If you’re like most buyers, a home is the most expensive purchase you’ll ever make, and you’ll probably need some form of financing. Before you start viewing homes or attending Open Houses, you need to know the answer to a key question, “How much home can I afford?” Doing the math and seeing how your mortgage payment affects your cash will help you immensely.
In order to qualify for a mortgage to buy a home, you’ll need good credit, a pattern of paying your bills on time, and a maximum debt-to-income ratio of 45% or less (gross monthly income compared to the minimum payments on all recurring debts including your new house payment). Some lenders have stricter guidelines, so the lower your debt-to-income ratio, the better are your chances of a loan approval.
What Can You Afford to Buy?
Housing prices and rents vary from one location to another. In some markets, buying a home can cost the same or even less than renting. The ideal home buying budget will include more than the price of a property. You’ll also need to consider how much cash you have available for a down payment and closing costs, as well as the cost for an appraisal, and a home inspection.
After the close, a home can present its owner with an unexpected repair bill – and if it’s for a high-dollar item like an air conditioning or a plumbing system, you’ll want to be prepared. Purchasing a home warranty is insurance money well spent and can often be acquired through the contract purchase negotiation as a seller paid expense. Other new obligations, such as property taxes and homeowner’s insurance, need to be part of your budget as well.
Once you’ve thought through the emotional and financial aspects of becoming a homeowner, your next steps should be to find a reputable REALTOR® to become your partner in the home-buying process and to meet with a reputable lender who can discuss your options for financing your purchase. There are many lending institutions that offer a variety of mortgage products. Financing options and rates can vary widely, so it is important to do your research and shop around to ensure you get the mortgage that best meets your needs at the best price. I would be happy to refer you to some excellent mortgage professionals. Call me at 541-778-1114.
Loan Pre-qualification – A Good Start
The loan pre-qualification process generally begins with an informal chat so your Loan Consultant can get a good picture of your current finances. They can do this all by phone if you’re too busy to come by in person. Either way, you’ll discuss your income, any long-term debts such as student loan repayments, and your credit history with your Loan Consultant.
After your Loan Consultant reviews your stated income, debts, and credit score, you’ll be presented with a ballpark figure of an affordable home buying budget. This approximation of the amount of loan funds the lender may provide is called a pre-qualification. It will help you shop smart. You’ll know ahead of time what you can afford, so you can concentrate on finding homes that are within your price range. When calculating your housing expense, bear in mind the difference between what you can qualify for and what your comfortable paying for.
Pre-Approval – A Great Finish!
While a loan pre-qualification can prove you’re a serious buyer, having a preapproval letter from a qualified lender is an essential component when submitting an offer for the house you want to buy. As there are often many buyers competing with you for the same house, having your loan process completed up front will assure you have the best chance of prevailing in your offer.
To pre-approve you for a loan, your Loan Consultant will help you complete a loan application. Additionally, you’ll need to supply documents that verify your income, employment, credit score, financial assets, and the source of funds for any necessary down payment.
Mortgage Loan Programs
There are loan programs available with little to no down payments.
A conventional mortgage is a home loan that isn’t guaranteed or insured by the federal government. Conventional mortgages that conform to the requirements set forth by Fannie Mae and Freddie Mac typically require down payments of at least 3%. Borrowers who put at least 20% down do not have to pay mortgage insurance premiums, which are typically required with FHA loans. Typically, the loan period length is either for a 15 or 30-year fixed term though can be more or less, and also be secured for shorter terms as an adjustable rate.
Fixed or Adjustable Rates
The fixed-rate mortgage is the most popular mortgage program in use today. A fixed-rate loan offers the borrower a fixed interest rate for the life of the loan. Borrowers have peace of mind knowing that their monthly principal and interest payments will not change over time. Conventional fixed-rate mortgages require certain down-payment and debt-to-income ratios to qualify. Fixed-rate loans are especially attractive to buyers who plan to stay in their home for more than a few years.
With an Adjustable Rate Mortgage (ARM), the interest rate changes periodically, and payments go up or down accordingly. Rates are tied to an index that reflects the cost of money at any given point in time. Generally speaking, lenders charge a lower initial interest rate for the ARM than for the fixed rate mortgage. If you are expecting interest rates to decrease in the future, or if you are trying to maximize your purchase power today knowing your income will rise in the future, then this loan may be right for you. Adjustable rate loans are attractive for buyers who expect to be in the home for a shorter period of time.
A HomeStyle Renovation Mortgage can help you finance one or more major renovation projects. It provides plenty of funds for repairs and/or remodeling. HomeStyle is available for new and existing homes – even new construction!
Features and Benefits
- Renovation funding equal to up to 50% of your property’s post-renovation value
- Lower closing costs, since you’re closing a single transaction
- Qualifying credit scores beginning at 620
- A variety of property types, including 2-4 unit properties and modular homes
- Fixed- and Adjustable-rate mortgage options
Jumbo loans are just that – larger amounts of funds for luxury properties and homes in high-cost areas. Generally, any loan that is over the high–cost loan limits set by the Federal Housing Finance Agency (FHFA) is a Jumbo loan.
Features and Benefits
- Loan funds to $2.5 million may be available.
- Low down payments beginning at 5%.
- Loans with fixed and adjustable rates (ARMs) are available.
- A variety of loan terms are available – you’re not limited to 15- and 30-year terms.
- Allowed property types include single-family residences, warrantable condominiums, properties in Planned Unit Developments (PUDs), co-operative units in the five boroughs of New York City
Government Loan Programs
A FHA loan is a type of home loan that is insured by the Federal Housing Association of the U.S. Department of Housing and Urban Development. FHA loans have lower down payment requirements (typically a minimum of 3.5% of the purchase price) than many other loan types.
Qualifying gifts can be used to cover the down payment, as well as closing costs and prepaid expenses. There are no income restrictions on a FHA loan and even those borrowers with lower credit scores may be considered. As is typical with most loans that do not require a minimum 20% down payment, mortgage insurance is required a FHA loan. Home types can include site-built, as well as modular and manufactured homes. Maximum loan amounts vary by state and county.
Features and Benefits
- You may qualify to buy with a low, 3.5% down payment.
- Credit scores from 580 are allowed for fixed-rate loans.
- Both fixed-rate and adjustable-rate mortgages (ARMs) are offered.
- You may finance a single-family home, 2-4 unit property, modular home, condominium or a Planned Unit Development (PUD) property.
- Temporary buy-downs may reduce your initial interest rate for 1-2 years.
VA Loans – Fixed-Rate and ARMs, High-Balance
A VA loan is a guaranteed mortgage loan supported by the U.S. Department of Veterans Affairs that allows veterans to obtain home loans without a down payment. To take advantage of this program, borrowers need to be among those listed as veterans and service personnel in the U.S. military.
Only primary residences qualify for this loan type with homebuyers certifying their intent to occupy the home within 60 days of closing. One of the biggest benefits of this program is that it eliminates the need for private mortgage insurance. Funding fees can be financed into a VA loan and the VA limits the amount that a veteran can be charged for closing costs.
Features and Benefits
- 0% Down Payment
- A minimum credit of 580 is required for fixed-rate financing.
- Borrowers with credit scores from 580 to 619 are subject to stricter guidelines*.
- Adjustable-rate mortgages (ARMs) require a minimum 620 credit score.
- High-balance loan amounts equal to the statutory loan limit for the area or $1 million (whichever is less) may be available.
- Allowed property types include single-family residences, 2-4 unit properties, VA-approved condominiums, manufactured homes, properties in Planned Unit Developments (PUDs)
- Financing for primary residences, second homes and investment properties may be available.
* Borrowers with credit scores from 580 to 619 may only qualify for purchase transactions of one-unit single family residences. Gift funds and down payment assistance is not allowed.
A USDA loan (also called a Rural Development Loan) is a government insured home loan that allows you to purchase a home with NO money down. USDA home loans offer 100%, fixed rate financing to qualified buyers and provide some of the lowest rates of any loan type. Because USDA loans are specifically created for lower to middle income households, there are specific income restrictions in place. This loan category only applies to certain USDA approved areas and is not limited to first-time buyers.
Features and Benefits
- Available for Purchase or Refinances*
- Available for Eligible Homebuyers
- Zero Down Payment
- Competitive Fixed Rates
- No Cash Reserves Required
- Guarantee Fee can be financed
- Closing Costs can be paid by Seller
*USDA Guaranteed Rural Housing loans subject to program stipulations and applicable state income and property limits.
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