When applying for a mortgage, it is important for would be home buyers to be aware of the factors, both positive and negative, that may affect their ability to get the loan they need.
Any steps you can take to accentuate the positive and resolve negative financial issues will be a plus in the eyes of the potential mortgage lender.
Some things that could harm your chances of getting the mortgage you need include:
- High levels of debt, especially high interest credit card debt.
- An unsteady employment history with long periods of unemployment.
- A debt to income ratio of more than 36%.
- If the buyer will have little or no cash available after closing costs.
- If the buyer is unable to put down at least 5% of the cost of the home.
Some of the factors that may help you get the mortgage loan you need include:
- A long and stable employment history, with few if any lengthy periods of unemployment.
- Low levels of debt, with no recent large purchases.
- A debt to income ratio of 36% or lower.
- A down payment of at least 5-10% of the purchase price of the home.
- Buying a property as a primary residence, as opposed to an investment property.
- If the mortgage is for a single-family home, as opposed to a duplex, townhouse or condominium.
- If the borrower will have liquid assets equal to two or more months of mortgage payments after all closing costs and expenses are factored in.
Top 5 ways to improve your Credit ScorePay your bills on time.
That’s a pretty simple one. Late or outstanding payments and collections can have a negative impact on your credit score. The longer you pay your bills on time, the better your score.
If you do have collections, be aware that even if you pay it off, it will stay on your record for seven years. Do yourself a long term favor and don’t let a bill get to the collection stage if you can help it.
Keep revolving credit balances low.
If you use credit cards or other types of revolving credit, either pay it off at the end of the month or try to keep the balances as low as possible. High balances will negatively impact your credit score.
Don’t close unused credit cards thinking it will improve your credit score and don’t open a number of new credit lines that you don’t need to increase your available credit. This can actually lower your score.
Limit your credit.
If you have a short credit history, do not open a number of new accounts in a short period of time. Opening a number of new accounts will lower your average account age, which will have a larger effect on your score if you don’t have a lot of additional credit information.
Opening up a number of new accounts in rapid succession also makes you look risky to lenders.
Be focused when you go for credit.
Do your credit shopping for a given loan within a focused period of time. The formulas that are used to calculate your credit score can actually distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
Manage your credit responsibly.
Open new credit only as required. When that junk mail comes in saying you’re pre-approved for a new credit card, throw it away. Again opening this type of credit will impact your credit score.
Assuming you make your payments in a timely fashion, having credit cards and installment loans will raise your credit score. Someone who has no credit is seen as a greater risk than a person who has credit and manages that credit responsibly.
Closing a credit account does not make it go away and will still show up on your credit report, and may be considered by the score.
Raising and maintaining a high credit score is pretty simple.. Get credit as required and don’t open credit for the sake of having credit. If you have credit, keep your balances as low as possible. If you do have a balance, make your payment on time.
Common Questions from First-time Homebuyers
1. Why should I buy, instead of rent?
2. What are "HUD homes," and are they a good deal?
3. Can I become a homebuyer even if I have I've had bad credit, and don't have much for a down-payment?
4. Are there special homeownership grants or programs for single parents?
5. Should I use a real estate broker? How do I find one?
6. How much money will I have to come up with to buy a home?
7. How do I know if I can get a loan?
8. How do I find a lender?
9. In addition to the mortgage payment, what other costs do I need to consider?
10. So what will my mortgage cover?
11. What do I need to take with me when I apply for a mortgage?
12. I know there are lots of types of mortgages - how do I know which one is best for me?
13. When I find the home I want, how much should I offer?
14. What if my offer is rejected?
15. So what will happen at closing?
1. Why should I buy, instead of rent? Return to Questions
Answer: A home is an investment. When you rent, you write your monthly check and that money is gone forever. But when you own your home, you can deduct the cost of your mortgage loan interest from your federal income taxes, and usually from your state taxes. This will save you a lot each year, because the interest you pay will make up most of your monthly payment for most of the years of your mortgage. You can also deduct the property taxes you pay as a homeowner. In addition, the value of your home may go up over the years. Finally, you'll enjoy having something that's all yours - a home where your own personal style will tell the world who you are.
2. What are "HUD homes," and are they a good deal? Return to Questions
Answer: HUD homes can be a very good deal. When someone with a HUD insured mortgage can't meet the payments, the lender forecloses on the home; HUD pays the lender what is owed; and HUD takes ownership of the home. Then we sell it at market value as quickly as possible. Read all about buying a HUD home. Check our listings of HUD homes and homes being sold by other federal agencies.
3. Can I become a homebuyer even if I have I've had bad credit, and don't have much for a down-payment? Return to Questions
Answer: You may be a good candidate for one of the federal mortgage programs. Start by contacting one of the HUD-funded housing counseling agencies that can help you sort through your options. Also, contact your local government to see if there are any local homebuying programs that might work for you. Look in the blue pages of your phone directory for your local office of housing and community development or, if you can't find it, contact your mayor's office or your county executive's office.
4. Are there special homeownership grants or programs for single parents? Return to Questions
Answer: There is help available. Start by becoming familiar with the homebuying process and pick a good real estate broker. Although as a single parent, you won't have the benefit of two incomes on which to qualify for a loan, consider getting pre-qualified, so that when you find a house you like in your price range you won't have the delay of trying to get qualified. Contact one of the HUD-funded housing counseling agencies in your area to talk through other options for help that might be available to you. Research buying a HUD home, as they can be very good deals. Also, contact your local government to see if there are any local homebuying programs that could help you. Look in the blue pages of your phone directory for your local office of housing and community development or, if you can't find it, contact your mayor's office or your county executive's office.
5. Should I use a real estate broker? How do I find one? Return to Questions
Answer: Using a real estate broker is a very good idea. All the details involved in home buying, particularly the financial ones, can be mind-boggling. A good real estate professional can guide you through the entire process and make the experience much easier. A real estate broker will be well-acquainted with all the important things you'll want to know about a neighborhood you may be considering...the quality of schools, the number of children in the area, the safety of the neighborhood, traffic volume, and more. He or she will help you figure the price range you can afford and search the classified ads and multiple listing services for homes you'll want to see. With immediate access to homes as soon as they're put on the market, the broker can save you hours of wasted driving-around time. When it's time to make an offer on a home, the broker can point out ways to structure your deal to save you money. He or she will explain the advantages and disadvantages of different types of mortgages, guide you through the paperwork, and be there to hold your hand and answer last-minute questions when you sign the final papers at closing. And you don't have to pay the broker anything! The payment comes from the home seller - not from the buyer.
By the way, if you want to buy a HUD home, you will be required to use a real estate broker to submit your bid. To find a broker who sells HUD homes, check your local yellow pages or the classified section of your local newspaper.
6. How much money will I have to come up with to buy a home?
Answer: Well, that depends on a number of factors, including the cost of the house and the type of mortgage you get. In general, you need to come up with enough money to cover three costs: earnest money - the deposit you make on the home when you submit your offer, to prove to the seller that you are serious about wanting to buy the house; the down payment, a percentage of the cost of the home that you must pay when you go to settlement; and closing costs, the costs associated with processing the paperwork to buy a house.
When you make an offer on a home, your real estate broker will put your earnest money into an escrow account. If the offer is accepted, your earnest money will be applied to the down payment or closing costs. If your offer is not accepted, your money will be returned to you. The amount of your earnest money varies. If you buy a HUD home, for example, your deposit generally will range from $500 - $2,000. The more money you can put into your down payment, the lower your mortgage payments will be. Some types of loans require 10-20% of the purchase price. That's why many first-time homebuyers turn to HUD's FHA for help. FHA loans require only 3% down - and sometimes less.
Closing costs - which you will pay at settlement - average 3-4% of the price of your home. These costs cover various fees your lender charges and other processing expenses. When you apply for your loan, your lender will give you an estimate of the closing costs, so you won't be caught by surprise. If you buy a HUD home, HUD may pay many of your closing costs. Return to Questions
7. How do I know if I can get a loan? Return to Questions
Answer: Use our simple mortgage calculators to see how much mortgage you could pay - that's a good start. If the amount you can afford is significantly less than the cost of homes that interest you, then you might want to wait awhile longer. But before you give up, why don't you contact a real estate broker or a HUD-funded housing counseling agency? They will help you evaluate your loan potential. A broker will know what kinds of mortgages the lenders are offering and can help you choose a lender with a program that might be right for you. Another good idea is to get pre-qualified for a loan. That means you go to a lender and apply for a mortgage before you actually start looking for a home. Then you'll know exactly how much you can afford to spend, and it will speed the process once you do find the home of your dreams.
8. How do I find a lender? Return to Questions
Answer: You can finance a home with a loan from a bank, a savings and loan, a credit union, a private mortgage company, or various state government lenders. Shopping for a loan is like shopping for any other large purchase: you can save money if you take some time to look around for the best prices. Different lenders can offer quite different interest rates and loan fees; and as you know, a lower interest rate can make a big difference in how much home you can afford. Talk with several lenders before you decide. Most lenders need 3-6 weeks for the whole loan approval process. Your real estate broker will be familiar with lenders in the area and what they're offering. Or you can look in your local newspaper's real estate section - most papers list interest rates being offered by local lenders. You can find FHA-approved lenders in the Yellow Pages of your phone book. HUD does not make loans directly - you must use a HUD-approved lender if you're interested in an FHA loan.
9. In addition to the mortgage payment, what other costs do I need to consider? Return to Questions
Answer: Well, of course you'll have your monthly utilities. If your utilities have been covered in your rent, this may be new for you. Your real estate broker will be able to help you get information from the seller on how much utilities normally cost. In addition, you might have homeowner association or condo association dues. You'll definitely have property taxes, and you also may have city or county taxes. Taxes normally are rolled into your mortgage payment. Again, your broker will be able to help you anticipate these costs.
10. So what will my mortgage cover? Return to Questions
Answer: Most loans have 4 parts: principal: the repayment of the amount you actually borrowed; interest: payment to the lender for the money you've borrowed; homeowners insurance: a monthly amount to insure the property against loss from fire, smoke, theft, and other hazards required by most lenders; and property taxes: the annual city/county taxes assessed on your property, divided by the number of mortgage payments you make in a year. Most loans are for 30 years, although 15 year loans are available, too. During the life of the loan, you'll pay far more in interest than you will in principal - sometimes two or three times more! Because of the way loans are structured, in the first years you'll be paying mostly interest in your monthly payments. In the final years, you'll be paying mostly principal.
11. What do I need to take with me when I apply for a mortgage? Return to Questions
Answer: Good question! If you have everything with you when you visit your lender, you'll save a good deal of time. You should have: 1) social security numbers for both your and your spouse, if both of you are applying for the loan; 2) copies of your checking and savings account statements for the past 6 months; 3) evidence of any other assets like bonds or stocks; 4) a recent paycheck stub detailing your earnings; 5) a list of all credit card accounts and the approximate monthly amounts owed on each; 6) a list of account numbers and balances due on outstanding loans, such as car loans; 7) copies of your last 2 years' income tax statements; and 8) the name and address of someone who can verify your employment. Depending on your lender, you may be asked for other information.
12. I know there are lots of types of mortgages - how do I know which one is best for me? Return to Questions
Answer: You're right - there are many types of mortgages, and the more you know about them before you start, the better. Most people use a fixed-rate mortgage. In a fixed rate mortgage, your interest rate stays the same for the term of the mortgage, which normally is 30 years. The advantage of a fixed-rate mortgage is that you always know exactly how much your mortgage payment will be, and you can plan for it. Another kind of mortgage is an Adjustable Rate Mortgage (ARM). With this kind of mortgage, your interest rate and monthly payments usually start lower than a fixed rate mortgage. But your rate and payment can change either up or down, as often as once or twice a year. The adjustment is tied to a financial index, such as the U.S. Treasury Securities index. The advantage of an ARM is that you may be able to afford a more expensive home because your initial interest rate will be lower. There are several government mortgage programs,including the Veteran's Administration's programs and the Department of Agriculture's programs. Most people have heard of FHA mortgages. FHA doesn't actually make loans. Instead, it insures loans so that if buyers default for some reason, the lenders will get their money. This encourages lenders to give mortgages to people who might not otherwise qualify for a loan. Talk to your real estate broker about the various kinds of loans, before you begin shopping for a mortgage.
13. When I find the home I want, how much should I offer? Return to Questions
Answer: Again, your real estate broker can help you here. But there are several things you should consider: 1) is the asking price in line with prices of similar homes in the area? 2) Is the home in good condition or will you have to spend a substantial amount of money making it the way you want it? You probably want to get a professional home inspection before you make your offer. Your real estate broker can help you arrange one. 3) How long has the home been on the market? If it's been for sale for awhile, the seller may be more eager to accept a lower offer. 4) How much mortgage will be required? Make sure you really can afford whatever offer you make. 5) How much do you really want the home? The closer you are to the asking price, the more likely your offer will be accepted. In some cases, you may even want to offer more than the asking price, if you know you are competing with others for the house.
14. What if my offer is rejected? Return to Questions
Answer: They often are! But don't let that stop you. Now you begin negotiating. Your broker will help you. You may have to offer more money, but you may ask the seller to cover some or all of your closing costs or to make repairs that wouldn't normally be expected. Often, negotiations on a price go back and forth several times before a deal is made. Just remember - don't get so caught up in negotiations that you lose sight of what you really want and can afford!
15. So what will happen at closing? Return to Questions
Answer: Basically, you'll sit at a table with your broker, the broker for the seller, probably the seller, and a closing agent. The closing agent will have a stack of papers for you and the seller to sign. While he or she will give you a basic explanation of each paper, you may want to take the time to read each one and/or consult with your agent to make sure you know exactly what you're signing. After all, this is a large amount of money you're committing to pay for a lot of years! Before you go to closing, your lender is required to give you a booklet explaining the closing costs, a "good faith estimate" of how much cash you'll have to supply at closing, and a list of documents you'll need at closing. If you don't get those items, be sure to call your lender BEFORE you go to closing. Be sure to read our booklet on settlement costs. It will help you understand your rights in the process. Don't hesitate to ask questions.
|Essential Steps to Buying a Home|
By Susan M. Keenan
Photo: © Marilyn Volan - Dreamstime
Shopping for a home is a huge endeavor, so it is critical that consumers do a bit of research and get familiar with the home-buying process before they actually begin to shop around. This article outlines the basic steps to buying a home.
Step 1. Pre-qualify for a home mortgage.
Take the time to search for a mortgage lender or bank that provides home mortgages. Complete the paperwork and get pre-approval for a mortgage. Not only will you find out how much you can afford to borrow, but also, it will give you an edge above other potential homebuyers who make offers without first having gotten their pre-approval letter. Sellers feel more comfortable about accepting an offer from a potential buyer if they have already been approved for a loan.
Step 2. Shop for your home.
Put together a list of essential features that you must have, as well as a list of features that you would like to have with your new home. This will aid the real estate agent in locating properties that meet your criterion.
|Step 3. Make an offer.|
Once you find a home that you like and wish to purchase, make an offer. Your real estate agent will help you determine what your offer should be. In general, the closer you come to the asking price, the more likely it is that your offer will be accepted.
Step 4. Arrange for a home inspection.
If your offer is accepted, arrange for a home inspection to check out the functioning of the utilities, the roof, the construction, and such. Although an inspection will add to the overall cost of the home, it is definitely worth it in terms of finding out what to expect when you move in. It also lets you discover whether the sellers are hiding anything from you.
Step 5. Arrange for homeowner's insurance.
Homeowner's insurance is required to protect your lender's investment. Bundling your insurance policies, for example, getting homeowner's insurance and car insurance from the same company, may get you a discount.
Step 6. Gather contact information for the utilities.
Get pertinent information for the telephone service, trash service, cable television service and other utilities, before you make settlement. Arrange to have power reinstated and billing sent in your name.
Step 7. Finalize the deal.
Finally, attend settlement and sign on the dotted lines. This process is typically streamlined with the real estate agents on both sides providing most of the necessary documents. Be sure to bring any paperwork that will be expected from you along with payment.
Look at Eight Reasons to Buy a Home
Pride of Ownership
Pride of ownership is the number one reason why people yearn to own their home. It means you can paint the walls any color you desire, turn up the volume on your CD player, attach permanent fixtures and decorate your home according to your own taste. Home ownership gives you and your family a sense of stability and security. It's making an investment in your future.
Although real estate moves in cycles, sometimes up, sometimes down, over the years, real estate has consistently appreciated. The Office of Federal Housing Enterprise Oversight tracks the movements of single family home values across the country. Its House Price Index breaks down the changes by region and metropolitan area. Many people view their home investment as a hedge against inflation.
Mortgage Interest Deductions
Home ownership is a superb tax shelter and our tax rates favor homeowners. As long as your mortgage balance is smaller than the price of your home, mortgage interest is fully deductible on your tax return. Interest is the largest component of your mortgage payment.
Property Tax Deductions
IRS Publication 530 contains tax information for first-time home buyers. Real estate property taxes paid for a first home and a vacation home are fully deductible for income tax purposes. In California, the passage of Proposition 13 in 1978 established the amount of assessed value after property changes hands and limited property tax increases to 2% per year or the rate of inflation, whichever is less.
Capital Gain Exclusion
As long as you have lived in your home for two of the past five years, you can exclude up to $250,000 for an individual or $500,000 for a married couple of profit from capital gains. You do not have to buy a replacement home or move up. There is no age restriction, and the "over-55" rule does not apply. You can exclude the above thresholds from taxes every 24 months, which means you could sell every two years and pocket your profit--subject to limitation--free from taxation.
Preferential Tax Treatment
If you receive more profit than the allowable exclusion upon sale of your home, that profit will be considered a capital asset as long as you owned your home for more than one year. Capital assets receive preferential tax treatment.
Mortgage Reduction Builds Equity
Each month, part of your monthly payment is applied to the principal balance of your loan, which reduces your obligation. The way amortization works, the principal portion of your principal and interest payment increases slightly every month. It is lowest on your first payment and highest on your last payment. On average, each $100,000 of a mortgage will reduce in balance the first year by about $500 in principal, bringing that balance at the end of your first 12 months to $99,500.
Consumers who carry credit card balances cannot deduct the interest paid, which can cost as much as 18% to 22%. Equity loan interest is often much less and it is deductible. For many home owners, it makes sense to pay off this kind of debt with a home equity loan. Consumers can borrow against a home's equity for a variety of reasons such as home improvement, college, medical or starting a new business. Some state laws restrict home equity loans.
By B. Conrad
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