Diversified Communities

When it comes to buying your first home, the process can be downright scary. Where do you start? How much can I afford? Is it the right decision? Here’s a little help with the daunting, yet exciting process of purchasing your first home.

Securing A Loan

Mortgage lenders scrutinize your financial history to determine whether to approve your loan application. The first concern is your credit report which details your loan history, credit cards, mortgages, bankruptcy filings and other financial information and your credit score which uses your credit report to arrive at a numerical representation of your overall creditworthiness. Scores range from 300 to 900, with most homebuyers falling in the 600-700 range.

Factors used to determine your credit score:

Past delinquency – People who have failed to make payments in the past, tend to do so in the future. The more recent a delinquency, the more it counts against you. A 30-day delinquency within the past 12 months really hinders your changes of securing favorable mortgage terms.
Length of credit – the longer you’ve had credit, the better.
Credit use – If you’re close to your credit limits, you’re viewed as risky.
Mix of Credit – Someone with a combination of revolving and installment debt is considered less risky than one with only a secured credit card

Cleaning up your credit report:

Check your credit report before your lender does. An estimated 4 of 5 reports contain errors. You can clear these up before visiting a lender.
Obtain credit reports from all three credit reporting agencies – Equifax, Experian and Trans Union. Each will contain slightly different information.
Look closely for error and correct them.
Check credit cards you no longer use and close them.
Note late payments and credit balances. You may have to explain them.
Compare account numbers to make sure they’re yours
Resolve outstanding bills
Pay all bills on time
Limit the amount of outstanding credit. Even if you pay your bills on time, you’ll improve your credit score by having lower balances and fewer cards.

Pre-Purchase Counseling

Homebuying can be complex and confusing, the U.S. government, Freddie Mac, Fannie Mae and some nonprofit agencies offer pre-purchase counseling for free. Classes teach everything from money management to the loan closing process.

Homebuying Terms Defined

Adjustable Rate Mortgage (ARM) – A mortgage in which the interest rate is adjusted periodically based on an index. Also known as the renegotiable rate mortgage, the variable rate mortgage or the Canadian rollover mortgage.
Appraisal – A written analysis of the estimated value of a property, as prepared by a qualified appraiser. A fee is typically charged for a real estate appraisal because a home appraisal is time-consuming.
Conventional Loan - A mortgage not insured by FHA or guarantee by the VA or Farmers Home Administration (FmHA).
Escrow - Refers to a neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or "closing." Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax or insurance payments.
FHA Loan – A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderate-priced homes almost anywhere in the country.
Fixed Rate Mortgage – A mortgage on which the interest rate is set for the term of the loan.
Lien – A claim upon a piece of property for the payment or satisfaction of a debt or obligation
Mortgage Commitment – A written notice from the bank or other lending institution saying it will advance mortgage funds in a specified amount to enable a buyer to purchase a house.
Mortgage Insurance – Money paid to insure the mortgage when the down payment is less than 20 percent.
Piggyback Loan - An alternative to private mortgage insurance, also known as a second trust loan. The most common type is an 80/10/10 where a first mortgage is taken out for 80% of the homes value, a down payment of 10% is made and another 10% is financed in a second trust at a higher interest rate. In some cases, you may even qualify for a piggyback loan with as little as a 5% down payment.
Points – Additional points you can pay a lender to lower the interest rate on your loan at closing. Each point is equal to 1 percent of the loan amount (e.g. two points on a $100,000 mortgage would cost $2,000). Also referred to as Discount Points. Points may include discount points and/or origination fee.
Private Mortgage Insurance (PMI) – In the event that you do not have a 20 percent down payments, lenders will allow a smaller down payment-as low as 5 percent in some cases. With the smaller down payments loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will require an initial premium payment of 1.0 percent to 5.0 percent of your mortgage amount and may require an additional monthly fee depending on your loan's structure. On a $75,000 house with a 10 percent down payments, this would mean either an initial premium payment of $2,025 to $3,375, or an initial premium of $675 to $1,130 combined with a monthly payment of $25 to $30.

Tips

Ask yourself, “Are you ready?” – in order to determine this ask yourself five simple questions – Do you have a steady job and income?

Do you plan on remaining in the same area for a few years?
Do you have enough money set aside for your down payment and closing costs?
Do you have an emergency fund?
Do you live within your means, avoiding credit card debt?

Find out what you can afford. The best way to do this is to get pre-qualified for a loan. There are three options for pre-qualifying:

Go to a lender with whom you already have established rapport
Find a real estate agent you trust and follow the agent’s recommendations for a lender
Research lenders online

Your monthly mortgage payment – principal, interest, taxes and insurance should not exceed 32% of your monthly gross income.