Obtaining financing to purchase a home includes a number of important factors. Lenders, banks and other sources for loans take into consideration a combination of items when determining whether or not to loan you money. They look at factors in your profile like:
• Current income
• Length of time at your job
• Debt-to-income ratio
• Past rent or mortgage payment history
• Your credit report
• Tax returns
• Down payment amount
• Months of reserve money
Your income level, debt and credit information will be used to pre-qualify you for an amount the lender thinks you can afford. However, a pre-qualification is different than a pre-approval. A pre-approval takes into account your credit report, the debt-to-income ratio and a more in-depth analysis of your financial situation. Once pre-approved, you will receive a pre-approval letter that can be provided to a seller with an offer.
Often the pre-approval process comes after home buyers begin looking at homes, but a pre-approval can provide a more definitive price range
for your search and is best completed as a first step, or as early in the home buying process as possible.
There are benefits to obtaining a mortgage on your home. These benefits can help you decide if it is the right time for you to buy, and provide other values such as the mortgage interest deduction to offset income against your taxes or making mortgage payments as an investment into building your wealth.
Once you have identified a property for purchase, and have an accepted offer, the lender will begin processing your loan. They will take
into account other factors impacting an approval including items such as:
• The preliminary title report
• Any homeowner or community association dues
• Financial stability of a homeowner or community association
• An appraisal report
• Homeowner insurance payments
• Property taxes
The combination of your financial profile (income, debt, credit, etc.) and the property (condition, value, etc.) gives the lender a complete picture of the risks and benefits of providing you with the loan. Once all these items are reviewed and approved you will be in the home stretch for closing on your new home.
LOWER PRICE OR LOWER INTEREST RATE?
Which is better?
In a buyer’s market, buyers wait for signs that prices are going lower. In a seller’s market, buyers don’t wait because they’re afraid prices will go higher. Both markets move on the fear of paying too much.
Right now, buyers have the best of both worlds – home prices have rolled back to nearly a decade ago, and mortgage interest rates are at record lows. Yet, many buyers are still waiting for a sign that it’s the right time to buy.
Should you wait for lower prices or lower interest rates before you jump in? Consider the following: The price of a home is fixed. Buyers have figured out that interest rates can change, so they wait for prices to go lower, but what they don’t realize is that prices have to drop significantly to equal a minor fluctuation in mortgage interest rates.
A quick visit to a mortgage calculator will show you the following:
• If you buy a home at $200,000 and a 30-year, fixed-rate mortgage at 4.5%, your monthly payment will be $1,013.37 and you’ll pay $164,813.42 in interest over the life of the loan.
• The same home at 5% interest costs $1,073.64, a difference of $60.27 more per month and $186,511.57 in interest over the life of the loan. The difference in interest payments alone is $21,698.15.
• If your home dropped 5% in value and you were able to buy it at $190,000 and 4.5% interest, your payment would be $962.70, a difference of $50.67 per month, with $156,572.75 in interest over the life of the loan. You’d save $50.67 per month than if you’d paid $200,000.
• At 5%, your $190,000 home costs $1019.96, or $53.68 more per month than if you’d gotten the loan at 4.5%. Your interest payments would total $177,185.99 over the life of the loan. The difference in payments is $20,613.24.
Home prices today are well below the peak of the housing boom in 2005, and mortgage interest rates are at all-time lows. Sooner or later one of them will move up. Why not buy while both are low?
Your Down Payment
Lately, it’s been in the news that credit is tight, but if you believe that you need 20% down and perfect credit to buy a home, you may have good news coming.
Loans are available with as little as zero down through the Veterans Administration, for veterans and active-duty military. FHA has programs as low as 3.5 percent down for qualifying borrowers who buy within maximum loan limits, up to $625,000.
Borrowers with less than perfect credit can get loans as well. Higher credit scores help qualify borrowers for better rates. For example, if you have a credit score of 720 or better, you can buy a home through FHA with 10% down.
The rule of thumb is simple – less money down requires a higher credit score and vice versa.
A down payment is simply your way of showing the lender that you are willing to risk your money to buy the home you want. The larger the down payment, the more likely the lender is to make the loan.
The credit score will tell you how much money you have to put down; it’s a factor in your interest rate. If you put 20 percent down, you can get a loan even if you have a low credit score of 580 or 620. If you have a 740 or 760, the lender will go with less money down.
First Time Buyers
It also matters where the down payment money is coming from. Lenders expect first-time buyers to get help from family to buy a home, so there may be limits to the size or percentage of the down payment gift that the lender will allow.
Down payment assistance can also come from grants. The FHA no longer allows seller-assisted down payments, but does provide a link to national organizations that may be of help. Also, check your local housing authority to see if there are grants available in your area.
Talk to your lender before you make an offer. Get prequalified, and be up front about the source of your down payment money. A good lender will explain the true costs of borrowing to you so you can comfortably afford the home you want as well as the monthly payments.