February 12th, 2018 6:38 AM by Jackie A. Graves, President
It’s easy to find your dream home and envision your life there,
but harder to actually buy that home unless you know how to get a mortgage. So
let’s take a look at the main things you need to know.
qualify you, lenders look at three main factors:
Lenders use a debt-to-income (DTI) ratio which tells them what percentage of
your income will be going towards all of your bills. They will let you spend as
much as 43 percent of your income on housing and non-housing bills.
health. Lenders will run your credit report from all three
credit bureaus — Equifax, TransUnion, and Experian — and base your loan
approval on the middle of your three scores. In addition to scores, the reports
lenders pull will also show them your full credit history which they also
consider. If you run your own credit scores, your lender won’t use them — they
must use their own, and the reports they pull will most likely produce
different scores than you’re able to obtain as a consumer. See below for how to
review your credit history for free.
in the game. Lenders consider down payment and how much money
you’ll have left over after you close a home purchase — they review this
against the DTI to consider how fast you’ll be able to build up reserves. As
noted below, lenders will still allow very little down, and some loans don’t
require money left over after close. But even in situations like this, you
should consider whether you want to own a home with no reserves.
planning is not just as simple as budgeting for a down payment. You’ll need to
plan for three categories of cash-to-close when buying a home.
payment. Current or past members of the U.S. military can get a loan with zero
down, and everyone else can put as little as 3 percent down on a
conventional loan and as little as 3.5 percent on an FHA loan. If you want to
avoid the extra monthly cost of mortgage insurance, you typically need to have
a down payment of at least 20 percent.
closing costs. These include lender and appraisal fees, title
insurance and transaction settlement fees, home inspection fees to make sure
the property you’re buying is acceptable to you.
costs due at closing. When you close on a home, it might be the
middle of a month or a local property tax cycle. So the interest you’ll pay on
your mortgage for the remainder of the closing month gets prorated and you
prepay it when you close. Same with property taxes. Also lenders require you to
prepay one year of homeowner’s insurance at closing. And if you’re getting a
loan that requires you to save up for property taxes and insurance by paying
into an account monthly, you’ll have to prepay that as well — it’s called an
escrow or impound account.
Federal government has a program called Know
Before You Owe, which requires all lenders to follow a standard format for disclosing cash-to-close line items
way you can see the total cash you’ll need and nothing will be a surprise.
Therefore, it’s good to connect with a lender even if you’re
early in the home buying research process. They will give you these disclosures
so you have a very accurate assessment of cash needed to meet your home buying
homeowner’s budget isn’t just a mortgage payment. It’s also property taxes and
insurance, and mortgage insurance if the down payment is less than 20 percent.
as you plan your mortgage budget make sure to use a mortgage calculator that includes
these items. And when you’re ready to talk to a lender, the disclosures noted
above include a breakdown of these monthly cost line items.
can currently deduct mortgage interest and property taxes from their gross
income when filing tax returns to ultimately pay less tax and therefore lower
their total cost of homeownership, but when budgeting, it’s best to budget with
the pre-tax numbers because that’s what’ll be due each month — the tax benefit
comes after you file each year.
you’re buying a condo or a home within a planned development such as a gated
community, find out what the homeowner’s association (HOA) dues are and include
that in your budget.
of course as a homeowner, you are responsible for your own maintenance and
upkeep on the home, so you’ll want to build that into your budget too.
can save for a down payment and cash to close, or lenders also allow you to receive gift funds for a home purchase.
you have the ability to get gift assistance, it’s worth considering because the
rate of home appreciation in your area may outpace your savings rate, making it
more expensive to buy the same home later rather than now.
for making sure your credit is clean, there is
only one Federal government-sanctioned free credit report service — AnnualCreditReport.com.
You can use this to review your credit history to see if there are errors or
derogatory items you need to clean up.
factor that causes credit scores to fluctuate the most month over month is
credit card balances. To keep your credit score the highest, try to keep your
credit card balances at 30% or less of your credit limit.
you want to go deeper on individual topics see Zillow’s How To Get A Mortgage library.
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