For many, just the idea of buying a new home can be menacing and intimidating. Don't let these feelings deter you from your dream of owning your first home. First time buyers actually have an array of options when it comes to making their dream of home ownership a reality. The first step is talking with a lender. Before the actual buying process begins, the lender will go over some important factors with you.
First Things First. We all know that specific locations, neighborhoods, and houses themselves greatly vary in price range. You need to know how much you can afford and secure a loan for, so that you don't waste time searching for the impossible. This is one of the first things your lender will discuss with you in your initial phone call or meeting. At this time, the lender will provide you with an estimate on how much money you're eligible to borrow. This will give you a good price range to stay within, but do keep in mind that the pre-qualified number you're given isn't a guaranteed amount and is still very much reliant on the lender verifying your financial information. Once the lender verifies information such as your employment history, income to debt ratio, credit history, and so forth, you will receive a firm maximum loan amount. This process is formally called a pre-approval.
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Qualifying. Qualifying for a mortgage isn't as simple as having a good paycheck.
The lender will look at your income to debt ratio, meaning they compare your wages to what you already and expect to owe in debt. Although the specific ratio used will vary by lender, 28:36 is a commonly used qualifying ratio. The number in front is called the front-end ratio. It's obtained by dividing your anticipated PITI housing expenses, which includes Principle, Interest, Taxes, and Insurance on the home, by your gross monthly wages. The back number is called the back-end ratio. It's obtained by dividing your entire monthly debt, including the anticipated PITI expenses, by your gross monthly wages.
The lender will also look at your stability by examining your credit and employment history. One important point about using a joint income from you and your spouse to qualify for a mortgage is that your qualifying ratio will change drastically if one income is lost due to a layoff or termination before the loan closes.
Your amount of existing debt and your credit score is examined carefully. How fiscally responsible you've been with your past debts can either put you on the fast track to approval or result in you having a higher interest rate or being denied. How long you've had a credit history, how many loans and sources of credit you've had, your credit limit, whether you've paid your debts on time, current level and types of outstanding debt, and how many inquiries you've had into your credit are some of the main areas that your credit score reflects.
Where's Your Down Payment? There was once a time when basically it was mandatory for a buyer to come up with a 20% down payment to buy a home. In today's market, this isn't necessarily the case. Experts will still tell you that you'll be better off with the more money you can put down. Indeed, larger down payments typically mean lower interest rates and an easier qualifying process. It also helps to avoid the cost of Private Mortgage Insurance (PMI) being added to your mortgage payments, as most lenders will typically require you to carry PMI if you don't put down 20%. However, not having the funding available to make a large down payment isn't a deal breaker any longer. Some loan programs don't require any down payment. Many others only require around 3%.
Those Pesky Closing Costs. You should receive a good faith estimate on the closing costs from the lender long before it's time to close. There are two groups of closing costs. The first group consists of state, county, and city transfer taxes and prepaid taxes and recording fees that are paid to the local and state government. The second group consists of the loan origination fees, appraisals, credit checks, surveys, legal fees, and such that are associated with the cost of the mortgage. In total, the closing costs typically will cost around 2% to 6% of the loan amount. Although the seller will occasionally agree to pay some or all of these, all buyers should be prepared to pay the majority of the closing costs.