Getting a home mortgage need not be an ordeal. Unfortunately, it can be if not done right. Following the steps presented here will increase the chance that your search for a mortgage will not be unpleasant and you will get the mortgage. Plus, by following these steps you are more apt to not overpay for your mortgage and in the end buy a home that you can truly afford and enjoy.
1. Determine how much you really can afford to spend for a home.
2. Search homebuyer government programs and grants.
3. Pursue gifts.
4. Verify and improve your credit reports.
5. Shop lenders.
6. Make sure you have an emergency fund.
7. Get pre-approved not just pre-qualified.
8. Pay attention to and abide by the conditions stipulated in your Mortgage Pre-Approval Letter.
DETERMINE HOW MUCH YOU REALLY CAN AFFORD TO SPEND FOR A HOME.
Once you own your home you will experience other housing costs besides your mortgage payment, taxes and insurance. You may have homeowner (HOA) and/or condominium (CONDO) fees and assessment payments to make. For sure, you will incur maintenance, repair and utility costs that most likely will differ from what you paid as a tenant. And if your down payment is less than 20 percent, depending on the mortgage you obtain, you might have to purchase private mortgage insurance (PMI).
Begin by subtracting the additional aforementioned costs to the rent you have been paying and crediting funds for tax credits and possibly additional funds generated by tightening the non-household areas of your budget. Next, subtract the real estate taxes and homeowner insurance you expect to pay once you own your home. What remains is your monthly interest and principal payment that you can afford. From this you can determine how much money you can borrow by using a mortgage calculator. Here is an example:
Current monthly rent = $1,200 ~ No HOA/CONDO fees. ~ No PMI ~ Monthly sidewalk/curb assessment = $35 ~ Additional monthly maintenance = $25 ~ Additional monthly repairs = $120 ~ Additional monthly utilities = $25 ~ Monthly income tax credit = $200 ~ Monthly tightening of household budget = $100 ~ Monthly real estate tax escrow = $210 ~ Monthly homeowner insurance escrow = $85 ~ Other monthly credits = 0 ~ Other monthly debits = 0
Monthly affordable principal & interest payment = $1,200 - $35 - $25 - $120 - $25 + $200 + $100 - $210 - $85 = $1,000.
A $1,000 per month principal and interest payment for a 30-year fixed-rate interest mortgage enables a qualified buyer to borrow $229,800 or buy a home costing $287,250 based upon a 20 percent down payment at a 3.25 percent interest rate.
Note that this approach leads to the amount of money you can safely afford to pay for a home since you have limited yourself to pay no more than the rent equivalent for your home.
Choosing to buy a much more expensive home, even if you could get a mortgage for it, puts you at a higher risk of default and financial ruin. Also, avoid the trap of escalating non-housing expenses once you become a homeowner. If you don’t have enough excess discretionary income to cover optional additional home related expenses eventually you might find yourself in financial jeopardy.
SEARCH HOMEBUYER GOVERNMENT PROGRAMS AND GRANTS.
There is a lot of government financial help available for homebuyers. This is particularly important if you are on the cusp of qualifying for a mortgage and need favorable terms to ditch the landlord.
Government financial help for homeowners is available at both the federal and state levels.
Federal programs include loan guarantor programs from the: Federal Housing Authority (FHA), Veterans Administration (VA), United States Department of Agriculture (USDA), Federal National Mortgage Association (FNMA) known as Fannie Mae, Federal Home Loan Mortgage Corporation (FHLMC) known as Freddie Mac and the Native American Direct Loan. Also, there is a Good Neighbor Next Door Program for public servants only. Google the programs to learn the details.
Also, you need to check your state’s first-time homebuyer programs. Some are particularly helpful like the Michigan First-time Homebuyer Programs. In this case not only are loan guarantees to third party lenders offered, down payment assistance grants and federal tax income credit are also available for those Michiganders who qualify. Another big perk is some of these state plans still consider you a first-time homeowner, even if you bought a home before, as long as you meet their "first-home" criteria.
Significant cash savings are possible by choosing the best plan or combinations of plans that fit your situation. Therefore, carefully examine all the federal plans and the pertinent state plans by looking at the pros and cons of each, eligibility requirements and the associated payoffs. This will enable you to determine which plan combinations are best for you.
Money gifts from family members and close friends can greatly help you get more favorable borrowing terms. When you can show others close to you that you have put together a sound financial plan to buy a home and you have skin in the game you greatly improve your chances of getting financial help from them.
Remember to seek money gifts not loans otherwise you will jeopardize your primary loan application. If you truly believe that you will pay it forward sometime in the future, tell your prospective donor(s). It just might help them decide in your favor. Also, if need be, mention that their money gifts can be put in escrow and returned if you don’t close escrow and decide to keep renting.
VERIFY AND IMPROVE YOUR CREDIT REPORTS.
Your credit report plays a major role in whether or not you can get a mortgage at the best terms possible.
Pull your Transunion, Equifax and Experian credit reports. Review them carefully for mistakes that negatively impact your credit. If any mistakes are found immediately report them to the appropriate credit bureau(s). Make sure that mistakes are corrected and your reports are 100 percent accurate before you apply for a mortgage.
Read about how to improve your credit scores and implement suggestions that are applicable to your situation. Each of the three credit bureaus provides tips on how to improve your credit scores.
In the months prior to buying your home, avoid opening and closing credit card accounts, buying expensive items like luxury vacation packages, cars, boats and furnishings. Keep credit card balances well below your available credit limits and don't increase them. Pay your credit card bills on time.
Even a small gain in your FICO score could help you qualify for a better loan and save you a lot of money over the lifetime of the loan.
Talk to three to five lenders including at least one direct lender, a mortgage broker and a credit union representative since they are nonprofits. The more lenders you shop the more you will learn and can compare. There are apt to be significant differences. You don’t want to pay more for your mortgage than necessary.
Compare types of mortgages offered, interest rates, fees, terms including early repayment penalties, lender service levels and whether your mortgage can be sold and, if so, what are the implications.
MAKE SURE YOU HAVE AN EMERGENCY FUND.
If you don’t have an emergency fund establish one and begin to fund it.
Financial advisors generally recommend you put aside enough money to cover three to six months of living expenses. Should you lose your job and need to get another one or get sick and your pay is interrupted, you will need to tap this fund.
Don’t be tempted to use your retirement savings and/or emergency funds to get a 20 percent down mortgage. There are many mortgage products available with low or no required down payments and this is generally a better choice when the down payment amount is a problem. New mortgage products are constantly evolving and you might even be able to avoid costly private mortgage insurance.
GET PRE-APPROVED NOT JUST PRE-QUALIFIED.
Sellers are extremely reluctant to consider offers from buyers unless they are pre-approved, not merely prequalified.
Mortgage pre-approval involves acquiring a letter from a lender giving you, the borrower, a conditional mortgage commitment including a specific loan amount. This reflects that you actually applied for a mortgage, submitted required documentation and a comprehensive examination of your financial background and credit situation has taken place. Therefore, it is extremely important that you comply with your lender’s requests in a timely manner and be absolutely truthful as you work your way through the mortgage pre-approval process.
Getting pre-qualified is based only on data provided by you. It is simply an estimate of what you may be able to borrow providing that the information you provided is accurate. It lacks independent verification.
Another significant shortcoming of just getting pre-qualified is that many agents are reluctant to work with you until you have a mortgage pre-approval letter in hand or are about to be issued one in the next few days. Successful agents are very busy people and many of them don’t want to risk wasting time working with buyers who are merely pre-qualified.
PAY ATTENTION TO AND ABIDE BY THE CONDITIONS STIPULATED IN YOUR MORTGAGE PRE-APPROVAL LETTER.
Contact your lender immediately if you do not understand any part of your mortgage pre-approval letter. Do not violate any of the conditions in the letter. Furthermore, keep in mind that your letter will have an expiration date and is, therefore, time sensitive. Otherwise, final approval of your mortgage might not occur. A sample mortgage pre-approval letter is provided below for you to know what to expect.
SAMPLE MORTGAGE PRE-APPROVAL LETTER
Provided by the Consumer Financial Protection Bureau (CFPB).
Lender Street Address City, State 90000 p: 310.555.1212
Dear Sarah Boyle,
Congratulations! Based on the information you provided, you have been pre-approved for a home loan from Mortgage Company subject to the conditions and terms below:
Purchase Price: $325,000 Loan Amount: $275,000 Loan Type: FHA Loan Term: 30-year fixed Property: Single Family Residence
Final approval for a home loan is subject to re-verification of all information you provided and satisfaction of conditions not limited to the following:
1. Your income, assets, liabilities and employment have not materially changed.
2. An acceptable appraisal of the subject property to support the sales price.
3. Clear title to the property.
4. Sufficient and verifiable funds to close.
5. Final underwriting approval.
This pre-approval expires 90 days from issuance and is subject to industry guideline changes. This letter does not constitute a contract nor a guarantee of specific rates or terms. Any rights related to this letter are not assignable.
Sincerely, Loan Officer NMLS: xxxxxxx
Print Name________________________ Sign________________________ LOAN OFFICER DATE ______________
This blog post is especially dedicated to first-time homebuyers who need a mortgage. It is also helpful to current homeowners who are upsizing, downsizing or cashing-out and looking to get a mortgage to buy another home. Also, the advice is beneficial to the homeowner wanting to refinance their current home mortgage.
Jim Lawson, DBA, Realtor®
Associate Broker, Domain Realty, Bonita Springs, FL 34135
Broker Associate, Core Real Estate, Stevensville, MI 49085
Serving Southwest Florida & Southwest Michigan Sellers & Buyers