Purchasing a home is a big step and an significant investment! We, at American Home Free Mortgage, would like to make this step as easy and as straightforward as possible. Please contact our mortgage professionals to find out how we can help you secure your new home!
- Are you ready to buy a home?
- You may be financially qualified to buy a home, but are you ready for the responsibilities that come with home ownership? There are many factors to consider making the largest purchase in your life!
- What is your medium to long-term plan? If you are a frequent traveler or your job requires you to move regularly, owning a home may end up costing you more money in the long run. Although you may build significant equity in a home, there are also large costs associated with selling your home. In order to sell your home, you will most likely have to hire a realtor, who may charge as much as 6.0% of the sales value as a commission to sell your home. You may also need to cover a portion of the closing costs in order to help a potential buyer afford your home. Finally, housing prices may have declined in the time frame that you owned your home that could force you to sell your home for less than what you paid. Clearly, if you do not plan on staying in your home for a period of time, it may not make sense to purchase a home.
- How is your credit score? Your credit score is a critical factor in determining whether you qualify for a loan or whether you can obtain the most competitive mortgage rate in the marketplace. Also, many home buyers who have lower credit scores only want to improve their credit score enough to qualify for a mortgage. But leaving a lot of outstanding credit issues unresolved, even if you can get a mortgage, without resolving them is not a good idea because it will be much harder to resolve those issues with the higher expenses of home ownership. A better plan may be to clean up all credit issues first and then to obtain a mortgage. Remember, a higher credit score will help you secure a more competitive mortgage rate.
- How much excess cash do you have? Coming up with enough money for a down payment and closing costs is a big accomplishment. Often times, homebuyers try to buy a house after coming up with just the down payment and closing costs funds. The reality is that you will need to have additional amounts of cash available to cover incidental costs including moving costs, home repair, home improvements, etc. More importantly, you will want to have an extra cash cushion to cover your mortgage if you were to run into any financial difficulties. We don’t like to think of these possibilities, but they do happen and it is better to be prepared now than sorry later.
- Are you ready for the responsibilities of home ownership? Home ownership responsibilities include the financial responsibility of paying all bills but also the physical responsibility of maintaining the house and the property. As a renter, it is easy to take for granted the ability to take off on vacation any time and just lock up and go. Homeowners, on the other hand, need to make sure their home will not have any problems while they are away. Whereas, renters can just call their landlord to fix any problems, home owners are the general contractor for their own home. Home ownership definitely comes with added personal responsibilities!
- What are the benefits of purchasing a home?
- Along with the benefits of having your own space, home buying also offers some excellent tax benefits. For example, in many cases all of the interest you pay on your mortgage loan is tax deductible. That means if you take out a $200,000 loan, during the first year of your mortgage, you may be eligible to deduct roughly $12,000 on your tax returns.
If you are a new home-buyer and you paid points on your mortgage, you can deduct a portion of those points during the same year you bought the house. Private mortgage insurance is also now deductible for many borrowers. Through 2010, any homeowner who bought a home or refinanced a mortgage since January 1, 2007 is eligible to deduct mortgage insurance premiums paid each year.
Another possible tax benefit is available to first-time home buyers with incomes below the median income of their area. These individuals can take advantage of a mortgage interest credit that gives tax credit for part of the interest they pay each. This credit will, however, decrease the amount of interest a borrower can deduct from her taxes. There may be other tax benefits available to you based on your situation. Consult a tax professional for full details.
- What to expect in your first conversation with a mortgage professional?
- The loan approval process generally begins with an initial interview where you and the mortgage professional meet to discuss the potential loan. You will need to bring information to verify your income and long term debts.
You may prefer to speak with your mortgage company before house hunting to determine in advance how much you can afford and the mortgage amount for which you can qualify. This step is called pre-qualification and can save you time and trouble by making certain you are looking in the correct price range.
To complete the 1003 Mortgage Application you will need to gather the following:
- A purchase contract for the house (if you have one)
- Your bank account numbers and the address of your bank branch along with checking and savings account statements for the previous 2-3 months
- Pay stubs W2 withholding forms tax returns for two years or other proof of employment and income verification
- Credit card bills for the past few billing periods or canceled checks for rent or utility bill payments to show payment history and amount of revolving debt
- Information on other consumer debt such as car loans furniture loans student loans and retail credit cards
- Balance sheets and tax returns if you are self-employed
- Any gift letters if you are using a gift from a parent or relative or other organization to help pay the down payment and/or closing costs. This letter simply states that the money is in fact a gift and will not have to be repaid.
Having these items on hand when you visit the mortgage company will help speed up the application process. Usually an application fee and the appraisal fee will have to be paid when you submit the mortgage application. After the initial meeting with the mortgage company you should have a general idea if you qualify for the size and type of loan you want. After the mortgage application the mortgage company should let you know if you qualify for the loan within 24 hours.
- How much of a loan can I afford?
- There are two basic formulas commonly used to determine how much of a mortgage you can reasonably afford. These formulas are called qualifying ratios because they estimate the amount of money you should spend on mortgage payments in relation to your income and other expenses.
In general, to qualify for conventional loans housing expenses should not exceed 26% to 28% of your gross monthly income. For FHA loans, the ratio is 29% of gross monthly income. Monthly housing costs include the mortgage principal interest taxes and insurance often abbreviated PITI. For example if your annual income is $30,000 your gross monthly income is $2500 times 28% = $700. So you would probably qualify for a conventional home loan that requires monthly payments of $700.
Any expenses that extend 11 months or more into the future are termed long term debt such as a auto loans or student loans. Total monthly costs including PITI and all other long term debt should equal no greater than 33% to 36% of your gross monthly income for conventional loans. Using the same example$2500 x 36% = $900. The total of your monthly housing expenses plus any long term debts each month cannot exceed $900, or 36% for conventional loans and 41% for FHA loans.
Maximum Allowable Monthly Housing Expense
- Conventional : 26% – 28% of gross monthly income
- FHA: 29% of gross monthly income – FHA
Maximum Allowable Monthly Housing Expense and Long Term Debt
- Conventional: 33% – 36% of gross monthly income
- FHA: 41% of gross monthly income
- What are typical mortgage down payment amounts?
- In the past, traditional mortgage down payments have been 10 -25% of the total purchase price of the property. In recent years, with the growth of FHA loans and other specialty loan programs, down payments have been significantly less. Below are some general programs that have lower down payment requirements:
In the past, traditional mortgage down payments have been 10 -25% of the total purchase price of the property. In recent years, with the growth of FHA loans and other specialty loan programs, down payments have been significantly less. Below are some general programs that have lower down payment requirements:
- VA Loans: Veterans Administration loans are designed to help service people and veterans obtain financing at very reasonable rates. They do not require a down payment or mortgage insurance. These loans are backed by the federal government and are probably the very best loans available to those who qualify.
- FHA: The Federal Housing Administration (FHA) was created to help middle- to lower-income buyers secure home loans. The FHA doesn’t actually lend the money; instead, it insures the loan. The FHA requires only a 3.5% down payment. There are guidelines, and the buyer’s credit is important to meeting these requirements. If you are going to put down a lower amount, you will need to pay both an Upfront Mortgage Insurance Premium upon closing and an annual Mortgage Insurance Payment (MIP) each year.
- Fannie Mae and Freddie Mac: These federally chartered programs offer loans for as little as 3% down. They either own the loan or guarantee it. A buyer must meet specific criteria to qualify for these types of loans.
- Other Options: There are private lenders that have programs not requiring the full down payment, but these generally have much higher requirements and higher interest rates. Contact your mortgage professional to learn more about these programs.
- What should you consider in deciding on a down payment amount?
- In today’s mortgage world, there are several down payment considerations for first-time home buyers. In years past, buyers were required to put down 20% of the home price in order to get a loan. Those days have long past and there are now lots of down payment options for first-timers.
- The Gold Standard – 20%: Even though most lenders do not require a full 20% anymore, it is still an important number. If the homeowners should default and the bank has to sell the home, a 20% down payment will provide a profit buffer, allowing the bank to offer the property at a deep discount to sell it off quickly. Also, by putting down 20%, you can avoid paying costly Private Mortgage Insurance and obtain a more competitive mortgage rate on your loan.
- Private Mortgage Insurance: Private Mortgage Insurance (PMI) is an insurance policy that lenders require buyers to purchase if they put less than 20% down. This insurance covers the lender, not the homeowner, for up to 20% of the home price if the homeowner defaults and goes into foreclosure. Buyers are required to pay for this insurance until the loan-to-value ratio reaches almost 80%. While this can be a great alternative to saving up for a large down payment, PMI premiums can be costly, running between 0.5 – 1.0% of the loan amount per year.
- Piggyback Loans: There is an alternative to paying PMI. Some lenders will allow borrowers to take out two mortgage loans – one for 80% of the cost and a second mortgage for the remaining balance (20% minus the down payment). The downside is that the interest rate on the second loan will be much meaningfully higher than the first home loan.
- Down Payment Gifts: For those with generous friends or family, they can receive part or all of the down payment as a gift. Some loan programs will allow first-time buyers to use money from almost any source that does not benefit from the sale. This can certainly give borrowers a head start on their way to home ownership.
- What is an appraisal and what is it for?
- An appraisal of real estate is the valuation of the rights of ownership. The appraiser does not create value, instead, the appraiser interprets the market to arrive at a value estimate. As the appraiser compiles data pertinent to a report, consideration must be given to the site and amenities as well as the physical condition of the property. An appraiser may spend only a short time inspecting the property, however, this is only the beginning.
Considerable research and collection of general and specific data must be accomplished before the appraiser can arrive at a final opinion of value. Due to the many types of value, such as fair market value, insurance value, tax value and value in use, the need to precisely define the purpose of the appraisal is essential.
Appraisals are critical to the mortgage origination process because the appraised value of a home is the proxy for what the home could be sold for in today’s marketplace. Investors, who ultimately own the mortgages that your mortgage bank originates, do not want to loan an amount of money that is in greater than the appraised value. If the investor were to loan to a borrower more than the home was worth, the investor could lose money if the borrower were to default as the investor would not be able to sell the home for as much as the outstanding loan value. The appraisal helps the investor determine the fair market value of the home, which is used in calculating the Loan-to-Value ratio.
Because appraisals are an art and not a science, it is important that your loan originator and lender take a close look at each appraisal to ensure that the data is properly collected and interpreted in arriving at a final appraised value for your home.
- What to know regarding FHA Loans for First Time Homebuyers?
- FHA (Federal Housing Administration) loans are popular with first-time home buyers. After the subprime meltdown, it has been more difficult for first-time home buyers to qualify for a mortgage. FHA loans are still easier to get and have some advantages over conventional mortgages. As long as you don’t already have a mortgage with the FHA and you meet the following requirements, you can expect a loan approval.
- Credit: The FHA is lenient on credit issues and is understanding of personal situations. Some blemishes will be excused with an explanation. If you had a previous bankruptcy, you can get an FHA loan two years after the discharge date. Also, if you had late payments all in a distinct time frame and had a good payment history following that, they will overlook those imperfections. Collections are not a problem. If, however, you have had any federal liens, like tax liens or defaults on student loans, then you will not be eligible for an FHA loan. Your credit score can be as low as 580, depending on the other characteristics of your financial history.
- Down Payment: The best advantage of an FHA loan over conventional loans is the low cash needed at closing. Most first-time home buyers do not have the funds available to put 20% down plus pay closing costs. The FHA requires only 3.0% of the loan value to be paid at closing. Some of these funds can come from a gift from a family member also. They will allow for 6% in seller concessions, meaning the seller can pay up to 6% of the closing costs.
- Rates: FHA loans have very competitive rates. This will equate to a lower payment every month. By having a lower interest rate, you will pay much less over the life of the loan. The FHA often offers lower rates than a traditional 30-year fixed loan because the loans are insured by the Federal Housing Administration.
- Application Ease: The FHA is fairly lenient about whom they will lend to. As long as you meet the credit requirements, have the 3.5% down payment and have steady employment, you will likely be approved. It can be an easier application process than a conventional loan.
- Debt to Income: The FHA allows a high debt-to-income ratio. If you have a car loan, student loans and credit cards, you can still qualify. Perhaps you are getting a raise later in the year but want to buy now. Or maybe your car will be paid off in six months. As long as you feel you can afford the payment, the FHA will allow a 50 percent debt-to-income ratio. This is determined by adding up all of your debt, including your proposed new mortgage payment, and dividing it by your monthly income to receive a percentage.