The Simple Dollar Home Loans Guide
First-time homeownership currently makes up 33% of all home buying transactions in the U.S. Putting homeownership at your fingertips means finding a good home loan lender and an agreeable mortgage, but it doesn’t stop there. You can negotiate the price of the home in most cases and lower your interest rate and mortgage payment as well. A good credit score will help you snag one of the best mortgage rates and improves your chances of qualifying for the best home loans, although there is some leeway on this.
During the home buying process, you’ll be completing paperwork with lenders, real estate agents and other vested parties, so it can be easy to miss red flags or potential money saving opportunities. It’s important to learn everything you can about the home buying process so you can be prepared and avoid making costly mistakes.
A step-by-step guide to home buying
Buying a new home doesn’t need to feel like a walk in a labyrinth. To ease the process, it’s important that you educate yourself on the most important steps in home buying.
How much home can you afford?
Home affordability is a matter of your debt versus your income. The ideal home should cost about twice your annual salary, with some room for give or take. Make sure you consider any other debt that you may have in that equation, because total debt, including your intended mortgage, should not exceed 36% of your gross annual income.
Compare home loan lenders
According to the Consumer Financial Protection Bureau, nearly half of all home buyers fail to shop around for the best mortgage lenders, yet we scour the stores and web for things like laptops, cell phones and cars to save money. Doing the same for a major purchase like a house is smart money management. As always, though, it’s buyer beware: the rates you’ll see online are only estimates. The rate you’ll actually get will depend on your particular credit score and other individual factors.
Make sure you don’t just jump at the lowest rate; you also need to consider the length of the loan, any special terms, how much you’ll end up paying over the long term, the reputation of the company and important information.
Negotiate your mortgage rate
You can negotiate your mortgage rate but it involves shopping around. If you can afford it, a larger down payment can also help earn you a lower interest rate. Shopping around can also help you land a better interest rate, but remember, not all lenders are the same. Even a 0.5% difference in your mortgage rate can equal considerable savings over the loan term, but it’s not always about the mortgage payment. Sometimes other complications arise.
Before purchasing furniture to fit the home and scheduling movers, the buyer should be aware that issues can arise during home inspections and appraisal that may kill the transaction before reaching the closing table,” Michael Drake, President of PMG Home Loans, said. “It is also possible that issues can arise in loan processing that may cause delays or even declined loans.”
Assess your credit score
For most home loans, a solid credit score is a must, but this can vary based on the home loan you qualify for. An FHA loan requires a minimum score of 580 with 3.5% down. USDA loans, which are for rural home buyers, require a credit score of 620, but no down payment is required. With Quicken Loans’ conventional home loans, buyers are required to have a score of 620 with 3% down.
Joseph P. McClelland, a consumer protection attorney at Jackson Law, specializes in credit reporting issues and suggests that you “pull your credit report [when] applying for a loan. You can use a free online service or use the Annual Credit Report” website to obtain it.
“Should you find any issues or discrepancies, you should dispute them,” McClelland said, because they can negatively impact your score as well as your ability to qualify for a better mortgage rate.
Avoid red flags
There are lots of potential issues to look out for when buying a home, so you should always have a contingency plan. For example, if a home inspection reveals a necessary repair — perhaps a roof leak or faulty wiring — be sure to establish a contingency for the repairs before you sign the final papers. A real estate attorney can help with this, and they are often more affordable than you might think.
There are also financing contingencies you should put in place in case your loan falls through, along with appraisal contingencies in case the lender’s appraiser deems the home’s value to be less than the asking price, which will impact your loan and down payment.
When closing on your home, there are a few documents that you need, according to Realtor.com. Proof of homeowner’s insurance, a copy of your contract with the seller, your home inspection report, loan approval paperwork and a government ID.
The first and last names on your identification must match the names that will be on the title and mortgage with no exceptions, so if you’re recently married, be sure to update this before starting any paperwork.
Costs of closing on a home
There are many costs associated with closing on a home such as a down payment, commission, attorney’s fees, inspection fees and title search. You can negotiate some of these fees, but others may be mandated by state law. Of the fees that can be negotiated, bear in mind that negotiations can also increase the overall purchase price.
In addition to costs directly associated with your home, there are other hidden costs to homeownership you should consider, like moving, replacements or repairs, property maintenance, wages lost while you relocate, restocking your pantry or fridge, or buying any additional items to personalize your new home. It’s also a good idea to set aside a few months worth of mortgage payments and homeowner’s insurance payments to get you started. Having money available in reserves can help ease you into your new role as a homeowner.
Fixed-rate mortgages are generally what they sound like: the mortgage rates remain fixed for the duration of your loan term, regardless of whether you have a 15-year or a 30-year home loan. This creates predictable mortgage payments each month. However, if interest rates dip, it also means that you’re locked into a higher rate unless you choose to refinance.
Adjustable-rate mortgages are best for homeowners who plan to keep their house for a short while as opposed to long term. ARMs start off with lower payments at “teaser” rates for a set period and adjust periodically according to changing mortgage rates. This can leave you with a higher, less affordable mortgage payment later should mortgage rates increase, but can also help you save money on interest if you plan on selling before the low fixed period is over.
Regardless of which type of mortgage you opt for, maximize your money to get the most bang for your buck.
Ashley Oshinsky, realtor and owner of Higher Living Real Estate, said that many states have programs for first time home buyers that offer down payment assistance.
“These are usually loans but are a huge help. Only some institutions do these loans. They’re definitely worth checking out,” Oshinsky said.
Paying down other debt and boosting your credit score can also help you get a better mortgage rate.
“The lower your credit score, the more likely you may benefit from shopping around for a mortgage,” McClelland said.
The higher your credit score and the better your overall debt-to-income ratio, the more likely you are to get a better rate. Another option is to make a larger down payment if you have the funds to do it. Doing so decreases the amount that you must borrow from the lender as well as the interest you will pay.
Online lenders vs. traditional lenders
Today’s mortgage lenders offer more flexibility than ever before. Although conventional financial institutions are still a great choice for your mortgage are online lending companies like Sofli, Better, Reali and Quicken Loans.
Whether you should choose an online lender over conventional lending options will depend on many factors, including your comfort level, your preference for more anonymity and faster lending decisions. If you work long or odd hours that conflict with the hours of conventional institutions, then an online lender may offer a better solution to meet your needs without impacting your schedule.
However, many people still prefer face-to-face interactions, and the ability to go to a physical location offers peace of mind to some home buyers. There are pros and cons to each. Weigh your options against your preferences to find a lender that’s right for you.
Regardless of whether you’re looking at online or conventional lenders, consider the mortgage rates you are offered. Sometimes you can get a better deal with larger online lenders than you can with smaller local banks and financial institutions. Be sure to shop around to get the best rate for your home loan.
Having sufficient reserves for maintenance and repairs is essential when buying a home, especially if your home was pre-owned. You’ll ideally want to have at least 1% to 3% of the property value stashed away for unexpected expenses. However, if there are repairs in excess of this or if you plan to renovate or build an addition to the home, then a future mortgage can help.
There are two types of future mortgages to help with anticipated costs later on: a home equity loan and a home equity line of credit. Both are similar in that they use your home equity — which is basically the amount your home is valued at minus the amount you still owe on your mortgage — but they function differently.
Home equity loans
A home equity loan provides you with a lump-sum payment for any planned maintenance or repairs. Like a home loan, home equity loans are available for 15- through 30-year fixed terms, or you can choose an adjustable rate loan that will have a fixed period of low interest followed by fluctuating interest rates.
Home equity line of credit
A home equity line of credit (HELOC) is similar but works as a line of credit instead of the money being doled out to you in a lump sum. You’ll be given a limit to what you can spend (usually 80% of the equity value) and the lender will provide you with a debit card or checking account to access the funds you need from the account. You only pay interest on the money you use, and payment on the principal isn’t due until the draw period (usually 10 years) has lapsed. However, keep in mind that regardless of whether you choose a home equity loan or a HELOC, your home will always be used as collateral for the loan, so budget wisely.
Mortgage rates for equity types of loans are often higher than conventional home loans. According to BankRate, some of the best home equity rates range from 3.79% to 11.99%, while conventional home loan rates start at 2.95%, depending on the lender. Always check the latest mortgage rates, and don’t forget to shop around.
Save yourself money and interest payments later by considering any repairs or renovations that you may need to make to your home before you purchase, and weigh the stability of your job and income.
“When considering a home [buyers] should be focused on a determination if the home meets all of their priority criteria. If they are not well-versed with a review of construction quality and issues, they should have their agent with them to handle that portion of the review,” Drake said.
If your goal is to obtain a better mortgage rate, then the best option might be to refinance your mortgage. However, refinancing isn’t for everyone. It could be an excellent option for those with good credit during a period when mortgage rates are lower. If your credit is poor, refinancing your mortgage could be a risky move and potentially leave you with a higher rate and payment.
One real estate term that continues coming up is the “1031 exchange.” It involves swapping one type of like-investment for another, but there’s a catch. A 1031 exchange allows you to swap an investment property for a like-kind investment. In some cases this allows you to defer tax payments until you sell the property later, but it cannot be used for primary residences. As always, knowledge is power, so do your homework.
The bottom line
Buying a home is a major expense and not one to rush into. Don’t let anyone pressure you into buying a home if you’re not financially ready for it. You’ll have an easier time obtaining a home loan with an affordable mortgage if your personal finances and other debts are in order first. Evaluate your current debt and establish a solid plan to pay it off. Review your finances to determine if you are financially ready to buy a home. You can do this by using a personal savings calculator to compare with your financial goals against your current savings. Find a strategy that works best for you to pave the path to homeownership.