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Buying A Home
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Owning your own home is
the American Dream. And that
dream is more alive today than ever before. Experience has taught us that the buying process involves common stages for all home buyers. To help you understand that process, and make the most of every day and dollar you spend, I have prepared this Home Buyers Guide to provide an overview from the planning table to the closing table. After all, helping you fulfill your home ownership dream is my business. Where do I start?
House
hunting begins at home-with planning. Before you grab the road maps and
hit the streets, you need to do a little planning. We call it
"pre-qualifying". Simply, its determining how much house you can
afford to buy. Knowing your affordable price range will bring your
house-hunting into focus. Many lenders, for a small fee (or in some cases,
no fee), will send out all the required verification and pre-approve you
for a mortgage, allowing you the opportunity to negotiate as a cash buyer.
How
much house you can afford to buy depends on two things: how much you can
afford for the monthly housing payment, and how much you can invest in the
down payment and closing costs.
payments include principal and
interest on the mortgage loan, and property taxes and insurance against
fire and other hazards. These four costs are often abbreviated
“P.I.T.I”. For some buyers and lenders, monthly housing costs may also
include home owners association dues, condominium fees, and mortgage
insurance.
Qualifying
In
today's market an "affordable" home is not so much determined by
sales price as it is by the financing which translates that price into a
monthly payment. A house hunter's first step is to set a housing budget,
then go shopping for the house (price) and payments (P.I.T.I) that fit
that budget. How Much Can I Afford?
The key items are the size of the down payment, interest rate, any monthly property fees, and the amount of the mortgage.. The down payment might be zero in the case of VA-backed mortgages. A down payment of 20% will eliminate the need for mortgage insurance. Your lender can show you other ways of eliminating the mortgage insurance. Sources For Your Down Payment
The
obvious source of money for your down payment is either your savings or
the proceeds from the sale of a home you already own. But there are some
other, not so obvious, sources. In recent years, for example, "parent
power" has taken some new twists for first-time buyers. Home
Equity Loan. Parents often have
considerable equity built up in their own homes, and many are tapping that
asset through home equity loans to make a gift to their children. Ask your
tax advisor for current information. Often lenders will require a
"gift letter" to verify that parents don't expect repayment. Shared
Equity/Profit-Sharing. In
return for providing a part of the down payment, the parents (or another
investor) may share in the "profit" or net equity of the house
when the home owners eventually sell it. Life
Insurance. If you have built up
a cash value on your life insurance policy over the years, you may be able
to borrow from your insurance company up to the amount of this accumulated
cash value. Often they will even charge a more favorable interest rate
than would be asked for other types of loans. Stocks
and Bonds. If you feel the
market doesn't favor selling your stocks or bonds now, you may be able to
secure a bank loan using your portfolio as security. Top of Page Mortgage Insurance Can Reduce Down
Payment
If
you obtain a conventional loan, you may put down only 5% or less. Through
the lender, you may be required to buy private mortgage insurance (PMI).
This insurance provides protection for the lender in case of default, and
allows the lender to approve a larger mortgage amount. In a common approach, you'd
pay an initial amount at closing (often one percent of the mortgage if
your down payment is 5 percent, 1/2 of 1 percent if you put down 10
percent). Then, included in your monthly payments for your mortgage, you
would pay an additional one-twelfth of 1/4 percent of the mortgage
balance. This payment will usually continue until dropped at the
discretion of the lender, unless a stop point is specifically written into
the deed of trust, such as accumulating a 20% equity. Talk to your lender
about ways to eliminate this PMI completely. Your lender can give you specific figures for any loan program you are
considering and can tell you whether PMI is required. One Caution
The
larger the down payment, the less money you need to borrow, which means a
lower monthly payment. However, remember that in addition to your down
payment and monthly payments, you will need money to pay for closing
costs, moving, appliances, household setup, a reserve for family
emergencies and other miscellaneous items. So don't plan to put your last
penny down on the closing table Figuring Your Housing Budget
Generally, lenders figure that the home buyer shouldn't pay more than 28-38 percent of gross income for P.I.T.I. payments, or 36-38 percent for both P.I.T.I and monthly debts combined. This might be a little more or a little less depending on other outstanding long term debts (more than 10 months), alimony/child support payments, number of children and their ages, and other household budget items. The easiest way to make a quick estimate of the mortgage amount you may qualify for requires applying the two basic formulas for loan application that lenders use. Keep in mind the loan balance will vary over the term of the loan, although the monthly payment remains the same.
What's Next?
Once you have your financing in place and a pre-qualified letter from the lender, you are ready to start your search for the home. Click on the Home Buying Steps link to follow the steps involved to locate and purchase a home.
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