Nick was a marketing intern at Better.com in 2019 and joined the business development team soon after he finished his internship. As an intern he worked closely with our affiliate businesses, Better Real Estate and Better Settlement Services and the Mortgage side too. The following post is a collection of tips he learned while working with Better Mortgage.
What You’ll Learn
How to prepare to buy a home
How lenders see borrowers
The true value of owning a home
My education prepared me to work, but it was work that finally prepared me for life. In school I learned critical thinking skills that helped land me a valuable internship at Better.com. But it was my internship that taught me the hows and whys of one of the most important financial decisions you can make—the decision to buy a home.
I learned that owning a home isn’t just about autonomy, it’s about investment. Investments take planning, time to mature, maintenance and monitoring, but, when done right, they can change your life.
Everyone who works at Better.com works to ensure that everyone looking to invest in a home does it the right way. This dedication to our customers impressed me as an intern, and, to contribute to the overall vision, I made a list of 5 important lessons to learn before you buy your first home.
1. Get yourself organized
Like many people, I thought saving up for your down payment was the only preparation that goes into buying a home. While saving for your deposit is a big part of buying a home, there’s a bit more you need to do before you get started.
While saving is crucial, you should also start paying down and consolidating your current debts. We’ll talk about this in depth in the next section, but lenders don’t just look at your cash on hand, they look at how much money you owe and to whom and your overall ability to pay back a home loan. Here’s a few tips to help you get ahead before you apply:
- Monitor your credit score and work to get it as high as possible before applying.
- Clear your credit card balances, but keep the accounts open.
- Pay off your car loans if there are no exorbitant penalties.
- If you’re thinking about buying a car, wait until after you buy a home.
- Refinance and/or consolidate your outstanding loans to lower your monthly payments.
- Think about having a family member with few debts act as a co-signer.
2. Get qualified—it’s less complicated than you think
Working for a major digital mortgage lender, I learned how to navigate the mortgage process from the inside out. It’s not as complicated as many other lenders make it seem. Your finances are evaluated based on easy to understand criteria like your credit score, your income, your assets (including things like savings, 401ks, and other property you may own), and all your outstanding debts and liabilities.
Your credit score acts as a quick guide for lenders and, as many of us know, is a number score given based on your ability to pay back your debts. Lenders use your score to determine which loan products are suitable for you. The higher your credit score, the more loan products you’ll be eligible to use.
Next, lenders will look at your total assets on hand. This is an aggregate of your total savings, investments, retirement accounts, other properties, and more. By looking at your assets, lenders will be able to assess your ability to make a down payment. They’ll also be able to assess your ability to continue to make payments should you have any changes in income down the line. Between your credit score and your self reported assets, lenders are usually comfortable with pre-approving you for a specified amount they think you’d be able to afford.
A mortgage pre-approval will help you shop for a home, but you’ll need to be fully approved to buy it. The approval process is when your lender will complete a hard credit check and begin to verify your reported assets and liabilities. A key component at this stage is to analyze your monthly income against your monthly debt payments. This calculation is called the debt to income (DTI) ratio. DTI is an important number lenders use to judge creditworthiness, and it’s pretty easy to check on your own.
Lenders are usually comfortable approving a loan for borrowers with DTI ratios as high as 43-47%. Ideally before applying, you’ll have paid down some of your debts to reduce this ratio in order to qualify and secure more favorable interest rates. There are many ways you can improve your DTI, here’s a complete guide.
3. Choose the mortgage that’s right for you
Home loans are not one size fits all. You have options, each with their benefits, and each customizable. For example, fixed term mortgages offer one consistent rate over a long period of time—usually 15, 20, or 30 years in length. Fixed rate mortgages are great for homebuyers who intend to stay in one home for a long period of time.
But what if you’re looking for a starter home and only want to spend a few years there before upgrading? We’ve got ARMs for that. Adjustable rate mortgages, or ARMs, come with low rates for an initial period of time, then adjust to a higher rate after that period elapses. Initial rate terms usually last for 5, 7, or 10 years before adjusting. If you plan to move or refinance before the initial term is over, then an ARM is probably your best option.
The best part about all these options is that your mortgage isn’t permanent. If your lifestyle changes, you can refinance your mortgage to fit your new status. In fact, many people choose to refinance their ARMs at the end of the initial, low rate period.
4. Manage your mortgage
Home loans aren’t “one and done” endeavors. Mortgage rates rise and fall with the market. Your financial situation can change. If you want to lower your rate, or shorten the length of your mortgage, you can do so with a mortgage refinance.
Essentially, a mortgage refinance is a new mortgage that covers the cost of the original loan but offers better terms. You essentially use a loan to pay off a loan, but the new loan can save you thousands of dollars, or put you on the fast track to paying off your debt.
So if the initial period of your ARM is about to come to term, and your rate is about to increase with the market, you might want to refinance to avoid higher monthly payments. Or if you're in a fixed rate mortgage and the market just dropped, you can refinance to take advantage of a lower rate to save more over the life of the loan. If you get a big promotion and can shoulder a larger monthly payment, you can go from a 20 year fixed rate mortgage to a 15 year mortgage. Mortgage refinances are versatile tools that help you leverage your home to accomplish new goals and save money over time. Our Better Guide to Refinance can help you decide which refi is right for you when you’re ready.
5. Know your worth
I mean that both literally and figuratively. Yes, it’s important to know your financial standing before the homebuying process, but homeownership is a valuable experience itself, and you are worthy of being a homeowner.
Owning a home is more than just the freedom to redecorate without asking your landlord. Instead of paying rent with no return, owning a home helps you build equity. You can leverage it to put your children through college. It’s a legacy to leave your family. It gives you a space for your family to dream and the financial flexibility to go out and make those dreams come true.
Historically, the mortgage industry hasn’t been quick to share trade secrets, but Better Mortgage is here to change that. We’re dedicated to making our industry transparent, and we’re willing to educate our clients if it helps inform and empower.
If you want to feel more empowered, start by using our affordability calculator.