Catherine Wilson's Blog
There are so many factors that go into finding and securing the financing to buy a home. While lenders require quite a bit of information for you to get a loan, you still need to be aware of your own financial picture. Even if you’re pre-approved for a certain amount of money to buy a home, you still need to dig into your finances a bit deeper than a lender would. The bottom line is that you can't rely solely on a lender to tell you how much you can afford for a monthly payment on a home. Even if you’re approved to borrow the maximum amount of money for your finances to buy a home, it doesn’t mean that you actually should use that amount. There are so many other real world things that you need to consider outside of the basic numbers that are plugged into a mortgage formula.
Run Your Own Numbers
It’s important to sit down and do your own budget when you’re getting ready to buy a home. You have plenty of monthly expenses including student loan debt, car payments, utility bills, and more. Don’t forget that you need to eat too! Think about what your lifestyle is like. How much do you spend on food? Do you go out to the movies often or spend a regular amount of cash on clothing? Even if you plan to make adjustments to these habits when buying a home, you’ll want to think honestly about all of your needs and spending habits before signing on to buy a home.
Now, you’ll know what your true monthly costs are. Be sure to include things like home insurance, property taxes, monthly utilities, and any other personal monthly expenses in this budget. If you plan to put down a lower amount on the home, you’ll also need to include additional insurance costs like private mortgage insurance (PMI).
The magic number that you should remember when it comes to housing costs is 30%. This is the percentage of your monthly income that you should plan to spend on housing. Realistically, this could make your budget tight so this is often thought of as a maximum percentage. By law, a lender can’t approve a mortgage that would take up more than 35% of your monthly income. Some lenders have even stricter requirements such as not allowing a borrower to have a mortgage that would be more than 28% of monthly income. This is where the debt-to-income ratio comes into play.
As you can see, it’s important to take an earnest look at your finances to avoid larger money issues when you buy a home.
Getting a mortgage is one of those things that everyone seems to have quite a bit of advice about. While people surely have good intentions, it’s not always best to take the buying advice of everyone you meet. Below, you’ll find the wrong kind of mortgage advice and why you should think twice about it.
Pre-Approvals Are Pointless
Getting pre-approved for a mortgage can give you an upper hand when it comes to putting in offers on a home. Even though a pre-approval isn’t a guarantee, it’s a good step. It shows that you’re a serious buyer and locks you in with a lender so they can process your paperwork a bit more quickly when you do want to put an offer in on a home.
Use Your Own Bank
While your own bank may be a good place to start when it comes to buying a home, you don’t need to get your mortgage from the place where you already have an account. You need to compare rates at different banks to make sure you’re getting the best possible deal on a mortgage. You’ll also want to check on the mortgage requirements for each bank. Different banks have different standards based on down payment, credit scores and more. You’ll want to get your mortgage from the bank that’s right for you and your own situation.
The Lowest Interest Rate Is Best
While this could be true, it’s not set in stone. A bank with a slightly higher interest rate could offer you some benefits that you otherwise might not have. If you have a lower credit score, or less downpayment money, a bank offering a higher interest rate could be a better option for you. Low interest rates can have some fine print that might end up costing you a lot more in the long term. Do your research before you sign on with any kind of bank for your mortgage.
Borrow The Maximum
Just because you’re approved for a certain amount of mortgage doesn’t mean that you need to max out your budget. It’s always best to have a bit of a financial cushion for yourself to keep your budget from being extremely tight. When life throws you a curveball like unexpected medical bills or a job loss, you’ll be glad that you didn’t strain your budget to the end of your means. Even though the bigger, nicer house always looks more attractive, you’re better off financially if you’re sensible about the amount of money you borrow to buy a home.
If you’re in the market to buy a home, you’re probably learning many new vocabulary words. Pre-approved and pre-qualified are some buzz words that you’ll need to know. There’s a big difference in the two and how each can help you in the home buying process, so you’ll want to educate yourself. With the proper preparation and knowledge, the home buying process will be much easier for you.
This is actually the initial step that you should take in the home buying process. Being pre-qualified allows your lender to get some key information from you. Make no mistake that getting pre-qualified is not the same thing as getting pre-approved.
The qualification process allows you to understand how much house you’ll be able to afford. Your lender will look at your income, assets, and general financial picture. There’s not a whole lot of information that your lender actually needs to get you pre-qualified. Many buyers make the mistake of interchanging the words qualified and approval. They think that once they have been pre-qualified, they have been approved for a certain amount as well. Since the pre-qualification process isn’t as in-depth, you could be “qualified” to buy a home that you actually can’t afford once you dig a bit deeper into your financial situation.
Getting pre-approved requires a bit more work on your part. You’ll need to provide your lender with a host of information including income statements, bank account statements, assets, and more. Your lender will take a look at your credit history and credit score. All of these numbers will go into a formula and help your lender determine a safe amount of money that you’ll be able to borrow for a house. Things like your credit score and credit history will have an impact on the type of interest rate that you’ll get for the home. The better your credit score, the better the interest rate will be that you’re offered. Being pre-approved will also be a big help to you when you decide to put an offer in on a home since you’ll be seen as a buyer who is serious and dependable.
Things To Think About
Although getting pre-qualified is fairly simple, it’s a good step to take to understand your finances and the home buying process. Don’t take the pre-qualification numbers as set in stone, just simply use them as a guide.
Do some investigating on your own before you reach the pre-approval stage. Look at your income, debts, and expenses. See if there is anything that can be paid down before you take the leap to the next step. Check your credit report and be sure that there aren’t any errors on the report that need to be remedied. Finally, look at your credit score and see if there’s anything that you can do better such as make more consistent on-time payments or pay down debt for a more desirable debt-to-income ratio.
Securing a mortgage can take years of planning and saving. Depending on credit score and financial history, it can be difficult for some people to secure a mortgage with a reasonable interest rate and down payment.
As a result, the U.S. government--at both the federal and state level--has created several programs to make the goal of homeownership more achievable for more Americans.
These programs are designed to help a number of people, including first-time homebuyers, low-income families, people living in rural areas, Native Americans, and veterans and servicemembers of the United States military.
In today’s article, we’re going to be talking about “VA loans,” or loans guaranteed by the United States Department f Veterans Affairs.
What is a VA Loan?
When a bank chooses to approve someone for a mortgage, they have weighed the risks of that person’s ability to pay back the loan. The less certain a bank is that they will see a return on their investment with a borrower, the higher the down payment and interest rate they will require.
One incentive that the U.S. Department of Veteran Affairs offers its service members and veterans is the ability to receive a loan that is, in part, guaranteed by U.S. Government. That means that lenders can safely approve you for lower interest rates and down payments knowing that the money they are lending you is insured.
Who is eligible for a loan?
Loans guaranteed by Veterans Affairs aren’t strictly for veterans. Active duty service members, including National Guard and Reserve Members may also be eligible. In addition to service members, people who are or were spouses of veterans or service members might also be eligible for a VA loan.
Specific eligibility requirements can be somewhat complicated, so it’s a good idea to visit the eligibility page or contact your local Veterans Affairs office.
What are the perks of a VA Loan?
If you’ve spent a significant portion of your time serving in the military, there’s a good chance that saving for a home has been placed on the back burner. Shopping around for a loan with an affordable down payment can be daunting or impossible for many.
Fortunately, with a VA loan eligible recipients are able to receive a loan with a low down payment or even no down payment.
In a time when down payments can average 20% of the mortgage, that can mean a lot of money you won’t have to spend up from. For example, a home that costs $275,000 would have a 20% down payment of $55,000.
What are the fees?
This great deal does come with one catch. As with many loan assistance programs, there is a fee charged for the services. On top of the funding fee charged by the VA, there are other costs associated with buying a home.
These may include appraisals, inspections, credit reports, and more. Additionally, lenders may charge a 1% flat fee for those using a VA loan.
Ready to buy a home? You'll likely need a mortgage to ensure you can afford your dream residence. Lucky for you, many banks and credit unions are happy to help you discover a mortgage that suits you perfectly.
Ultimately, meeting with a mortgage lender may seem stressful at first. But this meeting can serve as a valuable learning opportunity, one that allows you to select a mortgage that is easy to understand and matches your budget.
When you meet with a mortgage lender, here are three of the questions to ask so you can gain the insights you need to make an informed decision:
1. What mortgage options are available?
Most lenders offer a broad range of mortgage options. By doing so, these lenders can help you choose a mortgage that meets or exceeds your expectations.
Fixed-rate mortgages represent some of the most popular options for homebuyers, and perhaps it is easy to understand why. These mortgages lock-in an interest rate for a set period of time and ensure your mortgage payments will stay the same throughout the duration of your mortgage.
Meanwhile, adjustable-rate mortgages may prove to be great choices for many homebuyers as well. These mortgages may feature a lower initial interest rate that rises after several years. However, with an adjustable-rate mortgage, you'll know when your mortgage's interest rate will increase and can plan accordingly.
2. Do I need to get pre-approved for a mortgage?
Pre-approval for a mortgage usually is an excellent idea, and for good reason.
If you get pre-approved for a mortgage, you may be able to enter the homebuying market with a budget in mind. That way, you can pursue houses that fall within a set price range and avoid the risk of overspending on a home.
On the other hand, you don't need to be pre-approved for a mortgage to submit an offer on a home. But with a mortgage in hand, you may be able to gain an advantage over the competition, one that might even lead a home seller to select your offer over others.
3. How long will a mortgage last?
Many mortgages last 15- or 30-years – it all depends on the type of mortgage that you select.
A lender can explain the length associated with various mortgage options and highlight the pros and cons associated with these mortgages.
Moreover, you should ask a lender if there are any prepayment penalties if you pay off your mortgage early. This may help you determine whether a particular mortgage is right for you.
When it comes to finding a lender, don't forget to meet with several banks and credit unions. This will allow you to discover a lender that offers a mortgage with a low interest rate. Plus, it enables you to find a lender that makes you feel comfortable.
If you need assistance in your search for the right lender, be sure to reach out to a real estate agent. This housing market professional can provide details about local lenders and ensure you can accelerate your push to acquire your dream residence.