Many people have questions about how to purchase a home, loan process, and what type of down payment assistance programs available. You’ll find answers to some of the most common questions asked below.
Getting Started
Q. How Does Purchasing a Home Compare With Renting?
A. The two don’t really compare at all. The one advantage of renting is being generally free of most maintenance responsibilities. But by renting, you lose the chance to build equity, take free to decorate without permission and may be at the mercy of the landlord for housing.
Owning a home has many benefits. When you make a mortgage payment, you are building equity. And that’s an investment. Owning a home also qualifies you for tax breaks that assist you in dealing with your new financial responsibilities- like insurance, real estate taxes, and upkeep- which can be substantial. But given freedom, stability, and security or owning your own home, they are worth it.
Q. How Do I Know I’m Ready To Buy a Home?
A. You can find out by asking yourself some questions
- Do I have a steady source of income (usually a job)?
- Have I been employed on a regular basis for the last 2-3 years?
- Is my current income reliable?
- Do I have a good record of paying my bills?
- Do I have a few outstanding log-term debts, like car payments?
- Do I have money saved for a down payment?
- Do I have the ability to pay a mortgage every month, plus additional costs?
*If you can answer “yes” to these questions, you are probably ready to buy your own home.
Q. How Can I Determine My Housing Needs Before I Begin The House Search?
A. Your home should fit the way you live, with spaces and features that appeal to the whole family. Before you begin looking at homes, make a list of your priorities ‐ Here are a few examples below:
- Locate and size.
- Should the house be close to certain schools? your job? to public transportation?
- How large should the house be?
- What type of lot do you prefer
- What type of amenities are you looking for?
Establish a minimum requirements and a wish list. “ Minimum requirements are things that a house must have for you to consider it, while a “wish list” covers things that you’d like to have but aren’t essential
Q. Is a Older Home a Better Value Than a New One?
A. There isn’t a definitive answer to this question. You should look at each home for its individual characteristics. Generally, older homes may be in more established neighborhoods, offer more ambiance, and have lower property tax rates. People who buy older homes, however, shouldn’t mind maintaining their home and making some repairs. Newer homes tend to use more modern architecture and systems, are usually easier to maintain, and may be more
energy-efficient. People who buy new homes often don’t want to worry initially about upkeep and repairs.
Q. What is earnest money? How much should 1 set aside?
A.Earnest money is money put down to demonstrate your seriousness about buying a home. It must be substantial enough to demonstrate good faith and is usually between 1-5% of the
purchase price (though the amount can vary with local customs and conditions). If your offer is accepted, the earnest money becomes part of your down payment or closing costs. If the offer is rejected, your money is returned to you. If you back out of a deal, you may forfeit the entire amount.
Credit
Q. What Is a Credit Report?
A. A credit report is a detailed record of how you’ve paid your bills and managed your credit over time. Lenders use the information in your credit report to help them decide whether to grant you credit and, if so, how much and what interest rate to charge you.
Q. Does a credit score determine whether or not I get credit?
A. No, each lender makes that decision based on its own underwriting policies, which may include information such as the amount of debt a person can reasonably handle given their income, employment history and credit history.
Q. How Do I Get My Credit Report?
A. By law, you can receive a free copy of your report from each of the three credit reporting companies once every 12 months. Request your report online (annualcreditreport.com) or by calling 877-322-8228. Be sure to check your credit reports regularly to catch any data errors that could be damaging.
You can buy additional copies contacting the companies directly:
Equifax: (800) 685-1111, www.equifax.com
Experian: (888) 397-3742, www.experian.com
TransUnion: (800) 888-4213, www.transunion.com
Q.What factors affect my credit score?
A. Major purchases that require financing, like a home, are dependent upon you having good credit.
Your credit score is composed of:*
- Payment history – 35 percent of your credit score depends on paying your bills on time.
- Amount on credit balance – 30 percent is based on how much debt you have that is outstanding.
- A good rule is to keep your balances at 30 percent or less of their limits.
- Length of credit history – 15 percent is based on the length of your credit history.
- New credit – 10 percent is based on how many inquiries you have had on your credit report.
- Numerous inquiries into your credit can affect your score negatively.
- Types of credit used – 10 percent is based on the type of credit you receive.
Q. What if I find a mistake in my credit history?
A. Simple mistakes are easily corrected by writing to the reporting company, pointing out the error, and providing proof of the mistake. You can also request to have your own comments added to
explain problems. For example, if you made a payment late due to illness, explain that for the record. Lenders are usually understanding about legitimate problems.
Q. How Can I Improve My Score?
A. There are no easy ways to improve your credit score, but you can work to keep it acceptable by maintaining a good credit history. This means paying your bills on time and not overextending yourself by buying more than you can afford.
General Loan Process
Q. How Does The Lender Decide The Maximum Loan Amount That I Can Afford?
The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term
debts as car or student loan payments, alimony, or child support. According to the FHA, monthly mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, should total no more than 41% of income. The lender also considers cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.
Q. How Are Pre-qualifying and Pre-approval Different?
Pre-qualification is an informal way to see how much you may be able to borrow, You can be “pre-qualified” over the phone with no paperwork by telling a lender your income, your long term debts, and how large a down payment you can afford. Without any obligation, this helps you arrive at a ballpark figure of the amount you may have available to spend on a house.
Pre-approval is a lender’s actual commitment to tend to you. It involves assembling the financial records and going through a preliminary approval process. Pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying.
Q. Are There Special Mortgages For First-Time Home-buyers?
A. Yes, Lenders now offer several affordable mortgage options which can help first-time home-buyers overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don’t have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.
Q. What Is a Mortgage?
A. Generally speaking, a mortgage is a loan obtained to purchase real estate. The “mortgage” itself is a lien (a legal claim) on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.
Q. How Do I Determine What Price Home I Can Qualify For?
A. How much home you can afford depends on how much you earn and how much you owe, as well as you savings and the type of loan you choose? Consider your debt-to-income- ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non‐housing expenses include such long‐term debts as car or student loan payments, alimony, or child support. I also consider cash available for down payment and closing cost, credit history, etc. when determining your maximum loan amount.
Q. What Is a Loan To Value (LTV)?
A. The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: With a 95% LTV loan on a home priced at $250,000 you could borrow up to $237,500 (95% of $250,000), and you would have to pay $12,500 as a down payment.
The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV the less cash homebuyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, higher LTV (80% or more) usually require mortgage insurance (MI/PMI) policy.
Q. What is mortgage insurance (MI) or private mortgage insurance (PMI)?
A. MI is a policy that protects lenders against some or most of the losses that result from defaults on home mortgages. It is paid by the borrower and allows lenders to grant loans that they otherwise would not consider. It’s required primarily for borrowers with a down payment of less than 20%.
Q. What Is PMI?
A. PMI stands for Private Mortgage Insurance or Insurer. These are privately‐owned companies that provide mortgage insurance. They offer both standard and special affordable programs for borrowers. These companies provide guidelines to lenders that detail the types of loans they will insure. Lenders use these guidelines to determine borrower eligibility. PMI’s usually have stricter qualifying ratios and larger down payment requirement than the FHA, but their premiums are often lower.
Q. WHAT ARE “CLOSING COST”?
A. Closing costs are the fees paid at the time meeting that completes your transaction, also known as the “closing”. Closing cost often include: origination fees; discount points; attorney’s fee; costs for title insurance, survey and recording documents; prepayments of real estate taxes and insurance premiums; appraisal fee; credit report cost and underwriting fees. Sometimes the seller will help the borrower pay some of these costs. For an estimate on fees and closing cost for your mortgage loan, get an official Loan Estimate before closing a loan.
Q. WHEN SHOULD I REFINANCE?
A. When you own your home, you may have the opportunity to manage this important asset by refinancing your current mortgage. Perhaps you need extra money for college mortgage or a major purchase, or perhaps you are considering an addition or remodeling. Refinancing may be best choice for obtaining the lowest interest rate. You may not need to pay any out of pocket cash in the process. In addition, when rates are favorable, you may be able to lower your monthly mortgage payment or shorten your loan term. Speak with a Mortgage Loan professional to determine if you would benefit.