What You Should Know Before You Buy

Before you start shopping for a house, obtain a copy of your credit report. Make sure there are no errors and everything is accurate. Do not apply for any new credit, such as credit cards or auto loans before you purchase your home. This may slightly drop your credit score or change your debt-to-income ratio and affect your loan.

If you haven’t saved a lot of money for a down payment, don’t worry. A down payment isn’t necessary for most first time home buyers. Down payment requirements differ as do loan programs. When applying for your mortgage loan, let your lender know what you can afford.

The ideal situation is to save for your house. Having a down payment of 20% or more of the purchase price will save you from having to pay PMI (Private Mortgage Insurance). PMI helps protect the lender against a loss if the borrower defaults. You will only have to pay PMI if you have less than a 20% down payment. Normally your lender will add the PMI to your monthly mortgage payment depending on your loan program. After you purchase your home and reach 20% equity of the original property value, your PMI will be terminated. At that time, your lender should eliminate it but check with your lender to be sure.

You can apply for a mortgage loan online or in person. When you apply for your loan, make sure you get pre-approved rather than pre-qualified. A pre-qualification letter from a lender is just an estimate of what you can afford based on limited information, whereas a pre-approval is based on accurate and detailed financial information. Getting pre-approved will give you a better understanding of what you can afford and an advantage when negotiating with a seller.

The Most Common Types of Mortgages

Here is information about the most common loan options available.

Fixed Rate Mortgages
One of the most popular and safest mortgages is a fixed rate mortgage. If you have a steady income and plan on staying in your home for a long period of time, this type of mortgage will work well for you. Your rate will be fixed for the entire repayment term you choose. You will also receive a great interest deduction.

Fixed Rate Mortgage Terms: 15 years, 20 years, 30 years, and 40 years

Adjustable Arms
An adjustable rate mortgage has an initial fixed interest rate for a specified time. After that period, the interest rate adjusts each year. Each yearly rate adjustment is based on another rate, most likely the yield on a U.S. Treasury note.

Yearly Adjustable Arms: 1/1 ARM, 3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM.
2/28 ARM: The 2/28 ARM is fixed for 2 years then adjusts every 28 months.

Government Loans (great loan for all credit types)
FHA: The Federal Housing Administration (FHA) insures lenders who offer loans to borrowers who may not qualify for other loans. FHA allows flexible down payment options and debt-to-income ratios. This is a great fixed loan with low interest rates. In some cases, you can virtually finance 100% of your home when used along with a down payment assistance program.

VA: Similar to FHA loans, the Veterans Administration (VA) insures lenders who offer loans to qualified veterans. They too have lower interest rates with flexible requirements. Funding fees can be paid by the seller, so just like an FHA, you can practically finance100% of your home.

RHS: These loans are offered by the Rural Housing Service (RHS) to people and families with low income who live in rural areas or small towns. They provide very low interest rates.

Interest Only Loans
An interest only loan is a loan that allows you to pay only the interest portion of your monthly payment, rather than paying both interest and principle. It enables you to make a lower monthly payment for a period of up to 10 years. After that period, you have a pre-determined time to pay both the interest and principle. Please note, there is no money applied to the principle of the loan for the initial 10-year period.

Buying Do’s and Don’ts

Do Research
Always do basic research before purchasing a home. Calculate what you can afford. Look at prices of other homes in the area where you intend to purchase. Research your mortgage options. Know what you can afford before you shop.

Don’t Buy More Than You Can Afford
Your lender may qualify you for a mortgage loan higher than you expect. Just because you qualify for a higher amount doesn’t mean you can afford it. Make sure you budget for a payment that is comfortable. Your total debt including your mortgage, auto loans, credit cards, student loans, etc. should not be more than 35% of your gross monthly income.

Do Use An Experienced Real Estate Agent
Find a full-time agent who has experience buying and selling homes in your area. Ask the agent about their commission or fee structure, and for references from past clients. You may be able to take advantage of current market conditions. Ask the agent how they negotiate and intend on getting you the best price.

Don’t Skip A Home Inspection
After you decide on a house, request a home inspection so you don’t miss any unforeseen repairs. Costly repairs after you purchase your home can make owning your home difficult to afford. The cost of a home inspection is typically between $200 and $400. The inspector will provide you with a full report of the home’s condition and any recommendations for repairs.

Do Review Your Closing Documents
Before you sign your final closing documents, make sure the figures are what you agreed to. The closing officer at the title company should go over all the costs and fees related to your loan. Always take the time to double check your mortgage payment amount, repayment terms and any prepayment penalties. You don’t need any surprises.

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