If you plan to buy a home with financing, you may feel overwhelmed by everything you need to learn about the process. Here are some key points to get you started.
Understand the full cost of owning a home : There are four main categories of a homeowner’s monthly housing payment – principal, interest, taxes and insurance. Principal and interest comprise your monthly mortgage payment. The principal pays down your loan balance monthly, and the interest pays for fee for borrowing the money. Taxes refer to property taxes assessed by the county you live in, and average 1.2 percent of your home’s value every year. Homeowners insurance is required when you have a mortgage, and you pay it to an insurance company of your choosing. Insurance can typically cost $700 to $1,200 per year for a single family home.
Examine your credit history now : A strong credit report is critical for getting the best mortgages with the lowest rates. Lenders want reliable on-time payment history, as well as credit depth. Your report will be more appealing to lenders if you have a significant amount of credit. If you need to obtain more credit, note that your credit score can drop 5-15 points when you first open a new account, then will rise again when you’ve established good payment history, so it’s best to open new accounts a few months before applying for a mortgage.
Match mortgage products to your budget and timeline : You can calculate how much you can afford to spend on a home with inputs you already know – income, monthly non-housing debt and savings for a down payment. Next, you need to think about how long you’re going to be in a particular home so you can target the right loan product. In your income isn’t going to grow over time, you will probably be in the home longer term, so you’ll want a loan with a payment that won’t change, like a 30-year fixed. Or maybe you except your income to increase within five years and you’re going to upgrade homes within that time, so you’ll want a five-year ARM, which has a much lower rate. If you don’t have a 20 percent down payment, you can buy with as little as 3 percent down using FHA, VA or Fannie Mae, but you’ll have mortgage insurance.
Get pre-approved in advance : If you do all of your home financing research without getting pre-approved, you could be disappointed when it comes time to find a home. Home shopping is competitive, and most sellers require your offer to be submitted with a lender pre-approval letter to prove you’re all ready with your financing.
*Know what lenders will require : When you’re ready to get pre-approved, remember that lenders will closely examine all aspects of your life. They’ll ask for full name, address, date of birth, social security number and ages of children. They’ll also review your credit report, employment history, pay stubs, tax returns, bank statements and any legal settlements. A lender will give you a checklist outlining exactly what documents they need. Follow this checklist exactly! Also, be prepared to write short letters to explain past inquiries on your credit report, past addresses and name changes.
