August 30th, 2016 5:18 AM by Jackie A. Graves, President
buying a house. Or, at least, you're thinking about buying a house.
excellent news. Homeownership is a terrific way to create stability in your
life, and to start building wealth for your future.
also an emotional time, and one which is fraught with stress. There's so much
money involved when you buy a home and every decision can be analyzed then
So, how do
six million people manage to buy new homes each year? With preparation and
attention to detail.
know everything there is to know about buying a home -- especially when you're
a first-time home buyer. But, you can do a little research and put yourself in
position to succeed.
The more you
know, the better off and less stressed you'll be. You may even get a better
deal on your home loan.
the National Association of REALTORS®, roughly 10 percent of all homes are
purchased using cash. For everyone else, there's a mortgage.
are loans used to finance real estate. You can get a mortgage loan for 100% of
a home's purchase price, so that the home is financed entirely by the bank.
you can put some of your own money toward the purchase -- a figure known as a
"down payment" -- so that you finance the amount that's left over.
if you bring $25,000 of your own money to a $250,000 home purchase, you have
made a 10% downpayment and your remaining mortgaged amount is $225,000.
You can get
a mortgage loan from just about anywhere.
If you have
a favorite local bank or credit union, you're able apply for a mortgage loan
there. Or, if you have a online bank or lender you prefer with which to work,
you can apply for a mortgage loan there, too.
are ubiquitous -- you can even apply for a mortgage from members of your
family, if they're so inclined to make you a loan.
As a home
buyer with choices, then, what's important to remember is that every mortgage
lender will offer slightly different terms and require you to meet slightly
you get approved for a mortgage with Bank 1, for example, doesn't mean you'll
get approved at Bank 2. And, if you're approved for a loan at both banks,
there's no guarantee both will offer you the same low rate.
This is one
of the main reasons why you should plan to speak with two mortgage lenders --
at minimum -- when you're in the process of buying a home.
It not only
helps to have a Plan B, but it's nice to know that you're getting the lowest
mortgage rate possible.
today have their choice from more than a dozen different loan types, but more
than 90% of buyers will end up using one of four government-backed programs.
that you will, too.
programs are the Conventional home loan, the FHA home loan, the VA home loan,
and the USDA home loan.
programs are popular for their accessibility, their low rates, and their
friendly terms. You can apply for each with your favorite mortgage lender --
online or in-person.
mortgage loans are what most home buyers think of when they think of "home
loans". There are more conventional loans closed than any other loan type.
mortgages are often the best choice for home buyers with good credit scores and
a downpayment of at least 10 percent.
conventional mortgage options exist for buyers making a downpayment of just
three percent. They are the HomeReady™ home loan and the Conventional 97
home loans offer discounted mortgage rates to buyers in lower-income
neighborhoods, minority-heavy neighborhoods, and in areas which have been
declared a federal disaster zone.
97 mortgages offer no such discount, but can be the most economical way to
purchase a home with little money down -- especially for buyers with extra-good
FHA loans represent the
next-biggest share of mortgages among U.S. homeowners. The biggest appeal of
the FHA loan is that buyers with below-average credit can get
allow buyers to make a downpayment of just 3.5 percent and the program offers
flexible mortgage standards for buyers with slightly banged-up credit.
rates are often lower than conventional mortgage rates, but because all FHA
loans require mortgage insurance premiums (MIP), the overall cost of an FHA
loan is sometimes higher.
The VA loan
is the next most common mortgage type.
veterans and active members of the U.S. military, VA loans offer 100%
financing, simplified loan approval standards, and access to the lowest
mortgage rates available.
For the last
two years, VA mortgage rates have consistently beat rates for all other common
loan types. VA mortgage rates can be as much as 40 basis points (0.40%) lower
than rates for a comparable conventional loan.
rural areas and low-density suburbs, the USDA loan is another no-money-down
mortgage you can use to finance a home.
loan is meant for home buyers of modest means who are buying modest homes. The
program allows for lower-than-average credit scores and offers below-market
mortgage rates to qualified borrowers.
of how the USDA program defines “rural”, more than 97% of the geographic United
States is potentially USDA home loan-eligible.
uncovered the mortgage loan type which works best for you, you'll want to begin
thinking about your monthly budget and how much home you can afford.
It's up to
you to figure this out. A bank can't do it for you. So, first, determine your
monthly budget and write that number down.
example, let's say it's $1,500 per month.
work backwards to determine your maximum home purchase price.
mortgage payment is made up of four parts, collectively known as PITI --
Principal + Interest, Taxes, and Insurance.
Interest is your mortgage payment. It's based on the amount you're borrowing,
the interest rate at which you're borrowing, and the number of years in your
real estate taxes. As a homeowner, you're responsible for paying an annual real
estate tax to the local taxing authority. Annual taxes typically range from
1-2% of your home's value annually.
homeowners insurance. As a homeowner with a mortgage, you're required to have
your home insured, and insurance cost in the range of 0.25-0.50% of your home's
a home purchase price of $250,000 and a ten percent downpayment, we should set
aside $400 from our monthly budget for taxes and insurance.
$1,100 to spend on principal + interest.
whether a home is "in budget" will depend on your principal +
interest payment; and, your principal + interest payment depends on current
that mortgage rates change all day, every day; and, over the course of weeks
and months, rates can change by 50 basis points (0.50%) or more.
shopping for a home, then-- especially over long windows of time -- it's
important to check in with how the market rates are moving.
above example, where we have budgeted $1,100 to spend on principal + interest
show why you should never shop for homes by "price range". The same
home is affordable when rates are low; and unaffordable when rates increase.
target price range based on current mortgage rates. It's the only true way to
There are a
lot of reasons to be stressed when you're buying a home, but getting your
mortgage shouldn't be one of them. A little bit of knowledge can go a long way
toward keeping you calm.
good tools can help, too. Use a mortgage calculator to see how today's mortgage
rates might fit your household budget, and what your mortgage PITI could be.
How much of a down payment do I need to buy a home?
To buy a home, you may not need a down payment at all. There are various
mortgage programs, such as the VA Home Loan Guaranty program and the USDA Rural
Housing Loan, which allow for 100% financing. Additionally, U.S. municipalities
often offer down payment "grants" to first-time home buyers, which
can make it possible to purchase a home with no money down. Absent these
programs, buyers should expect to make a minimum three percent down payment for
a conventional loan; and 3.5% for an FHA-backed loan.
Can I use gift funds for my down payment on a mortgage?
Yes, you can use gift funds for a down payment on a mortgage. In order to use a
cash gift for down payment, however, a paper trail must show the gift funds
leaving the giftor's account, and being deposited into the home buyer's
account. The cash gift should also be accompanied by a "gift letter"
which states the parties involved and their relationship; the amount of the
cash gift for down payment; and a statement that the gift is not actually a
loan. There is no limit to the amount of monies that can be gifted to a home
Are there any fees when a home buyer works with a real estate agent?
No, real estate agents are "free" for home buyers; their sales
commission is paid by the home seller. Furthermore, because of conflicts of
interest. there are almost no situations in which it makes sense for a home
buyer to employ the same real estate agent as the home seller.
What is Private Mortgage Insurance or PMI?
Private Mortgage Insurance (PMI) is an insurance policy which makes
homeownership possible for home buyers who don't want to make a twenty percent
down payment. PMI is paid by mortgage borrowers, protecting mortgage lenders
against default and foreclosure. Should a homeowner fail to repay its mortgage,
the lender can "cash in" the homeowner's PMI policy to recover its
lost monies. PMI is required with conventional mortgages only, when the home
buyer makes a down payment of less than 20 percent. PMI later self-cancels when
the homeowner's home equity reaches twenty percent (i.e. 80% loan-to-value).
The most common form of PMI is paid monthly, bundled into the homeowner's
What are points? How do I know if I should buy them or not?
Points, which are formally known as Discount Points, are an optional, one-time
payment which give mortgage borrowers access to "discounted" mortgage
rates as compared to today's current rates. One discount point comes at a cost
of one percent of the borrowed loan amount, and typically lowers a mortgage
lender's quoted interest rate by 25 basis points (0.25%). Deciding whether to
pay points is a personal decision. Home buyers with plans to sell or refinance
within a few years should usually not pay discount points. For many home
buyers, discount points are 100% tax-deductible in the year in which they are
Credit score range breakdown: Fair, Good, Excellent
Mortgage credit scores are assigned by the three major credit bureaus –
Experian, Equifax, and TransUnion – and scores range from 300-850. Your median
credit score (i.e. the middle score) is the credit score used for your mortgage
approval. If you only have two published credit scores, which is common among
first-time home buyers, your credit score is the lower of your two available
scores. Credit scores of 720 or higher are considered to be
"Excellent". Credit scores between 680-719 are considered to be
"Good". Credit scores between 620-679 are considered to be
"Fair". You can get a mortgage approval with credit scores of 500 or
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