The Homebuying Process
Can you afford to buy?
Buying a home is usually the biggest financial purchase people make in their lives and although it’s exciting, the first step is to take the emotion out of the equation. When it comes to figuring out if purchasing a home is right for you, take a look at the numbers.
How much money do I need to purchase a home?
The amount of money needed to purchase a home depends on its cost, the type of loan you get and the amount of your down payment. When you make your offer on a home and it’s accepted by the seller, you will need to write a check to accompany the offer to buy the home. You will also need to pay for a home inspection and any costs needed for credit reports and an appraisal.
The next step in the equation is your down payment, which is the amount required by the lending institution to secure your loan. The lending institution will determine your down payment or if one is needed by your credit score, debt-to-income ratio and available cash. A down payment is separate from earnest money, so keep that in mind as well.
There are sometimes programs that lenders or the government offer called first time home buyers credit which allows you to receive down payment assistance and closing cost funding from the county you are buying in. You might also qualify for below market value fixed interest rate loans.
Closing costs are in addition to your financed amount and can add 3-5% on top of the price of the home. Even if you qualify for Veterans Affairs loans or “100 percent financing,” loans, closing costs are still additional costs that can’t be wrapped in the loan.
Closing costs can sometimes be negotiated in the home purchase price. Some sellers will consider paying a buyer’s closing costs out of their profits. Buyers should speak with their real estate agent if this is something that can be discussed with the seller.
Are there any reasons why I should NOT buy a home?
Yes, there are many reasons why you should not buy a home:
- You can’t afford it.
- It makes more financial sense to rent.
- You can only afford it with a risky type of loan (e.g., adjustable-rate, negative-amortization loan).
- You plan on living in the house for fewer than 5 years.
- The market is rapidly declining.
- You have too much debt.
What is your Credit Rating? How to Fix It!
What is a Credit Rating?
When looking to get a mortgage, the most important factor which will determine your eligibility and interest rate is your credit rating. Your credit rating can range from 300 to 850, depending on the credit scoring agency and the higher the score, the better your rating. When deciding if purchasing a home is right for you, first take a look at your credit report and rating then get pre-approved by a lending institution for a mortgage.
FICO vs. Credit Report
Your credit report is a report of your credit history and includes personal financial information like credit accounts, listing when they were opened, their current balances, credit limit and whether they were paid on time; outstanding taxes or liens against you; court judgments and any city, county, state and federal liens for unpaid taxes and bankruptcies.
Equifax, TransUnion, and Experian are the three major reporting bureaus who supply credit reports and they also provide your credit rating or score called FICO. Your FICO score is a number obtained from your credit reports and is considered the standard. Since there are three credit-reporting bureaus, you have three FICO score and 75% of mortgage lender use your FICO score to determine eligibility.
How is My FICO Score Determined?
- Payment history (35% of score)
- Amounts owed/Debt (30%)
- Length of credit history (15%)
- New credit (10%)
- Types of credit used (10%)
What qualifies as a high score?
FICO scores can range from 350-850 and the median score in the United States is 723. A good interested rate for a mortgage can be expected if you have at least a 720 FICO score. If you’re not sure if your FICO score is good or not, look at offers you receive for credit cards; If the offers are for 0% or a very low interest rate, you have a good score.
If you’re in a hurry and need a loan quickly, you can apply for a no-income-verification loan where you do not have to provide any income documentation. When going this route, the mortgage lender will want you to have a minimum FICO score of 680. If you’re purchasing a home for the first time, an FHA loan can be obtained with a 630 or higher score.
The Fair Credit Reporting Act (FCRA) expects Equifax, Experian and TransUnion to provide you with a free copy of your credit report once every 12 months. Keep in mind, they do not send these automatically and you need to request them.
FIXING YOUR CREDIT
If your FICO score or credit report don’t look too pretty, experts suggest these strategies to help fix your credit:
- Don’t max out your credit cards Lenders look at the amount of credit you have available and what percentage of it is used.
- Always pay your minimum balance on time: Although paying only the minimum will have you paying your loans off longer than paying extra each month, showing you’re consistent in making payments of at least the minimum on time looks good to lenders.
- Try to reduce balances Skip out on a night of eating out and put that extra $20 towards your credit card balance. It will help in reducing the amount you owe and will add up to help reduce your debt.
- Throw away new credit card offers Every time a credit card company runs your credit to give you an official offer, your credit score decreases It also will not look good to lenders that you all of a sudden need more credit.
The Low Down on Down Payments
Housing market up, but cash tougher to come by
Since 2011 the housing market in the United States has shown modest gains and buyers are more confident than they were a decade earlier. Lower mortgage rates are allowing buyers to be able to afford to own a home.
With needing about 20% of the home’s purchase price on top of the loan for closing costs, a lot of first-time buyers don’t have the additional cash to make the down payment. Those that currently own homes and want to sell aren’t getting enough equity to be able to afford the down payment either. Government loans through the FHA and VA allow for these homebuyers to have options that can work for them.
Conventional loans require at least 20% down, no matter the cost of the home.
First-time home buyers can obtain a mortgage with a 3.5-5% down payment requirement.
According to FHA.gov:
“Your down payment can be as low as 3.5 percent of the purchase price, and most of your closing costs and fees can be included in the loan. Available on 1-4 unit properties.”
“Many borrowers find there are additional factors that affect the amount of the down payment. For example, those who do not qualify for the most competitive loan terms may not be able to get the lowest required down payment. Credit issues or other factors may affect the lender’s perception of your credit worthiness. That can affect the terms, rates and down payment you’re qualified for from that particular lender.”
VA mortgage = 0% down payment
Military borrowers can apply for a VA loan which is insured by the U.S. Department of Veterans Affairs. Those who are active-duty, honorably discharged service personnel, have spent at least 6 years in the Reserves or National Guard or spouses of service members killed in the line of duty are eligible for this type of loan.
This loan program takes into consideration intermittent occupancy, which allows for deployment issues, and it does not automatically disqualify those who have filed for bankruptcy or had other credit issues.
If you’re able to make a 20% down payment, you will not have to pay private mortgage insurance each month. PMI insures the lender for the amount of loan-to-value above 80 percent. PMI insurance is automatically added to your mortgage payment monthly.
Condos mean more down
Mortgage lenders see condominiums as higher risk than detached single-family homes because of the complicated ownership factors associated with them. Because of this, buyers looking to purchase a condo will need to put down at least 10% in order to secure their loan.