First Time Home Buyer? Here’s What You Need to Know About Loans
Buying a new home for the first time is exciting and there are some things you need to know about the home purchase process. While exciting at heart, this experience may turn into a stressful and costly process if you don’t know how to make a well-informed decision. One wrong move can lead to a failed deal and there are things you can do ahead of time to set yourself up for success. This is especially true of buyers that may have bad credit when beginning the home search.
While there are many out there, most mortgage lenders are there to provide a variety of options to your home buying decision. To keep from shooting in the dark, you should first make sure that your credit report is free of any errors and also run through our Free Quote engine to see what sort of interest rate you might qualify for depending on the purchase price of your home, its location, and your credit scores. From there, the first step is to know how you should decide to make use of the various options your lender offers. To put one foot forward, here is a guide to make your first home-buying decision simple.
Know Your Budget
The first thing to consider when you are planning to buy a new home is to know how much you can afford. Consider your household income and expenses to know how much you can borrow. This is something that helps tremendously before you even find that perfect home. If you know your budget you are better able to communicate the deal-breakers from the deal-makers when working with a realtor. Many first time home buyers make the mistake of reaching out to a realtor first when in fact, a little bit of pre-purchase education is necessary to realize that you’ll need both a mortgage loan officer/broker AND a realtor that can work with you.
Costs to Consider
Many home-buyers decide to buy a home when they think they are ready for a mortgage. What they don’t realize is that their mortgage payment might be much more than what they believed it to be. Look out for those expenses that are perhaps, obvious, but not entirely known to a rookie home-owner.
Along the way, there are many associated costs that you might have to bear and you don’t want to be “house poor” once you’re in what you thought was a dream home. A dream home is not something that is going to put you in a poor financial position… no matter how nice that house may be, if you are carrying too much of a financial burden on your shoulders the stress will make that dream turn into a nightmare.
As a buyer, know that property tax and insurance have the tendency to go up every year and ask yourself if you are able to afford the increased costs that are associated with that as well as other items such as:
The down payment is the necessary part of every mortgage. Down payment is not included in the amount of loan and the actual amount you pay will be based on your credit score, loan amount and loan choice.
The closing costs you might need to pay are:
Prepayments include interest from the date of the closing to the date of first payment, prorated property taxes, mortgage insurance premium, hazard insurance premium, and flood insurance premium.
Mortgage Lender’s Fees include loan origination fee, credit report fee, commitment fee, appraisal fee, and loan discount points.
Additional Fees may include attorney fee, recording and transfer fee, title charges, home inspection, termite inspection, and survey fee… and then there may be homeowners association (HOA) fees on top of that as far as your monthly expenses go.
Look for a Loan First and Home Later
Simply put, connect with a great mortgage broker first and THEN reach out to your favorite realtor. Also know that it costs you no money at all to do this. Your mortgage broker and realtor don’t make money until the close of the transaction so fortunately you have no upfront expenses to worry about in this phase.
Once you know the costs you might have to bear when buying a new home, your mortgage broker will help you consider and select for the most appropriate mortgage choice at hand. Knowing that you may not afford the house you love may be heart-breaking but it is not the end of the world. It is better to get pre-approved and then look for a home. A home purchase is both emotional and logical and ultimately the perfect mix of what makes financial sense alongside what you love will help you make a more practical decision.
Apply for a Loan
After finding the home you want to buy, go to the lender with the right documents and submit your application.
Once your application is complete, the lender will perform necessary checks and prepare for closing. Your lender will consider factors including your credit history, income-to-expense ratio, assets, and appraised value of home. If your credit is poor or fair, consider what options are available and you may want to spend at least 6 to 12 months to try and improve your credit scores before the big purchase.
How do lenders determine my eligibility for a loan?
Lenders determine your ability to pay a loan by calculating a certain percentage of your monthly gross income which is known as ratio. Your housing debt comprises the cost of principal amount plus interest, the real estate taxes, homeowner’s insurance, mortgage insurance, and other related expenses. This is known as PITI – Principal, Interest, Taxes and Insurance.
You are required to apply a certain percentage of your gross income to service the loan. There is a limit to how much income you could spend to your total debts which is called recurring debts. Recurring debt includes payment of credit card, various loans installments and other types of debts. Your recurring debt plus monthly housing debt should not exceed 43 percent of your gross income.
After evaluating your application and due diligence, the lender makes the approval decision. If your loan is approved, the lender issues an approval letter. The letter carries the information of the transaction in detail along with the conditions under which the loan has been sanctioned.
If the loan is not approved, the lender issues a written explanation. You can re-apply after taking corrective actions. The lender may also present a counteroffer which may contain changed terms or loan amount.
After approval, the seller is paid and the ownership of the house is transferred from the seller to you.
For special situations or specific questions, you may seek the expertise of a real state attorney during the process of buying a new home. Take that advice for what it is and consider bringing your broker into the conversation if necessary. In the end, you should have enough information to make the decision that is in the best interest of you and your family.