Credit & Finances
When you start to think about buying a home, it can seem a bit overwhelming, particularly if this is your first time. It is OK to feel that way. Just break it down into bite sized pieces … below is an excerpt from the REBAC Home Buyer’s Toolkit re: credit and finances to get you thinking about the process and budget. This info is just an overview, if you want to talk about local financing options and next steps, get in touch. I can help answer questions and also put you in contact with some fantastic lenders!
Assess your Credit and Finances
Financial considerations and preparations are central to any home purchase. In addition to helping you make better decision about what you can afford in a home, getting preapproved for a mortgage puts you in a better negotiating position when its time to make an offer to a seller.
Getting a jump on your mortgage now can greatly alleviate headaches later. If you’ve already lined up a lender and secured a commitment on your mortgage, the process of closing will go much smoother.
Mortgage options and requirements change frequently. Your ABR® can discuss current developments, suggest qualified lenders in your area, and help answer questions you may have about their programs.
Photo by Amy Hirschi on UnsplashDetermine your Credit Status
Because any mortgage lender will review your credit history, it’s wise to verify your credit rating on the beginning of your home search. Even if you’re sure you have an excellent credit record, there may be blemishes in your credit history about which you are unaware. Identifying and resolving any credit problems to improve your credit rating will provide benefits, such as preferred rates from lenders and home insurers.
Acquiring a copy of your credit report is simple. Three major credit bureaus — Equifax, Experian, and TransUnion — compile consumer credit data. The Fair Credit Reporting Act allows consumers to obtain one free credit report from each of the the three major reporting bureaus every 12 months.
To obtain a copy of your report, visit annualcreditreport.com or call 877-322-8228. While you can find many other sources for credit reports, this is the only one authorized by the Federal Trade Commission .
Selecting a Lender
When selecting a lender, your goal is to obtain a mortgage with the terms that are most favorable your situation. In order to find the best home loan for you, contact several lenders to discuss what they offer, their rates, closing costs, and other fees If you already have a mortgage, contact that institution too..
Gather as much information as you can online and through phone calls. Once you’ve done your homework and narrowed your options, it’s best to meet with a lender face to face. This allows you to ask specific questions and decide if this is the right lender for you. Are they offering you attractive financing, as well asn service and support in completing your transaction?
Rates and Term
Two of the most important factors in choosing a mortgage are the interest rate and term. Combined with the amount you borrow, they will largely determine the amount of your monthly payment.
The interest rate is the percentage of the loan amount you are charged to borrow money, ; the higher the rate, the more you pay. But your monthly payments will also hinge on the term of your mortgage. Paying off the same total loan at the same rate over less time will result in a higher monthly payment. To determine monthly payments for different rates and terms, use the mortgage calculate at realtor.com .
Mortgage rates change, subject to various economic factors. To be more certain of what they will pay, most buyers lock into an interest rate when they apply for their mortgage. A lock means that the rate in the approved application will be valid for a set period of time — during which the deal must be closed — regardless of what market interest rates are at the time of closing.
With fixed rates mortgages, usually 15- or 30-year terms, you pay the same interest rate over the life of the mortgage. With an adjustable rate mortgage, or ARM, the interest rate changes after a predetermined number of years.
Pre-Qualification or Pre-Approval
Typically you will first pre-qualify for a mortgage, then get pre-approved before you find the specific home you wish to purchase. It’s essential to understand the difference, and to clarify which your lender is providing.
Pre-qualification: An informal determination by a lender or a mortgage broker stating the amount of a mortgage you can afford.
Pre-approval: A guarantee in writing by a lender to grant you a loan up to a specific amount (subject to receiving full documentation).
There are two advantages in obtaining a pre-approval as early as possible in your home buying process:
Sellers will find any offer you make more attractive if you are pre-approved for a mortgage.
The length of time before closing can be shorter if you’ve secured a mortgage approval prior to signing a contract to purchase property.
How much can I afford?
Lenders look at a variety of factors when evaluating how much mortgage you can afford on your home, but these two are the most important:
Your monthly mortgage payment, as a percentage of your gross (pretax) income.
Your total debt load, including your mortgage payment, relative to your gross income.
Another determining factor is the loan-to-value (LTV) ratio, meaning the amount borrowed relative to the appraised value of the property. Higher LTVs represent a higher risk to lenders.
Lenders can provide qualification details for various types of mortgages, including Federal Housing Administration (FHA) and Veterans Administration (VA) loans. Qualification guidelines are subject to periodic changes, so e sure to obtain the most current rules.
If you need help finding a lender or determine affordability, your ABR® can suggest providers and direct you to the best sources of information on mortgage program,s, including online tools for estimating affordability.
When considering how much you can afford, don’t forget to consider other expenses, beyond your mortgage payment, that could also impact your monthly budget. Most mortgage payments are comprised of four components: principle, interset, tax and (homeowners) insurance, collectively called PITI.
Beyond PITI, other expenses commonly associated with homeownership include:
Mortgage Insurance
Home maintenance expenses
Homeowners association fees
Parking Expenses
Utilities
Down Payments and Mortgage Insurance
To help ensure that borrowers have some “skin in the game,” lenders require a down payment on mortgages. Typically, down payments may range from 3 percent to 10 percent of the appraised value of the home.
You can obtain a mortgage with a lower down payment, but you will need to obtain mortgage insurance, which helps protect the mortgage underwriter from default. This is an additional monthly expense that you will need to consider when evaluating the total cost of homeownership.
Next Steps
When you are ready to make your mortgage application, several additional steps and documents will be required.
extracted from REBAC: Home Buyers Toolkit (c) 2016 Real Estate Buyer’s Agent Council (REBAC)