Best mortgage advice for first time buyers in Melbourne

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Buying your first home can be daunting, to say the least, but knowing what to expect can make it far less stressful and confusing.

These are the best pieces of advice I can give a first time home buyer.

Take your time

Buying a home is a long process with a lot of moving parts. If you try to rush through, it might come back to bite you later. Fixing any problems with your credit will take months, possibly even years. That time should also be used to save up for a significant down payment and closing costs. You should allow yourself plenty of room for the unexpected to happen, and map out your timeline at least a year in advance. However, choosing a good finance broker which is in Melbourne like can help you avoid lots of unexpected issues and save you time.

Understand and bolster your credit score

Your credit score will determine if you qualify for a mortgage and will heavily impact what interest rates you’re offered. Lenders will check your credit at the start of the process and during the closing to make sure nothing has changed.

It’s important that you first get your credit report from Typically 720+ is excellent, 680 to 719 is good, 620 to 679 is fair and anything under 620 is poor. Once you know your score take steps to repair any problems:

  • Dispute any errors that could hurt your score
  • Always pay your bills on time.
  • Keep your credit card balances low.
  • Don’t close old cards or open new ones during the mortgage process.

Get preapproved before you start home shopping

A mortgage pre-approval is the lender’s statement of how much they are willing to lend you under certain conditions. It is based on how much money you have in the bank, what your income is and your financial obligations. This process involves a credit check by the lender but doesn’t let that scare you off from applying for multiple preapprovals at a time. As long as you keep it confined to a 20-30 day window your credit should be largely unaffected.

Consider all your mortgage options

The four main categories of mortgages that a first-time buyer will need to know about, and their benefits, are:

  • Conventional mortgages: First-time buyers with good credit can get as low as 3% down.
  • FHA loans: Most appealing to those with poor credit. FHA loans can be as low as 3.5% down even for lower credit scores.
  • USDA loans: Aimed specifically at rural home buyers, they usually have 0% down.
  • VA loans: VA loans aim to make buying a home affordable to current and veteran military service members and usually have 0% down.

Putting down 20 percent might be unrealistic

Ideally, we could all afford to make a 20 percent down payment on the house of our dreams. Unfortunately with rising housing prices, it’s just not reasonable. According to the National Association of Realtors, the average down payment on a home is just 12 per cent. As low as 6 per cent for first-time buyers. So trying to save up the full 20 percent down payment will likely add unnecessary time to your home buying timeline.

Don’t overextend you bank account

As tempting as it is to get the biggest loan you can, you have to assess what you can get versus what you need. Most analysts say that you shouldn’t spend more than 30 percent of your gross monthly income on home costs. It’s wise to determine your Debt-to-income ratio (DTI) with a simple formula: add up all your monthly debt payments and divide that by your gross monthly income, then go from there. Anything past a DTI of 45 percent is inadvisable.

Shop around

You’re not going to pick the first house you see and call it a day so you shouldn’t pick the first lender either. Consider getting quotes from at least three different lenders on top of working with a mortgage broker. You want to compare rates, fees and terms and make sure that you get the absolute best deal possible. It can be the difference of thousands of dollars.

Consider a mortgage broker

A mortgage broker is an individual that plays the middleman between you and the lenders. They use their expertise and connections to shop around for you. Matching you to the best possible loan and simultaneously navigating a tangled web of banks and paperwork.

That isn’t to say you should trust them implicitly. Some brokers get paid commissions per loan and some take their fee from you. Some lenders simply don’t work with brokers at all. They can be massively helpful but as with lenders, you need to find the right one.