worst, take some time to research and understand the basics of finance to know before buying a house before you buy. While taking on a mortgage can be daunting, there are basic things you should know as you enter the market. Prepare yourself financially for homeownership. By understanding these basics, you will be able to move through the process with greater confidence and less stress.
Interest Rates
Interest rates are critical to the success of your mortgage. Mortgages have what are called “fixed interest rates.” This means that they remain the same for the term of the loan – 15 or 30 years. The rate you get is tied to market conditions, which change frequently.
You’ll need to think carefully about what discount point is right for you. While it will cost upfront, it will save you money in the long run by reducing your interest rate and saving thousands on the life of your mortgage. You can shop around with different lenders to find out if they offer discounts for certain points or not at all. Some lenders may offer discounts for as little as 0.125%. Others may charge as much as 1%.
Pre Approval vs. Pre Qualification
Before you start making offers, make sure you understand the difference between prequalification and preapproval. Prequalification is quick and often done online or over the phone. You simply share your income and goals, and the lender gives you an estimate of what you might afford. There’s no documentation required, because it’s only a rough idea, not a firm commitment.
If that level of info works for you, awesome. But if you plan to negotiate with sellers, ask the lender to include “subject to verification” on your prequalification letter. That note tells everyone the lender still needs to review your documents before confirming the loan. It keeps expectations clear and avoids surprises once you’re ready to make a serious offer.
Pre Approval process:
Pre Approval is a formal process in which a lender reviews all your financial documents. They determine how much they are willing to lend you, based on what you have told them about your income and expenses. You can obtain pre-approval from your lender as soon as you know that you would like to buy a home. However, lenders will only consider those homes within their price guidelines. Preapproval takes more time than prequalification, but it’s worth it. A mortgage preapproval letter can give you a stronger edge against competing buyers and often helps you win an offer without extra back-and-forth. It shows sellers you’re serious and ready to close, which can make all the difference in a competitive market.
Planning to buy a rental property instead of a primary residence? Qualification can be different. Many investors use Debt Service Coverage Ratio (DSCR) loans, by Griffin Funding. These loans assess whether projected rental income covers PITI rather than relying solely on W-2 income. For a step-by-step guide to calculating DSCR, typical minimum ratios, current programs, and how to apply, see this investor resource from Griffin Funding on DSCR loans.
Setting Your Budget
Before viewing homes, it is important to set your budget. This way, you know what price range you should be looking in. When people start talking about buying “X” number of bedrooms or square feet, you’ll understand the implications on your monthly payment amount and credit rating. Home affordability comes down to how your income compares to the full cost of owning a home. That includes your down payment, interest rate, insurance, and property taxes. On top of that, your household size and any existing debts play a big role in what you can comfortably afford.
The easiest way to figure out your price range is to use a mortgage calculator. Just enter your desired monthly payment, your interest rate (APR), and your down payment amount (either as a dollar amount or a percentage). With a couple of clicks, you’ll get a clear estimate of what you can qualify for, including any points on your loan. This gives you a quick starting point before talking to a lender and exploring real options.points on your loan.
Follow these steps and you’ll collect everything you need to buy your dream home. Buying a house takes work, but when you understand the process and know the basics, it feels way less intimidating. Learn how mortgages work, get preapproved before you start touring homes, and keep your credit strong. Do that, and you put yourself in a great position to land the home you want.
This way you can qualify for lower interest rates. Your monthly payments will be more affordable, and you’ll understand how much of a house payment you can really afford when it comes down to crunch time in negotiations.