All Your Questions Are Answered
Mortgages are different today, so if you are a first-time buyer or this is not your first purchase, check out the articles that explain some of the newer loans out there. And today, lenders have to go by many different guidelines than even just a couple of years ago. Some frequently asked questions are here on this site to give you an overview of some of the options available.
Downpayments can be as low as 5% of the purchase price. VA loans available to some veterans can be 0% down, and FHA loans maybe 3% down. There are special loans for various communities
When we first meet, I will help you evaluate what programs might work for your situation.
Even sellers can help a buyer who is short on the total funds necessary to purchase.
Please contact me if you have specific questions. We are here to help you!
One of the best ways to determine your budget is to have your real estate agent or lender prequalify you for a loan. Prequalification is different from preapproval because it is only an estimate of what you'll be able to afford. On the other hand, preapproval is a more formal process where a lender examines your finances and agrees in advance to loan you money up to a specified amount.
Banks and lending institutions will use several criteria to determine how much money they'll agree to lend. These include:
- Your gross monthly income
- Your credit history
- The amount of your outstanding debts
- Your savings--or the amount of money you have available for a down payment and closing costs
- Your choice of mortgage (i.e., 30-year, FHA, etc.)
- Current interest rates
Lenders also use your financial information to figure out two very important ratios: the debt-to-income ratio and the housing expense ratio.
Many lenders use a rule of thumb that the amount of debt you are paying each month (car payment, student loan, credit card, etc.) shouldn't exceed more than 36 percent of your gross monthly income. FHA loans are slightly more lenient.
It is generally difficult to obtain a loan if the mortgage payment is more than 28 to 33 percent of your gross monthly income.
If you can make a large down payment, lenders may be more lenient with their qualifying ratios. For example, a person with a 20 percent down payment may be qualified with the 33 percent housing expense ratio, while someone with a 5 percent down payment is held to the stricter 28 percent ratio.
If you're having trouble saving money, many lenders will allow you to use gift funds for the down payment and closing costs. However, most lenders require a "gift letter" stating the gift doesn't have to be repaid and will also require you to pay at least a portion of the down payment with your own cash.
Negotiating Closing Costs
Through negotiation, some sellers may agree to pay all or most of your closing costs (for example, if you agree to meet their full asking price). If you choose to try this, make sure to ask your real estate agent for advice.
Many local governments have special loan programs designed to help first-time home buyers. Loans may be available at reduced interest rates or with little or no down payments. Check with your local housing authority for more information.
Some homebuyers choose Adjustable Rate Mortgages (ARMs) because of low initial interest rates. Others opt for 30-year loans because they have lower monthly payments than 15-year loans. There are significant differences between different loans, so make sure to discuss the pros and cons of different loans with your agent or lender before making a decision.
How Much Can You Afford
Understanding how much you can afford is one of the most important rules of home buying. Depending on your individual situation, your budget can affect everything from the neighborhoods where you look to the size of the house and even what type of financing you choose.
Bear in mind, however, that lenders will look at more than just your income to determine the size of the loan. Likewise, you may find that there are some creative financing options that can help boost your purchasing power.
When a buyer applies for a loan, lenders are required to provide them with a good-faith estimate of their closing costs. The fees vary according to several factors, including the type of loan they applied for and the terms of the purchase agreement. Likewise, some of the closing costs, especially those associated with the loan application, are actually paid in advance. Some typical buyer closing costs include:
- The down payment
- Loan fees (points, application fee, credit report)
- Prepaid interest
- Inspection fees
- Mortgage insurance (typically 1 years’ premium plus an escrow of 2 months)
- Hazard insurance (typically 1 years’ premium plus an escrow of 2 months)
- Title insurance
- Documentary stamps on the note
If the seller has not yet paid for the house in full, the seller's most important closing cost is satisfying the remaining balance of their loan. Before the date of closing, the escrow officer will contact the seller's lender to verify the amount needed to close out the loan. Then, along with any other fees, the original loan will be paid for at the closing before the seller receives any proceeds from the sale. Other seller closing costs can include:
- Broker's commission
- Transfer taxes
- Documentary Stamps on the Deed
- Title insurance
- Property taxes (prorated)
In addition to the sales price, buyers and sellers frequently include closing costs in their negotiations. This can be for both major and minor fees. For example, if a buyer is particularly nervous about the condition of the plumbing, the seller may agree to pay for the house inspection.
Likewise, a buyer may want to save on up-front expenditures and so agree to pay the seller's full asking price in return for the seller paying all the allowable closing costs. There's no right or wrong way to negotiate closing costs; just be sure all the terms are written down on the purchase agreement.
At the closing, certain costs are often prorated (or distributed) between buyer and seller. The most common prorations are for property taxes. This is because property taxes are typically paid at the end of the year for which they were assessed.
Thus, if a house is sold in June, the sellers will have lived in the house for half the year, but the bill for the taxes won't come due until the following year! To make this situation more equitable, the taxes are prorated. In this example, the sellers will credit the buyers for half the taxes at closing.
The bundle of fees associated with the buying or selling of a home is called closing costs. Certain fees are automatically assigned to either the buyer or the seller; other costs are either negotiable or dictated by local custom.
Remember that lenders are most interested in your average income. Not only will they want to see this month's paycheck, but also how much you've been making for the past two years. Steady employment is also more attractive to lenders, so if you've been hopping from job to job, be prepared to discuss the reasons why.
In order to qualify you for a loan, most lenders will also ask you for copies of your bank statements. Ideally, they'd like to see a steady history of savings--or at the very least, that you're not bouncing checks every month.
It's always a good idea to save copies of your tax returns, especially if you're self-employed. If you own your own business, it's important to note that lenders generally consider your income as the amount you paid taxes on--not the gross income of the business.
Lenders will usually consider long-term investment dividends, as well as your investment portfolio when evaluating your income.
If you receive steady payments as part of a divorce settlement or for child support, you can also include this as part of your gross income. Just remember that lenders will want to see a copy of your divorce/court settlement verifying the amount of the payments.
Virtually every lender will want to see a copy of your credit report as part of the loan application process. The report lists all of your long-term debts, as well as your payment history. In general, they will require you to pay for the credit report (approximately $50), but if you have a recent copy, they may accept that instead.
Getting your Finances in Order
A crucial step in starting your search for a new home is having a clear idea of your financial situation. By getting a handle on your income, expenses, and debts, you'll have a much better idea of what you can afford and how much you'll need to borrow.
For lenders to verify this information, though, they're going to need to look at your financial records. It is also important to remember that you should include records for each person who will be the owner of the house. So before you even visit the bank, make sure you'll be able to provide copies of these important documents: