Month after month, you write a big, fat check to the landlord. All it buys you is another month. Wouldn’t it be fabulous if that money built you some equity? After a few years, you’d actually have value in a home. That’s the American dream, and it’s still alive and well. Most responsible adults who work hard and pay their bills on time can reasonably expect to become homeowners. The steps aren’t hard if you know what you’re doing. Here’s everything you need to know to move out of the rent zone and into home ownership!
When is the right time to buy a house?
Don’t feel bad if you need to rent another year or so to build your credit and save up a down payment. In the long run, you’ll be glad you’re paying lower interest rates and smaller payments. Plus, the landlord has to take care of the leaky faucets awhile longer.
There are several ways to determine whether renting or buying is the best option.
- Can you buy a home for about the same monthly cost as renting?
- Do you plan to stay in the same home long enough to justify the closing costs?
- Can you afford the costs of maintaining the home?
- Do you need the tax advantages of buying a home, such as the home business exemptions?
Most mortgage lenders want to keep your payments under 25 to 30 percent of your take-home pay. If you earn $30,000 per year, that’s going to be about $525 per month, depending on your filing status and how many dependents you’re claiming on your taxes. Your mortgage broker will work with you to hammer out the details of your mortgage, but it’s good to have a general idea of what you can and are willing to spend before going through the loan process. If you have a set price in mind, you won’t be tempted when the real estate agent starts dangling houses in front of you that are just out of your price range.
Know your home loan language
Speaking of working with mortgage brokers and real estate agents, it might sound like they’re speaking a different language. But all of these terms are easy to learn, and most make sense once you understand the lingo.
Fixed-Rate & Variable-Rate Mortgages – Fixed-rate mortgages usually come with a higher initial interest rate, but the rate does not change over time. In other words, it’s “fixed”. Variable-rate mortgages (or Adjustable-Rate mortgages) might initially be a lower interest rate, but that can go up considerably when interest rates rise. It might mean hundreds of dollars more per month in mortgage payments.
Conventional Loan – Conventional loans are just loans that aren’t guaranteed by the federal government. This is just a way to set it apart from federally-backed loans, like FHA, VA, and USDA or RHS loans.
FHA Loan – These loans are backed by the Federal Housing Administration. Open to all home buyers, these loans do mean making monthly mortgage insurance payments. The upside is that there is a very low minimum down payment required. Usually, that’s just 3.5 percent of the price of the home.
VA Loan – These loans are available to members of the armed services and their families. These loans can usually be issued with no down payment. That’s a huge advantage for struggling military families.
USDA/RHS Loan – These loans are made to certain families with limited incomes, generally for the purchase of rural homes.
First-Time Home Buyers’ Programs – Many lenders offer special programs for first-time home buyers. FHA loans are excellent options for first-time buyers, because the requirements for buying and the required down payments are typically lower. Talk to your mortgage broker about all the options available to you.
Don’t let a mortgage lender or real estate agent talk over your head! If you don’t understand what they’re saying, ask them to explain. If they won’t, find another one to work with. Don’t let someone confuse you into making a bad decision by intimidating you with fancy finance talk. It’s your home, and you’re paying the bills. Their job is to help you, not confuse you.
Get pre-approved for a loan before shopping for houses
Many lenders have special programs for first-time home buyers. FHA loans, for example, are a great option. Talk to your lender about your own situation and which loan suits your needs.
As anxious as you are to get started finding your new home, there are some important steps to take care of first. Don’t go out house shopping until you’ve got a pre-approval letter in your hand and are ready to make the down payment and closing costs. This eliminates a lot of frustration on your part and on your real estate agent.
To get pre-approved for a home loan, your lender will need you to fill out one of their applications. Most mortgage lenders have these available online, or you can get a printed copy. You’ll also need the paperwork to prove you’re able to pay for the home. Usually, mortgage lenders want to see:
• W-2 forms or 1099 forms
• Personal income tax returns for the past 2 years
• Recent pay stubs (one to two month’s worth, usually)
• Bank statements
• Statements for any other accounts you have (credit, savings, CDs, etc.)
• Addresses for the past 5 years (sometimes longer)
• Statements for any retirement accounts you have (401(k), IRA, etc.)
Your mortgage broker or banker may also ask to see other paperwork, depending on their requirements and your particular situation.
For example, if you are a business owner, they might want to see your business’ tax returns. If you’re self-employed, they may ask for more than two years’ tax returns. Don’t be surprised if the underwriter asks for something extra, because it’s actually quite common. It doesn’t mean anything is wrong.
If the mortgage lender is okay issuing you a loan, you’ll be given a pre-approval letter. You can use this as proof of financing to offer contracts on homes you’d like to buy.
Check your credit score
Whether you’re single, a young couple starting out, or a young family making their way out of renting, home ownership is within your grasp. You just need to build your credit, find the right lender, and then pick your home!
In addition to the paperwork above, your mortgage underwriter will also get a copy of your credit report. Your credit is a number that comes from a combination of factors, including:
- How long you’ve had credit
- How much money you’ve borrowed
- How much unused credit you have access to
- Whether your payments are on time
- Whether you carry a balance from month to month or pay balances off every month
Your credit score doesn’t just determine if you’re approved or denied for a loan. It also determines how much interest you’ll pay. If you have bad credit, you may want to take a few months or a year to clean it up before taking out a home loan. That way you can get a better interest rate, and perhaps even have time to save up for more down payment.
Bad credit is usually considered to be a score between 300-629. Fair or average credit is 630-689 and above. An excellent credit score is 720 and above.
You can raise your credit score by making payments on time and by reducing the balances on your current credit accounts.
Down payments, closing costs & other necessary evils
A 3.5 percent down payment on a $100,000 home is $3,500. Closing costs usually run between 2 percent and 5 percent of the total cost of the home. For a $100,000 home, this equals about $2,000 to $5,000. Buyers can also ask the seller to help pay closing costs, and in many cases some or all of the closing costs can be rolled into the mortgage loan.
Closing costs are due at the time of closing. Closing is when the buyer (that’s you!), the seller, and any real estate agents involved in the sale meet up to sign the paperwork. That’s when you are actually issued a home loan. Closing is usually done at the office of the real estate attorney handling the sale and purchase of your home.
Closing won’t happen until everything else is in place. That includes:
- The seller has accepted your contract
- Inspection of the property by your mortgage lender
- A clean title to the property (your real estate agent will have a title company handle this)
- The underwriting on your home mortgage is complete (you’re approved for the loan and all requirements for the loan are met)
Your down payment and any closing costs not paid by the seller or included in the mortgage are due at the time of closing. At the time of closing, you give the seller a date when they have to be out of the home. Usually, buyers give the seller about 30 days to vacate the premises. In some cases, the seller may already be out. Then you can begin moving into your new home immediately.
Give yourself several months or a year to complete this process, including the time it takes to shop for a home. Don’t rush through the process. If you take the time to determine when you’re ready to buy a home, shop potential lenders until you find the right match, and then look for the perfect home for your family, all that time and effort will pay off with home mortgage that fits your budget and your lifestyle.
Ready to get that application and pre-approval underway? Find the best mortgage companies here !