home loans

Posted : February 28, 2018
Last Updated : February 28, 2018

home loans

Buying a home may be the most expensive purchase of your life, which is why the process can be so daunting. Consider these factors for buying your first house.

Owning a Home

  • You can build equity. Equity is the value of the home minus the amount you owe on it.
  • You can borrow against the equity for many purposes.
  • Homes generally increase in value over time and are a good long-term investment.
  • The home is yours once your mortgage is paid in full.
  • Homeownership may reduce the amount of income tax you pay (interest and taxes are tax deductible).
  • You can pass your home on to family members.

  • Property maintenance and upkeep are your responsibility.
  • You’re responsible for the additional costs of: homeowner’s insurance, other types of insurance if required by the lender (e.g., flood or earthquake insurance), real estate taxes, homeowner’s association fees, if applicable, to pay for maintenance of the common areas and the exterior of the buildings and grounds.
  • You may have to sell or rent your home before you can afford to buy or rent another one.
  • You can lose your home, and your investment in it, if you don’t make timely mortgage payments.

Steps Involved in Buying a Home

Step 1: Determine if you’re ready to buy a house.
Step 2: Determine how much mortgage you can afford.
Step 3: Determine which mortgage option is best for you.
Step 4: Qualify for a loan.
Step 5: Go through settlement.

Am I Ready to Buy a Home?

  • Do I have a steady source of income?
  • Have I received this income on a regular basis for at least the last two or three years?
  • Do I have a credit history?
  • Do I have a good record of paying bills?
  • Will I be able to pay my bills and other debts?
  • Do I have the ability to make the mortgage payment every month, plus handle additional costs for taxes, insurance, maintenance, and unexpected repairs?
  • Do I anticipate moving to another community within the next two or three years?
  • Do I have money saved for a down payment and closing costs?
  • Where do I want to live?
  • What kind of neighborhood do I want to live in?
  • What types of schools are in the neighborhood?
  • How much space do I need?

Down Payment

The down payment is the portion of the home’s purchase price the buyer pays in cash. Lenders prefer that you have 20 percent of the purchase price for a down payment. If you have difficulties saving 20 percent, there are mortgage options that make it possible to buy a home with a smaller down payment (e.g., only three percent).

Other Expenses

  • Household emergencies, repairs, and other expenses. (It’s a good idea to save money in a special savings account for these.)
  • Private Mortgage Insurance (PMI); required insurance for loans that are more than 80 percent of the home’s value.

Mortgage Payments Considerations

Based on your savings and your budget, ask yourself how much you can devote to monthly loan payments as well as related costs. The answers will help you determine whether to buy a home, how much to pay, and what type of mortgage will meet your needs. Keep in mind that lenders look at debt-to-income (DTI) ratios when they consider an application for a mortgage loan. A DTI ratio is your monthly expenses compared to your monthly gross income. Lenders also consider monthly housing expenses as a percentage of income. The qualification ratios differ between loan programs.

How Taxes and Insurance Are Paid

You’ll most likely pay the taxes and insurance along with the principal and interest to the lender every month. However, the lender may allow you the option of paying the taxes and insurance separately.

If the lender requires you to pay the taxes and insurance as part of your mortgage payment, the lender will open an escrow account to hold this money until the payments are due. In certain states, the escrow account will also earn interest. Many people consider this convenient because they don’t have to make separate payments.

If you pay the taxes and insurance separately, you’ll be responsible for paying your property tax bill, either once or twice a year, and insurance premium, usually paid annually.

Determine How Much Mortgage You Can Afford

Pre-qualification is an informal way to find out how much money you can borrow. You can be pre-qualified by giving the lender some basic information over the phone, including:
  • Employment.
  • Income.
  • Down payment information.
  • Outstanding debts.

No paperwork is required. There is no obligation. The pre-qualified amount isn’t exact; it is only a ballpark figure.
Pre-approval is a commitment from the lender to lend you money. The pre-approval process lets you know how much of a mortgage you can obtain and tells sellers you’re prepared to buy a home. To obtain pre-approval, you need to assemble financial records and fill out an application. You’ll usually need:
  • Pay stubs for the last two or three months.
  • W-2 forms for the last two years.
  • Tax returns for the last two years.
  • Information about your assets and long-term debts.
  • Recent bank statements.
  • Proof of any additional income – you don’t need to disclose alimony or child support payments unless you want them considered in repaying the loan.

As a rule of thumb, many people estimate they’re able to afford a mortgage of two to three times their household income.

Consider your debt-to-income ratio. While requirements vary, lenders usually require the principal, interest, taxes, and insurance (PITI) of your housing expenses to be less than 28 percent of your monthly gross income. Lenders call this the front-end ratio. Calculate your front-end ratio and be sure your monthly mortgage payment is no greater than this figure.

Although the requirements vary, lenders usually require housing expenses plus long-term debt to be less than 36 percent of your monthly gross income. Lenders call this the back-end ratio. Calculate your back-end ratio and be sure your monthly mortgage payment is no greater than this figure.

Long-term debt is outstanding debt with a remaining term of at least one year. It can include student loans, credit cards, car loans, other loans, and other non-housing expenses.

If your debt-to-income exceeds these ratios, talk to your lender about your options.

Determine Which Mortgage Option Is Best for You

There are different types of mortgages:
  • Fixed-Rate mortgage (usually 15 or 30 years in length) - You pay the same amount each month at a fixed interest rate for the life of the loan.
  • Adjustable-rate mortgage (ARM) - The interest rate adjusts according to a schedule; usually the rate is fixed for a short term in the beginning of the loan, after which time it automatically adjusts.
  • Interest-only mortgage - You pay only the interest (not the principal) on the mortgage in monthly payments for a fixed term. Be very careful with these mortgages.
  • Biweekly payment mortgage - These are usually fixed-rate conventional mortgages with payments due every two weeks.

Shop, Compare, Negotiate

  • Check advertisements in local newspapers and on the Internet to get an idea of the best terms and rates.
  • Contact several lenders on the same day to compare quotes.
  • Negotiate for the best price you can get.
  • Make sure the lender gives you all the costs of the loan in writing.

Loan Estimate

A Loan Estimate is an itemized list of the costs and fees associated with your loan, given to you in good faith by your lender or broker. Federal law requires the lender or broker to mail or give you a Loan Estimate within three business days of getting your application.

Use the Loan Estimate to compare and understand all costs, terms, and the risk of “payment shock.” The only charge a creditor can require you to pay before giving you a Loan Estimate is a reasonable fee for a credit report, so you can get Loan Estimates on different kinds of loans, and from different creditors to help you compare. For example, you can get a Loan Estimate for a four-and-a-half percent fixed rate loan, and one for a four percent adjustable rate loan, to help you understand and compare the overall costs and risks of each.

You can use the Loan Estimate to shop mortgage lenders and save hundreds of dollars. Be aware that the amounts listed on the Loan Estimate are only estimates. Actual costs may vary and changing market conditions can affect prices. If the APR increases by a certain margin above what was previously disclosed, you must receive a corrected disclosure at least three business days before the loan closing.

Keep your Loan Estimate so you can compare it with the final settlement costs and ask the lender questions about any changes.

Qualify for a Loan

Lenders use certain criteria to qualify you for a loan, including: income, debt, and credit history. You already learned that before you start looking for a house, you should become pre-qualified by a lender. Once you find the house, you can get a pre-approval. In some circumstances, it’s advisable to get pre-approved before you buy (e.g., in housing markets or areas in which houses stay on the market only a short time before they’re purchased).

Go Through Settlement

Settlement occurs when the borrower meets with the seller and other representatives to sign the documents that will finalize the sale of the house and any mortgage financing. An important document that you should review before the settlement meeting takes place is the Closing Disclosure. This is to ensure that the loan terms and costs are what you and your lender agreed on.

You should get the Closing Disclosure at least three business days before you close on the loan. Use this time to review the Closing Disclosure, and compare it to the Loan Estimate, to see whether there are changes. There is a chart on the third page of the Closing Disclosure, called “Calculating Cash to Close,” that will highlight changes from the Estimate to the final terms. If you don’t understand the changes, ask the lender.

Home Equity Loans

If you own your home, you have the option of borrowing against the value of your home. This is called a home equity loan. Equity is the value of the home minus the debt.

There are two main types:
  • The traditional home equity loan is a one-time loan for a lump sum, and typically at a fixed interest rate. The loan is repaid in equal monthly payments over a set period of time.
  • A home equity line of credit (HELOC) works like a credit card. You receive a line of credit from which you can draw money. As you repay the principal your available credit goes up again, just like a credit card. Typically, the interest rate on a line of credit is variable, meaning that it is tied to an index and will change with movements in interest rates.

When deciding whether a line of credit is right for you, you must decide if:
  • You’re comfortable with a fluctuating monthly mortgage payment or prefer a fixed interest rate and stable payments.
  • You can afford the monthly payments and increased payments after the introductory period ends or when interest rates rise.

Home Equity Loan Tips

  • Don’t agree to a home equity loan if you don’t have enough income to make the monthly payments. Refer to the Putting Your Home on the Loan Line Is a Risky Business publication, available on the Federal Deposit Insurance Corporation’s (FDIC) website at fdic.gov.
  • Don’t let anyone pressure you into signing any documents. Read them carefully and ask questions if you don’t understand something.
  • Shop around for the best rates.
  • Remember that all home equity loans, which are secured by your primary home, have a three-day right to rescind or right to cancel.
  • Contact an attorney if you think you’re a victim of a predatory loan. Most communities have legal offices that provide free legal services, called pro-bono programs, to individuals with limited income. The American Bar Association has a directory of pro-bono programs staffed by lawyers who have agreed to provide free legal services. The following link can help you find a program in your area: https://www.americanbar.org/groups/legal_services/flh-home.html.

To get more information on home improvement, including: how to hire contractors, how to understand your payment options, and how to protect against home improvement scams read the FTC brochure Home Sweet Home Improvement available at the FTC website, ftc.gov.

Source: PlanningYourDreams.org


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