Financing Your Home Part 2

You have decided on your budget and reached out to your lender for an approval. You have reviewed last weeks article, Financing Your Home Part 1. Once you receive your price point from your lender, keep these tips in mind:

1. Mortgage “Rules of Thumb”

These are additional guidelines that you can use to help determine your mortgage payments. Remember, you still want to have some cash left over and not be wiped clean each month.

  • It’s not one-size-fits-all when it comes to mortgages, and working with a lender to go over the options available is important. Make sure you are looking at the entire loan picture — the program, the time period you are going to own the home, and the terms of the loan; and how all of that creates the best financial position for you. Think of the loan summary and price points your lender gives you as rough drafts until you find an option that suits your specific finances and situation.

The loan your friend gets is not the one you should necessarily get. These days, when it comes to financing your first home, there are SO MANY loan options available that you really need to focus on what’s best for your particular financial situation and goals.

  • Know your credit details on your report and your score since your score will also affect your mortgage interest rate. Your credit score is a major factor for lenders when determining your risk. That means your score plays a part in the type of loan you will be offered and its interest rate. The higher your score, the lower your rate. A credit score has nothing to do with your income or investments. It’s based on how you’ve handled your credit card payments and other loan payments, like your car or student loan. It also takes into account if you’ve declared bankruptcy, have a tax lien, or you’re being sought by a collection agency.

Having a score of 680 and above means you’ll have more options, lower interest rate, less down payment requirements.

620-660 is considered a fair score and lenders may work with you but may require more documentation to determine if they should take a risk and give you a loan.

Below 620 is considered a lower score and some lenders will deny your loan application completely. You may have access to fewer loan options, such as a FHA loan or an adjustable rate mortgage (ARM). If this is you, keep HOPE ALIVE! You may want to spend a few weeks or months getting your score up a bit so you will have more options.

2. See if you qualify for any first-time homebuyer assistance programs.

Many programs are for moderate-income buyers and offer down payment assistance and/or cover closing costs. This is “free” money and that means you might use less from your savings than you thought.

3. Determine how long you plan to own this home.

Consider your current and future finances and also where you will be in 5 or more years. There are several loan products that may be better for you than a “go-to” 30-year fixed loan.

If you don’t plan on owning for more than 5 or 6 years, you might want to consider an adjustable-rate mortgage (ARM). Today’s versions are much more straight-forward, conservative, and safer for homeowners than the ones in the past. These loans typically offer a lower interest rate, saving you thousands of dollars while you live there.

4. Carefully consider options if you need to pay points to get a lower interest rate.

Your lender may tell you that if you pay one point, your interest rate will be lower than if you pay zero points. And even lower, if you pay 2 points. A point is equal to 1% of your mortgage amount (or $1,000 for every $100,000). So points are basically an “upfront payment of interest” at closing for usually 30-year fixed loans. Rather than pay it over the life of your loan, you can pay a large chunk when you get the loan. As a buyer, you will need to weigh the pros and cons in getting the lower rate and paying for points upfront.

However, if you plan to live in your home for many years or interest rates continue to go up, then the benefit of the lower rate will kick in and save you money in the long run.

5. Keep an eye out for hidden fees or additional costs along the way.

  • Don’t be fooled by advertised rates! Behind that rate could be a long list of fees, points, or closing costs. Ask the lender to break down the fees and give you the total amount for closing the loan.

  • Review fees for FHA loans. Don’t always assume a FHA loan will be cheaper or better. You will pay an upfront premium for mortgage insurance and possibly a recurring annual cost of a percentage of the outstanding loan amount (added to the monthly payment) for the life of the loan. Review the pros and cons of these loans carefully.

  • Mortgage disclosure forms have been simplified. They disclose a loan’s terms and cost to borrowers. Carefully review the Loan Estimate, given three business days after application, and the Closing Disclosure, provided three business days before closing.

You’re off to a great start now that you know the best way to go about financing your first home. Now it’s time to show you how your budget, location, and your criteria for a home come together as a “roadmap” in your search for the perfect home. Next week’s article, Putting It All Together explains how these three factors are intertwined and will lead you to your new home!