Build a Plan of Action and Get Ready
Buying a home will probably rank as one of the biggest personal investments one can make. Being organized and in control will contribute significantly to getting the best home deal possible with the least amount of stress. It’s important to anticipate the steps required to successfully achieve your housing goal and to build a plan of action that gets you there. Before you can build a plan of action, take the time to lay the groundwork for your decision-making process. First, ask yourself how much you can afford to pay for a home. If you’re not sure on the price range, find a lender and get pre-approved. Pre-approval will let you know how much you can afford, allowing you to look for homes in your price range. Getting pre-approved also helps you to alleviate some of the anxieties that come with home buying. You know exactly what you qualify for and at what rate, you know how large your monthly mortgage payments will be, and you know how much you will have for a down payment. Once you are pre-approved, you avoid the frustration of finding homes that you think are perfect, but are not in your price range. Things to consider: – Convenience for all family members. – Proximity to work, school. – Crime rate of neighborhood. – Local transportation. – Types of homes in neighborhood, for example condos, town homes, co-ops, newly constructed homes etc.
Your Savings and Down Payment
While 20% is the traditional down payment, many programs (like FHA or VA) allow for much less. However, putting more money down reduces your monthly payment and may eliminate the need for Private Mortgage Insurance (PMI).
Items You Need When Applying for a Loan
Commonly required documents include the last two years of W-2s and tax returns, recent pay stubs, two months of bank statements, and a copy of your ID. Having these ready in advance can significantly speed up the approval process.
FICO Scores and Your Mortgage
Lenders use your middle score from the three major credit bureaus (Equifax, Experian, and TransUnion) to set your mortgage rate. Even a small improvement in your score can move you into a better ‘tier’, saving you thousands in interest over 30 years.
FICO Score: A Brief Explanation
Your FICO score is calculated based on five factors: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). Maintaining a clean payment history is the most effective way to boost your score.
Documenting Your Assets: Verifying Your Down Payment
Lenders require ‘sourced and seasoned’ funds for your down payment. You’ll need to provide bank statements showing where the money came from. Large, unexplained deposits may require a ‘gift letter’ if they aren’t from your regular earnings.
Closing Costs When Buying or Refinancing a Home
Closing costs typically range from 2% to 5% of the loan amount. They cover things like appraisal fees, title insurance, loan origination fees, and government recording charges. Always review your Loan Estimate for an accurate breakdown.
Adjustable Rate Mortgages: The Pros & Cons
The pros of an ARM include lower initial payments and higher buying power. The main con is the risk of the rate increasing significantly after the initial period, which can lead to ‘payment shock’ if rates rise.
Adjustable Rate Mortgages: The Basics
An ARM is a mortgage with an interest rate that changes periodically based on an index like the SOFR or CMT. They usually start with a lower rate than fixed-rate mortgages, making them attractive for short-term homeowners.
Types of Mortgage Lenders
Lenders include commercial banks, credit unions, and mortgage companies. Each has different criteria and loan programs. It’s often beneficial to compare quotes from different types of institutions to see who offers the best deal for your specific financial situation.