Buying a home is one of the most significant financial decisions a person can make in their lifetime, which makes it both exciting and stressful. On top of that, the process isn’t without its difficulties. Gaining the right information and working with the right people is essential to make the best decision for you, your family, and your finances.
In this article, we discuss some of the more common pain points in securing a Pennsylvania mortgage and the steps potential buyers can take to overcome obstacles to homeownership.
1. Credit Score
Credit score is one of the first things lenders check, so that puts it high on our list. According to the lender, it determines whether or not you will pay back the loan on time and in full as agreed to in the mortgage contract. Think about it this way: If you have paid back your credit cards or student loans consistently and on time, your credit score is likely to be in pretty good shape. Lenders want to know these same habits will transfer over to your mortgage payments. The higher your credit score, the less of a risk you are to your lender.
Conventional loans require a score of at least 620, which is considered a prime score. Scores below 620 are considered subprime and are more difficult to secure a loan with. Although some government-backed loans are more relaxed, a subprime score typically suggests that the time isn’t right to buy a home and that you should instead focus on increasing your credit score. After all, lower credit scores affect the loan’s interest rate, meaning you will pay more the entire duration of the loan.
2. Debt-to-Income Ratio
Your debt-to-income (DTI) ratio is another important factor in qualifying for a loan. Lenders need to know you will be able to make your monthly payment. Typically, a DTI ratio is capped around 43 percent. If your DTI ratio is too high for the home you’re interested in, you will need to consider either buying a cheaper home or paying off prior debt before purchasing the home.
To determine your DTI ratio, add your monthly debts—including your credit card minimum payment, car payment, student loan payment, and future monthly mortgage— and divide that number by your pre-tax monthly income. Lenders require at least two years of employment history, so you will need to provide the lender with a pay stub showing year-to-date income and W-2 forms covering two years of employment.
3. Down Payment
Most lenders will advise that you make a 20 percent down payment. Although a larger down payment is certainly beneficial, as it means that your loan is smaller and therefore you pay less in interest, some lenders accept a lower down payment depending on credit score. You can also contribute as little as three percent in down payment if you’re a first-time homebuyer. However, a down payment of this amount requires that you purchase private mortgage insurance.
Because you plan to secure a Pennsylvania mortgage, knowing the average cost of a home in Pennsylvania allows you to determine the range of your payment and closing costs, which will be between two and five percent of the loan amount.
Also, be sure that you have enough savings. It’s easy for first-time homebuyers to forget about the payments that follow the down payment. Be sure you have enough for closing costs and any unexpected maintenance or personal emergencies.
4. Value and Condition of the Home
To secure a mortgage loan, a home appraisal is required. During an appraisal, the property is inspected to estimate the value of the home in comparison to recently sold homes around it. The findings of the appraisal determine the amount the lender will allow you to borrow for the property.
Although a home inspection is not required to secure a mortgage, it is highly recommended because it allows you to know the exact condition of your home. It will also give you insight into potential maintenance and repair costs down the line.
5. First-Time Homebuyer Education Classes
Depending on the loan, you might be required to take a homebuyer education class. Although it isn’t required for everyone, it is highly recommended because it allows buyers to more fully understand the home-buying process.
For first-time homebuyers in Pennsylvania, the Pennsylvania Housing Finance Agency’s Online Homebuyer Education Course is free and covers major aspects of the buying process. Courses are also available in Philadelphia, Pittsburgh, Allentown, Erie, and Reading.
6. Select the Right Mortgage in Pennsylvania
When you choose a loan, you should pick one with a low interest rate, without sacrificing good service. By working with an insightful, transparent lender, you can apply for the loan that’s right for your financial situation and be taken care of during the whole process. You might find that you’re eligible for an assistance program. Although there are several government assistance programs, you can also choose from a number of Pennsylvania Homebuyer Programs that help with down payments and closing costs.
Once you’ve completed a mortgage loan application, your lender will notify you of an official loan estimate. This estimate will include your interest rate, monthly payment, closing costs, property taxes, and estimated insurance. Finally, your lender will provide you with a commitment letter.
Secure a Pennsylvania Mortgage
A good lender helps you find the right mortgage based on your credit score, income level, condition of the home, and more. At radius financial group, our Loan Officers lead with curiosity, and this allows us to truly know our customers, especially those in Pennsylvania and the Northeast.
To learn more about the home-buying process, read through our guide for first-time homebuyers purchasing in Pennsylvania. We look forward to hearing from you soon!