Figuring Out What You Can Afford
Monthly Mortgage Payment
Amount of Money Needed
- Down Payment – Your down payment is a percentage of the property value and is usually from 3 to 20%, or more if you want a lower loan amount. This can vary by the type of mortgage you obtain. Also, if your down payment is less than 20%, you may be required to pay mortgage insurance (PMI or MI).
- Closing Costs – these are settlement costs involved in purchasing your home. They range from 2 to 7% of the property value and include such things as points (a percentage paid for securing a particular interest rate), financing fees, taxes, title insurance, pre-paid and escrow items, and your down payment. You will receive an estimate of these costs prior to closing.
- Move In and Initial Expenses – these are costs associated with moving in such as movers, utilities, electric, cable, internet, new appliances needed, initial updates or repairs such as flooring, paint, electrical work, or any other initial expense that “pops up”. Nearly every home comes with a few surprises. You should have a savings set aside for these new home “adventures”.
What To Know About Credit
If You Don’t Have Credit
If You Have Bad Credit
Often What You Qualify For Is Different Than What You Can Afford
Depending on your credit, you may qualify for more or less than you can afford.
You Don’t Always Need A Large Down Payment
Coming up with a 20% down payment is one of the biggest hurdles for many. There may be other options. Different lenders offer different programs. Some have programs with government assistance for the down payment and closing costs, some offer programs with as little as 3% down. It’s good to talk to several lenders and do some research into which program and type of loan will be the best for you so you an be in a home and building equity sooner.
Closing Costs May Be More Than You Expected
Save Some Money For Unexpected Expenses
It’s no secret that there are many potentially expensive repairs that come with home ownership. The seller is legally obligated to disclose any known problems with the home and the home inspection will give you a sense of what issues could arise, but there are always unexpected surprises. Some not even related to the house – like losing your job, car problems, or getting ill. That’s why even if you have enough money to make a sizeable down payment, it may be a good idea to put less money down if it means using all of your savings. That way you have money available to handle the unexpected.
Types Of Mortgages
Fixed Rate Mortgages
Consider a fixed rate mortgage if either of the following describes you:
- You plan on living in your new home for many years, and/or
- You are not a risk-taker and prefer the stability of knowing how much your payment will be each month.
Since most home loans are for a period of 30 years, if you want a payment you can count on for that long of a period of time, a fixed rate mortgage may be what works best for you. Once your loan amount and interest rate are calculated and locked in, a fixed rate mortgage will guarantee that you will have the same payment over the life of the loan. Making extra payments to principal will allow you to pay your loan off sooner.
This may not always be the best choice, however. If interest rates are very high at the time you take out your loan, with a fixed rate mortgage you’ll be stuck with that high interest for the life of the loan (unless you choose to refinance). Conversely, if interest rates are very low, you’ll come out the winner with interest rates that will stay low no matter how high interest rates go in the future.
The following are the advantages and disadvantages of the varying lengths and terms of fixed-rate mortgages:
- Pay off the loan in half the time of a 30-year loan
- Equity builds up more quickly than in a 30-year loan
- Payments are higher (which may be a problem if you lose your job or become unable to work)
- Pay off the loan in 2/3 the time of a 30-year loan
- The overall interest paid is considerably less than for a 30-year loan
- The most common choice, especially for first-time homebuyers, as it’s the easiest of the fixed-rate loans to qualify for
- Monthly payments are lower than for 15-year and 20-year loans. This can prove especially helpful if you do not have a lot of “padding” between the amount you can afford to spend and the monthly payment for your desired property
- More desirable if you plan on staying in the same home for years, since equity builds more slowly than for shorter-term loans
- For income tax purposes, this term provides the maximum interest deduction
Adjustable-Rate Mortgages (ARMs)
If neither the fixed-rate or the adjustable-rate mortgage seems like the best option, perhaps the convertible ARM will be right for you. This alternative combines the initial advantage of an ARM with a fixed rate after a predetermined number of years. Obviously, this type of mortgage has more advantages when the initial interest rate is low and the future rate is not guaranteed.
Another mortgage option available to some people is a government loan, providing that you meet the qualifications for these loans.
- VA Loans:Veterans may qualify for a loan from the Veterans Administration. There is a limit on the amount you can borrow, so this option works best for those buying a lower priced home.
- FHA Loans: The Federal Housing Association offers loans to lower-income Americans. Look for the phrase “FHA approved” when looking at ads for homes.
Low Down Payment Loan Options
Loans with Private Mortgage Insurance
With a loan backed by private mortgage insurance, buyers are able to purchase a home with a down payment as low as 3%. There are several payment options available, and depending on the form of private mortgage insurance, your payments might automatically cancel when your mortgage balance reaches 78% of the home’s original value. Some lenders will even allow cancellation with an 80% balance. Private mortgage insurance premiums may also be tax deductible.
FHA Insured Loans
With an FHA insured loan, buyers are able to purchase a home with a down payment as low as 3.5% through a government program backed by taxpayers dollars. The program offers only one payment option – an upfront fee due at closing and a monthly fee. It’s important to note that while the FHA recently lowered their premiums for the loans they insure, making them more affordable, they removed a buyer’s ability to cancel the premium payments, meaning a buyer must make the payments for the life of the loan. FHA premiums may also be tax deductible.
How are private mortgage insurance and FHA different?
Private mortgage insurance is the private sector alternative to FHA, which is a government program backed by taxpayers. Another key difference is with cancellation. Some forms of private mortgage insurance may be cancelled when a loan reaches 78% loan-to-value, unlike FHA that may be paid for the entire loan term. And while both base the cost of their insurance premiums on a variety of factors, including your credit profile and other characteristics, their premiums are different, so it’s important to compare the cost of both options to see which makes the most sense for you.
Loans for Veterans
VA loans provide a benefit by offering a long term financing option to American veterans. These programs are government insured loans and offer various down payment options. To find out more about VA loans and whether or not you are eligible, go to the US Department of Veterans Affairs website or speak to a loan professional.
Down Payment Assistance
Down payment assistance provides additional options for families that qualify (typically low to moderate income). These programs can provide assistance by giving favorable terms for second mortgages, grants, or gifts, but they can add steps to the home buying process.
Mortgage Application Document Checklist
- Social Security Number and Date of Birth. Required of you and any co-borrowers.
- Current Housing Information. For renters: your address, the name and address of your landlord, proof of lease, and your current monthly rent. If you’ve lived at your current address for less than 2 years, bring information for your previous addresses. For existing homeowners: your address, current market value, mortgage lender, account number, current monthly payment, and outstanding balance due on the mortgage.
- Employer(s) Verification. Names, addresses, and telephone numbers of your employers for the past two years.
- Income Verification. Your two most recent pay stubs with year-to-date earnings, and W-2s for the past two years.
- Self-Employment Documents. If self-employed, bring your profit and loss statement and balance sheet for the past two years, and two years of tax returns.
- Additional Income. Bring documentation to prove you receive any of these additional forms of income: social security or veteran’s benefits (provide copies of the award letter), overtime bonus, commissions, interest income, or alimony income from divorce/ separation agreements.
- Tax Information. W-2 tax forms and tax returns for the past two years.
- Bank Account(s) Information. Account number(s) and current balance(s) of your checking, savings, or any other account(s).
- Assets Information. Statements of current assets, such as Individual Retirement Accounts (IRAs), Certificates of Deposit (CDs), stocks, and bonds. For individual investments, a current brokerage statement with the name of the stocks, the amount per share, and the number of shares owned.
- Personal Property Information. Disclosure of the value of your personal property, including employee retirement accounts, furniture, cars (copy of titles to any vehicles owned), any valuable collections or other valuable property, and life insurance.
- Credit Information. Credit card bills for the past few billing periods.
- Rental Property Information. Federal tax returns and a schedule of all real estate property you own, plus account number and address of the mortgage company if any property you own is not paid for. If the property is rented, provide a copy of the current lease and rent payments in the form of canceled checks.
- Gift Funds. If money for down payment is a gift from a relative, supply a copy of the gift letter (which should state that the gift money does not have to be repaid) and copy of the gift check.
- Divorce or Separation Information. A copy of the divorce decree or maintenance agreement, along with any amendments and a 12-month payment history of alimony and/or child support payments, as well as documents if the payments are needed to verify your income and qualify for the mortgage.
Top 5 Tips To Financing A Home
- Get pre-approved – A pre-qualification letter is an important first step in successful home hunting, so real estate agents and sellers take you seriously.
- Get your documents in order – You’ll need to document two years’ worth of your gross income, down payment, and credit.
- Understand your credit score – Your credit score plays a key role in determining several factors of the mortgage you get, and there’s more to it than just paying your bills on time.
- Do not increase monthly debt – while you are going through the process of buying a home as it could negatively impact your ability to buy the property / qualify for a loan.
- Keep paying your bills on time