Financing

The first step in the home buying process is to speak with one or more reputable lenders.  The lender will walk you through the process of pre-qualification or pre-approval. Your lender can also supply you with one or more good faith estimates which will give you an idea of your monthly payments and the money you will be required to bring to closing. This is the best way of determining what price range we will look in when searching for homes.

What’s the difference between pre-qualification and pre-approval?

PRE-QUALIFICATION:  A process where you supply information to the lender in regard to your employment history, current income, current monthly debts and the amount of your assets to close.  It may also include the contents of a basic credit report.  No information is verified nor is it reviewed by an underwriter.  A pre-qualification will establish a monthly payment you are qualified for, assuming your information is correct and verifiable.

PRE-APPROVAL:  You can be pre-approved for a loan by completing a loan application and supplying the lender with tax records, pay stubs and bank statements to verify your income and debts.  Other documents may be necessary.  These items, along with a credit report, will be reviewed by an underwriter and the mortgage approved subject to an acceptable appraisal on the property you want to purchase.  A pre-approval can make your offer on a home more enticing to the seller.

How much can you afford?

There are three key factors to consider:
1.    The down payment
2.    Your ability to qualify for a mortgage
3.    The closing costs associated with your transaction.

DOWN PAYMENT REQUIREMENTS:
Most loans today require a down payment of between 3.5% (FHA) and 20% (conventional) depending on the type and terms of the loan.  If you are able to come up with a 20-25% down payment, you may be eligible to take advantage of special fast-track programs and possibly eliminate mortgage insurance.

CLOSING COSTS:
You will be required to pay fees for loan processing and other closing costs.  These fees must be paid in full at the final settlement, unless you are able to include them in your financing.  Typically, total closing costs will range between 2-5% of your mortgage loan.

QUALIFYING FOR THE MORTGAGE:
Most lenders require that your monthly payment range between 25-28% of your gross monthly income.  Your mortgage payment to the lender includes the following items:

• The principal on the loan (P)
• The interest on the loan (I)
• Property taxes (T),
• The homeowner’s insurance (I).

Your total monthly PITI and all debts (from installments to revolving charge accounts) should range between 33-38% of your gross monthly income.  These key factors determine your ability to secure a home loan: Credit Report, Assets, Income, and Property Value. 

Comparing Lenders

Many people like to shop around for different lenders. When comparing lenders, it is important to try to get an apples to apples comparison, meaning that you should ask for each lender to give you one or more  “good faith estimates” (GFE) for the same kind of loan (30 yr fixed, 5 yr arm, interest only, FHA, etc).  Once you have found a home, you will want to get updated GFE’s which include that property’s taxes, the closing date, purchase price and any seller concessions which have been negotiated.  This will enable you to get a very close estimate of your payments and the amount of money you will need to bring to closing.

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