Buying a Home
Are you thinking of buying a home, but dreading the difficult process? It doesn’t need to be as painful as you may think. You just have to do a little work ahead of time in order to save yourself headaches, wasted time, and disappointment. Contact Mortgage Funding US, so we can help you through the home-buying and financing processes.
Before you go searching for a house to buy, you will probably want to figure out exactly how much house you can afford. This can save you quite a bit of time and disappointment. In order to establish how much house you can afford, you will need to calculate what your maximum monthly home mortgage loan payments can be.
Home Mortgage Loan Limits (Somewhat) Demystified
When you make your monthly mortgage payment, in many cases you will primarily be paying off some of the principal balance of the loan, as well as the interest accrued. This is sometimes referred to as the P(rinciapl)+I(nterest), or P+I payment. In addition to these payments, you will also likely make monthly payments towards property taxes and homeowner’s insurance. This is referred to as the T(axes)+I(nsurance), or T+I payment. All of these payments together are referred to as P+I+T+I payments.
Your lender will probably require you to pay Private Mortgage Insurance (PMI) premiums if your down payment is less than 20% of the purchase price of the property. PMI protects the lender in the event of default on the home mortgage loan. If you expect your down payment to be less than 20% of your home purchase, you should factor PMI into your home affordability calculations.
Now it’s time to calculate these payments as a percentage of your monthly income. In many cases, your P+I+T+I payment should be roughly 28% of your monthly income. This percentage is called your housing ratio. So, if you make $4,500 a month, your P+I+T+I payments should not exceed $1,260. To find your debt ratio, add the total payments you make on all of your debts (including your P+I+T+I payment), and find out what percentage of your monthly income these amount to. For example, if you have other monthly debt payments totaling $375 and your P+I+T+I is $1,260, your debt ratio is 36.
Your debt-to-income ratio is your housing ratio and your debt ratio (for example, 28/36), and this ratio is important to your lender when he is deciding how much money to loan you. A debt-to-income ratio of 28/36 is generally the cap, but there are some cases where it can be higher (such as with an FHA loan). Of course, how big of a home mortgage loan you can obtain will influence the price of the home you can afford. There are many other factors involved in finding your loan limit, so you should seriously consider becoming pre-qualified for a loan before you begin home shopping. Contact Mortgage Funding US to begin the process today!
Another thing to consider is whether you want your home mortgage loan to be conforming or non-conforming. The difference is the amount of the loan. Fannie Mae and Freddie Mac set the limits of conforming loans, and this greatly influences the secondary mortgage market. Fannie Mae’s conforming loan limit for a first mortgage on a one-family home is (as of the year 2006) $417,000, though the limit is 50% higher in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. For more information about Fannie Mae’s conforming loan limits, visit their website. The advantage of a conforming loan is that they are easier to obtain and the interest rates are generally lower than those of non-conforming loans.
These are just a few things to consider, though you can save yourself quite a bit of time and trouble by being pre-approved for your home mortgage loan, so this is highly recommended. You will be asked about your credit history, but don’t worry: there are many types of financing available to people with less than ideal credit records. Based on your credit history and your debt ratios, the lender will tell you how much you can borrow. DO NOT MISREPRESENT YOUR CREDIT STANDING! This will make any pre-approval you receive void.
When you are pre-approved for a loan, you will have a far better idea of how much house you can afford. You will also have a better negotiating position when you are dealing with the seller!
The Down Payment
You should also give some serious thought to how much of a down payment you can make when you’re figuring out how much you can afford to spend on a house. If you haven’t been saving up, there are still some alternatives that will allow you to buy a more expensive house.
Federal Programs: FHA loans and VA loans, offered by the Federal Housing Administration and the Department of Veteran’s Affairs, respectively, feature lower down payment requirements. In some cases, the home buyer doesn’t need to make any down payment at all! To find out more about these programs, go to HUD’s website or VA’s website.
State and Local Programs: Many states and local governments have programs to assist people in buying (and even maintaining) their home. Click here to find out more about programs offered in your area.
Private Mortgage Insurance: If you are willing to pay PMI premiums, you may only need to make a down payment of 5% of the purchase price of the home. On a $200,000 house, that can make the difference between paying a $40,000 down payment and a $10,000 down payment.
Individual Retirement Accounts: You may be able to withdraw up to $10,000, with no penalties, from your IRA if you are a first-time home buyer. If you are buying a home with your spouse, that’s a $20,000 addition to your down payment funds.
Gifts: Do not overlook the possibility of asking friends and family members for gift money to use for a down payment.
The Nehemiah Program: This is a privately funded down payment assistance program. You may be able to receive up to 6% of the sales price to use for a down payment, as well as closing costs. Best of all, you don’t have to pay them back! Click here for more information about this excellent opportunity.
Now that you have a down payment, it’s time to start looking for a house. Here are a few steps you can follow to minimize the hassle of the home buying process.
Steps to Home Ownership:
- Become pre-approved: This step will save you the trouble of looking at houses you cannot afford. You will also have more leverage over other buyers who are not pre-approved, because this proves to the seller that you are serious about buying a home
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- Find a Realtor that you are comfortable with: You want to find a Realtor that understands what you want, and can obtain it for you. Evaluate several Realtors before you make a decision.
- Check the listings: Look in the Multiple Listing Service (MLS), as well as any other publication featuring real estate listings. Many communities have free fliers with listings in them.
- Neighborhood watch: Check out various neighborhoods and compare them based upon school quality (if that’s a factor), safety, location (distance from work, etc.), traffic issues, and any other factors you find important.
- See how the house looks on paper: Once you have narrowed down your choices, contact the local government and find out all you can about the property. Are there any liens on the property? Does the power company have the right to dig up your yard anytime they want? Are there any zoning concerns?
- Plan an offer: Begin negotiations with the seller and try to determine the precise value of the property. While you’re considering the offer that you will make to the seller, bear in mind that it can become legally binding. Be careful to include provisions for financing contingencies and the like.
- Carry out the inspections: Find out as much as you can about the condition of the house. Note things that will need to be replaced and negotiate based upon this information.
- Sign the Purchase and Sale Agreement: This will set the date and place of the closing, as well as any pre-closing terms and conditions. The buyer may be asked to provide Earnest Money as a deposit, which will be used at closing.
- Complete the financing process: You will be required to have financing by the closing date. To speed up this process, make sure that you send your loan officer all of your documentation in a timely manner.
- One last inspection: Go through the house before the closing to make sure that everything is in order.
- Closing: All you have left to do after this is start enjoying your new home!
You may have to adjust some of these steps or add new ones to fit your particular situation, but this list should serve as good starting point. Remember: a little effort now can save you many headaches later!
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