Buying a home can be one of the most rewarding and significant events in your lifetime. Perhaps you’re the person who, out of the clear blue sky, says to themselves “I’d like to own my own home!” Or, you may just be starting to research the idea of owning your own home. Whether investing in a home right away or somewhere in the near future, there is, undoubtedly, a whole lot to plan for…and we’re here to help!
For example, you’ll want to determine the type of home you’d like to buy and in what part of town. You’ll want to consider the amount of money you can offer for a down payment. Do you know how much you’ll be able to borrow? Have you reviewed your financial considerations of home ownership? Buying a home should be a planned process, but if you follow a few basic and simple guidelines, your home buying experience can be a joy, as well as an adventure!
Where to Start: Review Your Credit Report Before you jump “feet first” into the home buying process, we recommend you order a copy of your credit report, as knowledge is power. You can obtain a free copy of this report at www.annualcreditreport.com. This website is a collaborative effort supported by the three main credit repositories – the same that mortgage lenders use.
When you review your credit report, be on the lookout for errors and missing information. Credit reporting agencies collect and compile massive amounts of data, so it is not totally uncommon for a piece of outdated or incorrect information to appear on your report. We’ve even seen and heard about others’ information landing in our customers’ credit report files. This is why it is critical to review your report before applying for a home load, and, if you spot any mistakes, contact the reporting agency whose phone number is listed by the incorrect account information. As a bonus, mortgage lenders can often assist in removing errors from and correcting bad information found on your credit report, so don’t be afraid to ask for their help.
Mortgage lenders employ a variety of methods to determine how much you may borrow. This is primarily accomplished by what is called a debt ratio. A debt ratio is the amount of your current and proposed monthly obligations compared with your total gross monthly income. A generally acceptable debt ratio is around .38, although higher or lower ratios can be accepted based upon the loan program, amount of down payment and other factors.
For example, if you have a car payment of $400 and a student loan payment of $150, then your current monthly debt is considered to be $550. A lender will then review your gross monthly income and multiply that income by .38 to determine how much of your income can be used to service your monthly debt.
As a full example, if you bring home $7,000 per month and we use the .38 debt ratio to calculate debt, then $2,660 can be budgeted comfortably for monthly bills.
Now, subtract your car payment and student loan payment from that number and the result is $2,110, which may be applied toward a mortgage payment. This amount will need to include the principal and interest payment to the lender, as well as property taxes, homeowner’s insurance premium and any other housing-related fees, such as HOA (homeowner’s association) fees.
Therefore, if property taxes and insurance amounted to $500 per month, $1,610 would be left for the actual mortgage payment. Considering a 30-year fixed rate loan at a 4.00 percent rate, a borrower could technically contemplate taking out a home loan in the amount of approximately $337,000.
Understand however, that this is only an estimated scenario and only you truly know your own finances. If you feel that a $2,110 monthly mortgage would not be a comfortable monthly payment to make, share what your ideal monthly payment would be with your loan officer and work from there. Remember, you are in control during the mortgage approval process, so let your preferences be heard.
With a competitive array of mortgage terms and rates being offered today, it’s critical to determine which type of mortgage loan product is best for you. To start, there are two basic types of mortgages to consider; government and conventional.
If You Have a Down Payment of 10-Percent or More:
If you have a down payment of at least 10-percent, or more, of the purchase price, a conventional loan is likely your better option.
If You Have a Down Payment of Less Than 10-Percent:
If you have less than 10-percent available as a down payment, then an FHA mortgage may be best for you.
Qualified Veteran, But Do Not Have a 10-Percent Down Payment
Lastly, if you’re a qualified veteran and do not have 10-percent (or more) down, then your best pick, hands-down, is a VA home loan.
No matter what loan type you secure, each offer fixed and adjustable varieties.
Here’s what you need to know about both:
Fixed rate mortgage:
A fixed rate mortgage is a mortgage where the interest rate (and monthly payment) never change-it’s fixed. Adjustable rate loans can be preferable if current mortgage rates are higher than normal or if you do not plan on keeping your property longer than just a few years.
Adjustable rate mortgage:
An adjustable rate mortgage will rise and fall over the course of the mortgage loan based upon a previously determined index that all lenders use. Typically, if you anticipate holding onto your property for a longer period of time and rates are low, then a fixed rate loan may be your best choice.
To further plan for and understand how much you will need for a down payment and your associated closing costs, speak with an experienced loan officer who will answer all your questions without any obligation whatsoever. It’s so important to understand how much cash is needed to close on your new home. So, be sure your credit report is accurate and find out how much you can qualify for.
A qualified and service-oriented mortgage loan officer will ensure your home buying experience is one of the most rewarding events in your life!
Contact us and we will be happy to help you.