What You’ll Learn
How to accurately budget for your mortgage
When to get pre-approved in the homebuying process
What to prep when shopping and applying for your loan
Homebuying is a unique purchase experience. Unless you have hundreds of thousands of dollars at your fingertips, you can’t just swipe a credit card or make an impulse decision—finding and funding a home requires research and planning. Because it’s such an important investment, most homebuyers will have a ton of questions right out of the gate: from the basics of budgeting, to working with lenders and agents, to shopping for a loan. Curiosity might kill the cat, but it always helps the homebuyer.
To help you get started, we sat down with some Better Mortgage homebuying experts and talked through the most important questions to ask when buying a house (plus, shortcuts to finding the answers).
How much can I afford?
With most purchases—a bottle of wine, a pair of sneakers—the question of affordability is pretty clearcut. You just look at the price tag. When it comes to houses, it’s a little different. Not only is the price tag (aka the listing price) much bigger, it isn’t the best indicator of whether a house is in your budget.
Unless you can pay completely in cash, you'll need a mortgage to buy a home. That means you’ll pay some money upfront (the down payment) and borrow the rest from a lender at a certain interest rate. Interest rates are partially determined by the market, but they’re also based on other factors like your credit score. Rates play an important role in the long-term affordability of your mortgage. If you aren’t happy with your initial quote, you have the option to buy down your rate with points. You’ll pay more money in the short-term (typically about 1% of your mortgage total for every 0.25% you knock off your rate) but the amount you save in interest over time can be worth it. For example, you might spend an extra $2000 at closing to reduce your interest rate from 3% to 2.75%, but you’ll owe less interest on your monthly mortgage payments.
Beyond the principal and interest, your monthly mortgage payments also go toward ancillary costs such as homeowner’s insurance, property taxes, and HOA fees. These can vary from house to house, meaning that two homes listed for the same price might have drastically different monthly mortgage payments. Translation? Even though closing on a home is a one-time transaction, your mortgage is a recurring cost and it’s this monthly number that really determines affordability. Having said that, you’ll also need to budget for non-recurring expenses like closing costs and fees associated with the mortgage itself such as appraisal and underwriting. (These can vary from lender to lender; at Better Mortgage, we’ve eliminated some costs completely.)
Once you know how much money you want to spend each month on your housing costs, you can assess homes based on more than just the listing price and find loans that fit your immediate and long-term needs. Better Mortgage offers a super simple affordability calculator that can help you figure out your complete budget.
How much money do I need for a down payment?
It’s a common misconception that you have to have tons of money saved for your down payment—you’ve probably heard that 20% is the standard benchmark. While a down payment of this size comes with some definite benefits (for starters, you can avoid paying Private Mortgage Insurance), plenty of people are able to qualify for loans with smaller down payments. Your down payment minimum requirement is determined by different factors, from the type of loan you choose (15-year or 30-year, for example) to your credit score. Down payments for conventional loans can range from 5%-20%, while FHA loans may require as little as 3%.
It’s true that bigger down payments have perks. Investing more upfront mitigates risk in the eyes of a lender, which can qualify you for a lower interest rate. A larger down payment also reduces your loan principal, or the amount you need to borrow. Both of these factors mean smaller monthly payments and increased savings over the life of your loan. A bigger down payment may also help you stand out to sellers when you start making offers on homes, especially in a competitive market.
On the other hand, smaller down payments can feel more financially practical for many borrowers, which is why 72% of first-time homebuyers put down less than 20%. Laying out less cash for a down payment gives you more capital to cover closing costs, moving expenses, and immediate home repairs or updates. If short-term savings are your priority, a smaller down payment is definitely one way to curb spending. You can also pay fewer closing costs in exchange for credits, which increase your interest rate, but you’d need to run some numbers to understand whether the immediate savings would outweigh the long-term cost of that marginally higher recurring rate on your monthly payments. Use this loan comparison calculator to get a clearer picture of how different fixed interest rates, term lengths, down payments, and points/credits will affect your monthly mortgage.
When should I get pre-approved?
Getting pre-approved is a standard step in the homebuying process. By sharing some basic details about your income, debt, and credit history, you’ll be able to see the types of loans available to you, including interest rates, term lengths, and the amount of money a lender may be willing to let you borrow. While you’ll still need to dig into the details of your budget to understand how much house you can actually afford, pre-approval gives you a solid jumping off point. This information will be outlined in a pre-approval letter, and then further detailed in a Loan Estimate. Both these documents paint a picture of what’s possible—options tailored to your financial profile rather than the exact details of your future mortgage—and nothing is set in stone at this stage.
If you’re ready to start touring houses, it’s a good time to get pre-approved. Having a pre-approval letter is one of the best ways to show sellers you’re serious and that you’ve already spoken to a lender about getting a mortgage; the letter is valid for 60-90 days, giving you time to find and hopefully bid on a home. Keep in mind that some lenders may do a hard credit check during this process that can hurt your credit score. At Better Mortgage, pre-approval happens completely online, takes as little as 3 minutes, and doesn’t require a hard credit check, meaning your credit score won’t be affected. We also let you adjust and customize your pre-approval letter, which can come in handy if you're putting an offer on a home with a listed price that's much lower than your pre-approved amount.
What’s required to get a loan?
Lenders evaluate loan applications based on a number of different factors, but it basically boils down to your assets, income, credit, and debt. Overall, lenders are trying to understand your previous patterns as a borrower and accurately predict your future behavior before they approve your loan. Looking at your credit history offers a glimpse into your past experiences with debt. Verifying your income, earning history, and available assets helps confirm that you’ll be able to make payments on your mortgage. Rather than looking for a magic number or an exact requirement in any one field, lenders are taking all the separate pieces of your financial profile into consideration and making a decision based on the sum of those parts.
For example, maybe you don’t have a lot of money saved up for your down payment, but you do have a solid credit score. That might qualify you for more favorable interest rates by showing a precedent for successful debt repayment and reducing your risk in the eyes of a lender. Or maybe you have a recent gap in your employment, but also don’t have a ton of pre-existing debt. A lower debt-to-income ratio (DTI) indicates you have enough money to cover your costs every month and can comfortably manage a mortgage payment. It’s not impossible to get approved for a mortgage if you have outstanding debt or a less-than-stellar credit score—Better Mortgage can approve loans below 50% DTI—but it might impact the type of loan you can get.
Bottom line: there’s no one-size-fits-all when it comes to mortgages. Lenders will evaluate a set of standard variables when reviewing your loan application (here’s the documentation you should have on-hand when you’re ready to apply). At Better Mortgage, our online process is simple, streamlined, and supported every step of the way by a non-commissioned staff. Unlike traditional lenders, we don’t charge lender fees during this process—it’s one of the many ways we save our borrowers money.
Do I need to use a real estate agent?
Buying a house takes a village. At Better Mortgage, you can go from pre-approval to closing in about 32 days (10 days faster than the industry average) and during that time you’ll work with underwriters, attorneys, home inspectors, and insurance providers—an awesome homebuying team dedicated to making sure things run smoothly. But before you get to the bidding and buying, you’ll need to do some house hunting.
In 2020, 88% of buyers purchased their home through a real estate agent or broker. That’s because using a real estate agent has big advantages! Once an agent or broker understands your non-negotiables, they can help you hone your search. Local agents are able to set up tours, answer questions about specific properties, and share expert knowledge of the surrounding area—this saves a ton of time and helps you conserve your energy throughout the shopping process. Real estate agents can also help you spot potential issues on-site when visiting homes and guide you through the bidding process when you’re ready to make an offer.
Most importantly, almost all sellers will be represented by an agent at closing, which means you should be too. Everyone’s interests have a fair amount of representation when you both have a real estate agent. At Better Mortgage, you can save $2,000 by working with a BRE agent*, get instantly matched after pre-approval, and start touring homes.
Am I ready to buy a home?
You’ve browsed online listings, saved some money, kept your eye on the market to track interest rates...but how do you decide when it’s time to officially dive in? Making the transition from renting to owning means extra commitment and responsibility, but it’s also an investment that offers more space, more stability, and the opportunity to build equity. Buying a home is an extremely personal decision, but there are some general factors that can help you feel confident in moving forward.
First, consider how financially stable you feel. Are you confident in your income and fully aware of your current and upcoming expenses? The last thing you want is to commit to a mortgage that doesn’t fit in with the landscape of your other financial obligations. Second, take a look at your current savings. Do you have enough set aside to comfortably cover a down payment, closing costs, and moving expenses? If not, start setting a portion aside each month—even a couple hundred dollars per month starts to add up over time. And lastly, look at the trajectory of your life. You don’t have to have your entire future planned out, but it’s helpful to sit down and consider any major upcoming milestones—marriage, kids, travel, etc.—and how those factors would influence your housing needs and impact your budget each month. You can also check out our complete homebuying checklist to guide you through every step of the process.
Explore your options with Better Mortgage
Whether you’re ready to start shopping for homes or still figuring out your budget, knowing which questions to ask is an enormous asset. We can help you find clear answers about affordability, see transparent rates, and ultimately land a loan that fits your life. One of the best places to start is by getting pre-approved with Better Mortgage.
*Terms and conditions apply. See here.