The best way to begin the home buying process is by being prepared. To do this, you'll want to consider all aspects of your finances and determine the current status of your savings, credit, debt, and income. All these elements set the stage for you to begin the buying process.
Your Down Payment
The amount you may or may not have available for a down payment will be one major deciding factor on which mortgage program best suits you.
In today's environment, there tend to be more opportunities available for those buyers who are able to provide a larger down payment. However, even if you may not have the funds available for a substantial down payment, you can still find loan programs that allow a low or no down payment option.
To prepare yourself to contribute a down payment towards the purchase of your home, there are a few simple things you can do:
Spend Less: Although it may seem obvious, by avoiding some of the large ticket, unnecessary items, you'll find more of your financial resources available to put towards a down payment. It's a good time to start distinguishing between your wants and needs in regards to your purchases.
Put Some Aside: Contact your Human Resources Department and look into their direct deposit option. Look at your monthly budget and determine how much you could safely afford to have directly transferred from your paycheck into a savings account.
Be Realistic: No matter how much you desire to purchase a home and how excited you are to move forward in the process, be sure that the efforts you make towards saving for a down payment don't hinder your overall goal -- purchasing a home. As you look at your monthly expenses and income, be realistic about how much you can truly afford to set aside. Don't do too much today and hurt your dreams for tomorrow.
Your Monthly Payment
Another concern will be which loan program fits your needs and how to structure your monthly mortgage payments. Before moving forward, you'll want to consider those items that make up your monthly payment and the factors that influence them.
Typically referenced as PITI, your monthly mortgage payment is comprised of Principal, Interest, Taxes and Insurance (PITI).
The initial amount you borrow to purchase the home and the remaining outstanding balance throughout the life of the loan is the PRINCIPAL.
The charge for borrowing money is the INTEREST.
Collected in an escrow account, your TAXES are assessed by your local government and typically paid to your lender as a portion of your payment. The lender will then pay them to the government upon their due date.
Established in a similar fashion as your taxes, INSURANCE is collected by the lender and put into an escrow account. Your insurance is composed of two prominent types of coverage. Homeowner's insurance provides you coverage for damages inflicted by hazards such as (but not limited to) wind and fire. Mortgage insurance is typically required for those making a smaller down payment on their loan; it provides protection for your lender in the instance that you are not able to fulfill the mortgage requirements and repay your loan.
Your Interest Rate
One of the issues that most concerns homeowners is their mortgage interest rate. This is for good reason as the interest rate directly affects the monthly payments for the life of the loan. Because of this, homebuyers search for steps they can take to obtain the lowest rate available.
Contributing factors to the interest rate include whether the homebuyer decides to:
The final decision that you and your Loan Officer reach about your loan program is also affected by other special factors.
If your credit history reflects large amounts of debt, foreclosure, bankruptcy, and/or other credit challenges, you will need to pay attention to the loans that are available with flexible qualifying criteria.
If your loan amount exceeds Fannie Mae's and Freddie Mac's conforming loan limits, it will be classified as a jumbo loan.
If the loan is insured by the Federal Housing Administration (an FHA loan) or by the Department of Veterans Affairs (a VA loan), you will have the opportunity to pay a lower down payment as well as have more flexible qualifying criteria. To be eligible for a VA loan, you need to be a veteran or currently serving in military active-duty.
These special factors don't exclusively determine which loan program is best for you, but they definitely contribute to reaching the best decision.
Just like you wouldn't dive into a pool without knowing how deep it is, you wouldn't want to house hunt without knowing how much you could afford. That's why once you have decided buying a home is your best option and you've examined what your finances will allow, it's a good time to talk with your Loan Officer about being prequalified.
Knowing how excited many homebuyers can be, it can seem frustrating to add a step before the house hunt. However, there are several advantages to being prequalified that can make it worthwhile.
Credit challenges or problems that might prevent qualification are discovered and addressed early in the process.
You will be able to house hunt with confidence knowing the financial backing that is available to you.
Home sellers typically see more strength in offers from prequalified buyers.
For self-employed or commission-based buyers, a prequalification letter can demonstrate financial backing. For buyers whose incomes may fluctuate more than those of salaried buyers and therefore possibly demonstrate more risk.
Prequalification letters show that the lender is willing to move forward with the loan for first-time homebuyers even though they may lack a credit history that demonstrates their ability to make monthly mortgage payments. It helps equalize their offer with similar offers made by previous homeowners.