Mortgage Basics

Before you can determine if you’re ready to buy a home, you need to make sure you can afford the short- and long-term costs. Other important factors include your down payment and credit score, both of which can affect your interest rate and payment.

Down Payments That Don’t Break the Bank

Let’s start with one of the biggest financial barriers to buying a home—the down payment. Many potential buyers don’t realize that you can put down less than the standard 20%. Today there are many mortgage products—especially those for first time buyers—that have low- or no-down payment options, ranging from 3 1/2% or less.

Talk to your ANBTX lender to learn what options may be available to you.

Factor in Other Expenses, Too

Besides saving for a down payment, you’ll also want to plan for other costs associated with buying a home.

• Closing Costs. This includes various fees involved when securing a mortgage. Typically, these include, but are not limited to, fees for a loan application/ origination, a title search, title insurance, and lender costs. It also involves upfront expenses which include, but are not limited to, mortgage insurance, homeowners insurance, property taxes and an initial escrow account for future insurance and tax payments. A general rule is that these expenses are typically between two and five percent of the home purchase price. In some instances, the seller may pay for these costs, so ask your real estate agent whether to request this in the offer.
• Moving-Related Costs. Once you’re ready to move into your new home, you may need to hire people to move your furniture, appliances, and other items. Even if you have friends or family to help, you may still need to account for the cost of a moving truck, as well as boxes and bubble wrap for packing.
• Utility Hookups. Setting up your new household requires getting connected to a lot of services. Be prepared for initial setup costs for gas, electric, internet, cable TV, and public utilities. Sometimes, you may need to pay installation fees and many may require initial deposits.
• Furniture & Appliances. In most cases, buying a home means you’ll have more space to fill, so it’s good to put aside some money for home furnishings. You may also need—depending upon the sales contract—to purchase or bring appliances that don’t transfer with the purchase of the house. This can include the refrigerator, washer and dryer, microwave, etc. Always check with your real estate agent on what’s included and what you’ll need to buy.
• Home Improvements. One of the best things about owning your home is that you can make it your own. You may be able to negotiate that the seller addresses certain repairs and upgrades so you’re not responsible for them. But if you think you may want to paint, update carpeting, change out light fixtures, or make larger improvements when you first move in, consider planning for these costs ahead of time.
• Home Maintenance/Upkeep. In addition to the costs that come with moving in, you’ll have additional expenses once you move in.

Finances That Do (or Don’t) Add Up

Buying and owning a home is a major financial commitment. And it can be hard to know whether you’re ready to take that step forward. That’s why it’s important to review your current financial situation and the future impact a home may have. To see if your finances are ready, here’s a three-step process to help you get started.

Step 1: Take a Look at Your Financial Picture (Current & Future)

The best way to understand your total income and expenses—and determine what’s affordable—is to look at and document your current financial situation. Chart what money is coming in each month and what money is going out eachmonth. It’s the best way to get a clear picture of how much you earn, spend, and save, and there are many free financial tools available to help you do this.

Don’t forget about other important goals you might have for your financial future, such as saving for education expenses or retirement, opening your own business, or simply managing other financial or familial responsibilities. You may realize there are other dreams (or needs) that you place ahead of buying a home, at least for now.

Step 2: Estimate What You Can Afford

Once you know what your finances look like, you can more accurately determine what you can afford to spend on a home. Keep in mind, you may be approved for an amount that’s more than you want to spend or that doesn’t allow you to save for your other financial goals. To get an estimate, there are mortgage calculators available, including on our website.

Step 3: Create a Budget & Plan for Buying

Now that you understand your finances and have an estimate of what you can afford, you’ll want to make a detailed budget and plan based on these numbers. Maybe you’re ready to buy or maybe you need to save a little (or a lot) before you buy. Either way, a budget will help you plan for buying and owning a home.

Credit Always Counts

Your credit is reviewed and evaluated by lenders, which allows them to examine your financial past and present. Specifically, borrowers have a numerical score ranging between 300 and 850. The lower the credit score, the riskier a loan might be, and to mitigate this risk, lenders may charge a higher interest rate. However, there are loan options for those with less-than-perfect credit, and many lending programs accept a range of credit scores.

While many factors go into determining your credit score, the number can be a good snapshot of your financial health and history. Like your finances, you’ll want to be proactive and review your credit score—and potentially work to improve—before moving forward. To get started…

Obtain Your Credit Score

There are a few different credit reporting agencies and it’s important to look at each one (they may vary slightly among them). By federal law, you get three free credit reports a year—one from each credit reporting agency (Experian, Equifax, and TransUnion). Go to annualcreditreport.com or call toll free 877.322.8228 to get your free report from all three or, at any time, you can pay to get a copy of your score.

Improve Your Credit Score, if Needed

If you’re thinking of buying a home and are concerned that your credit score is too low, you can take steps to improve it.

• Fix Reporting Errors: Before you get into improving your credit score, it’s important to make sure there are no errors on your credit report. If you do find errors, contact each agency separately and let them know in writing that the information is inaccurate, along with proof of why it’s inaccurate. Then, reach out to the company that misreported the information.
• Pay Bills on Time: One of the biggest contributors to your credit score is on-time payments. If you’ve made late payments or missed payments in the past, these are hard to fix. The best thing you can do going forward is to get payments in on time and know that past credit problems may become less of a problem as time moves on.
• Pay Down Debt: Paying off debt, especially credit card debt, can make a big difference in your credit score. It’ll increase your available credit and help lower your debt-to-income ratio.

Avoid Making Changes to Your Accounts

If you’re planning to purchase a home—regardless of your score—then there’s one important thing you must do: avoid any financing or credit changes. This includes opening new or closing old accounts, as well as making changes, such as asking for an increase on your credit card or applying for a store card to get a promotional rate.

This can negatively impact your score for many reasons, including the risk of taking on more debt and lowering your average account age. It also increases the number of inquiries to your credit report, which can affect your score.

Up next

After you’ve crunched the numbers, it’s time to talk about the process to buy a home.

Mortgage Process