Wednesday, 10 April 2019
Buying a home is an exciting endeavor and a lengthy process. After all, it's the largest purchase you may ever make. It's crucial to prepare in advance and educate yourself about the homebuying process. Consider your budget and your needs, allowing yourself to build ownership over time in an investment that will pay off personally and financially.
Make sure you're checking all the boxes and maximizing the homebuying experience with the following steps.
Your credit score is a three-digit number between 300 and 850 that expresses your credit history, which helps lenders determine your likelihood of repaying debt. For instance, higher scores show that you've been a reliable user of credit, repaying debt on time, and you likely don't have a lot of outstanding debt. Lower scores show that you already have a lot of debt or that you haven't repaid your debts reliably.
When you apply for a mortgage loan, your lender will check your credit. Your credit score will not only determine whether you are approved for a loan, but it can also determine the interest rate you'll be required to pay. If you have a higher credit score, you'll be able to get a lower interest rate on a mortgage loan. That means you'll pay less in interest over time, which can save you a lot of money. A credit score of 700 or above can help you get the best interest rates.
If your credit score is lower, you can take steps to raise it before applying for a mortgage. For instance, work to pay down outstanding unsecured debt, such as credit card debt. Make all payments on time for rent, credit cards, student loans and utilities. Also, if you have credit cards, spend no more than 30 percent of your credit limit. And check for errors on your credit report—if you find any, work with the credit bureaus to correct them.
Most people take out a mortgage loan to buy a home, but it's wise to avoid borrowing 100 percent of the cost of the home. (And few lenders will lend 100 percent.) A down payment is the amount of cash you pay upfront, which is not included in your mortgage loan amount. You can reduce the amount you borrow—and the amount of your monthly mortgage payments—by saving up for a substantial down payment.
It's ideal to put down 20 percent of the cost of the home. That's because a down payment below 20 percent requires most borrowers to pay private mortgage insurance (PMI), an extra 0.3 percent to 1.5 percent of the mortgage. PMI is required as a safety net for the lender in case you fail to make your payments.
If your down payment is lower than 20 percent, PMI will be added to your monthly payments until you have paid off enough of your home to equal 20 percent of its original cost. At that point, your payments will be lowered because they will no longer include PMI.
When you start shopping for a mortgage loan, you have lots of choices to make in terms of mortgage types. One of the first decisions is whether to get a fixed rate or adjustable rate mortgage. A fixed rate mortgage is one for which the interest rate does not change over the life of the loan. That means the amount of principal and interest you pay each month will remain the same as long as you have the loan. However, your payment could change if your property tax and insurance rates change.
On the other hand, an adjustable rate mortgage (ARM) is a home loan with an interest rate that can change periodically. That means your rate can go up or down, based on fluctuations in the market rate. Usually, you can get a lower initial rate with an ARM for a certain period. But after the fixed rate period ends, the rate may change periodically, such as once per year. For instance, a 5/1 ARM means you'll have the introductory rate for five years, and then the rate can change once per year after that, based on a market index.
Your decision about which type of loan is best will depend on how long you're planning to stay in the home, as well as your need for predictable monthly expenses. For example, if you only plan to stay in the home for five years or less, you may be able to get a lower interest rate with a 5/1 ARM, and by the time the rate changes, you may have already sold the home. If, on the other hand, you intend to stay in the home for the long term, a fixed rate mortgage may be your best bet.
Another decision to make is whether to get a 15-year or a 30-year mortgage. A 15-year mortgage allows you to save money on interest over time but will require you to make larger monthly payments. With a 30-year mortgage, you may have more cash flow each month—and you can always choose to pay extra on the principal of your loan each month or periodically.
As you move through the homebuying process, you may hear a number of unfamiliar terms thrown about. It's helpful to understand what these words mean and how they affect your purchase.
An appraisal is a determination of the value of something, such as the home you want to buy. A professional appraiser will examine the property and other sales nearby to make an estimate. Lenders require appraisals to determine the worth of the house—and if the home does not appraise for the price you plan to pay, they may refuse to fund the loan. If that happens, you can come up with additional down payment funds to cover the difference, renegotiate the price with the seller or simply walk away.
When you make an offer on a home, you'll need to accompany that offer with some money, like a deposit, to secure the contract. In real estate transactions, this is known as “earnest money." A traditional amount is 1 percent of the contract—so if you make an offer for $200,000, be prepared to write a check for $2,000 to accompany that offer. This money will be held in escrow, a reserve account held by the real estate firm or attorney helping with the transaction, rather than actually given to the homeowner, until the contract is finalized. When the contract is completed and you close on the home, the earnest money will be credited against your other closing costs.
The market value of your home, minus the amount you owe on it, is your home equity. For instance, say you buy a home valued at $200,000. You negotiate the price to $175,000 and make a down payment of $25,000, so you borrow only $150,000. The difference between your home's market value ($200,000) and your mortgage balance ($150,000) is $50,000, so you have $50,000 worth of equity in your home.
Lenders and other parties, such as appraisers, attorneys and county clerks, charge fees for their work on your home purchase. These are closing costs, or extra costs that must be paid when you finalize the purchase, or close, on your home. They usually amount to about 3 percent of the purchase price of your home and include various fees, such as the lender's underwriting and processing charges, and title insurance and appraisal fees, among others.
Timing can be important in getting the best deal for your new home. The summer months are traditionally the busiest homebuying months, so buyers can often find better deals in the winter months.
In addition to checking the calendar, take a look at the housing market to determine the right time to buy. When inventory is high, which means there are lots of homes on the market, buyers are more likely to find a home that meets their needs at a better price. That's because home sellers have more competition and must be willing to bargain with buyers.
The best time to buy a home can also be when interest rates are low. For several years following the Great Recession, U.S. interest rates have been at historic lows. During 2018, the Federal Reserve made several incremental increases to its federal funds rate, which determines the rate lenders charge borrowers. However, it's still possible to find mortgage rates that are historically low.
Most homebuyers assume they can negotiate the price of the home (which is correct). But you can also negotiate everything else involved in the sale. That means if you offer to buy a home for a certain price with a closing in 60 days, the seller can negotiate for an earlier or later closing date, as well as a different price.
As a buyer, this “everything is negotiable" policy means you can ask for anything you want in the home—the refrigerator, items of furniture, window treatments, the swing in the backyard. You can also request that the seller contribute to your closing costs. Of course, the sellers can refuse your request or negotiate a compromise, but it's important to remember that there are a number of variables you can negotiate on, not just the price of the home.
To take the next steps in your mortgage journey, click here.
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