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HOW TO FINANCIALLY PREPARE YOURSELF BEFORE LOOKING AT A HOME

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Prepare Financially Before Looking at Homes

Too often home buyers fail to prepare themselves financially before looking for a home to purchase. Doing so is a common mistake that many future home buyers make even though this may be the largest purchase of their lives. Not taking the proper steps to set yourself up for success could mean that you do not get your dream home, or it costs you more than it should.

Here are some of the best tips for preparing yourself financially before starting the home search process. By doing so you’ll be two steps ahead of the game and well on your way to home ownership!

CONNECT WITH A LENDER FAR IN ADVANCE

Before you start driving around neighborhoods, flipping through listings online or even stopping in to speak with a Realtor, it would be a good idea to know what your buying power is today. If you have a goal to be able to buy into a particular neighborhood, you should put a plan in place to be able to achieve that.

Speaking with a lender first to develop a plan of action on how you can qualify to buy a home in that area or price range is critical.

My recommendation is that you have an initial discussion with a lender nine months to one year in advance. Sound crazy? I know many people do not know that far in advance that they may be buying a home next year. For those who do, this is extremely important.

WHY IS IT IMPORTANT TO PLAN SO FAR IN ADVANCE?

First, your lender will let you know what you can qualify for today based upon your income, down payment and credit score.  There are other factors which play a part including credit events and large monthly payments on your credit report.

Income – Income sometimes is difficult to change in one year. Lenders will be looking at your last two years’ tax returns and recent pay stubs when you are ready to apply. They will also require that you have a two-year work history.

Some individuals decide to take a break for personal reasons without realizing that a gap in employment may prevent them from getting loan approval. Documenting your income is essential as well. If you are in a cash business, then you should begin depositing that money into an account on a regular basis so that you can qualify for a bank statement loan. These are just a few examples of what your lender will discuss with you.

Down Payment – This is extremely important, and it will partially determine your buying power. It is also connected to the various loan programs that you may or may not qualify for.  You will need to have those down payment funds in your bank account three months before you submit a loan application.

If you have little to no down payment and do not think you can raise additional funds over the next nine months, then your lender will discuss low down payment and loan program options which will then help determine your realistic price range.

If you can get to a twenty percent down payment that is ideal. When you don’t have at least twenty percent to put down, you’ll often be required to pay private mortgage insurance.

PMI is a useless fee that only benefits the lender as protection in the event you default on your loan. Most people will try to stop paying private mortgage insurance as soon as they can.

Credit Score – Your credit score plays a significant role here. It will have an impact on your final mortgage rate, in some instances your down payment requirement, or whether you are qualified at all for a mortgage. Borrowers with the best credit scores generally will get the lowest mortgage interest rate. Therefore it makes sense to put a lot of work into improving your financial status.

The good news though is that it is not that hard to improve your credit scores in as little as 6 months or less. There are creative ways to do it yourself and even some reputable services out there who know how to get your scores raised for you.

Do your best to target a score of 680 or above. There are lenders that can find a bad credit mortgage for you with scores as low as 500 but then your down payment requirement and your rate will be much different.

Credit Events – A credit event is a bankruptcy, foreclosure and in some instances collections. If you have a bankruptcy or foreclosure, your lender needs to know up front so he or she can plan for this. It is preferable to have had these two years prior to applying for a loan.

Less than two years out of bankruptcy for example will prevent you from getting an FHA loan. Collections need to be dealt with. Pay outstanding collection amounts and work to have them removed from your credit report. That can be negotiated with the creditor as part of the payment agreement.

Large Payments on Your Credit Report – Too often potential home buyers fail to qualify because they have too many other minimum monthly payments showing up on their credit report. During the qualification process, lenders need to factor your future mortgage payment as well as the monthly obligations that appear on your credit report.

Together, and when divided into your gross monthly income they make your debt to income ratio (DTI). Each loan program has a maximum DTI allowed. The less that you have in OTHER monthly payments on your credit report, the larger the loan you will be able to qualify for.

In this example, you can see that with a gross monthly income of $6,500, this person would qualify for a $300k loan at current rates using a maximum DTI of 43%. At the bottom, you can see how much more buying power this person has when the other monthly payments are removed.

This example above should hopefully explain why it is important to keep your credit report free from other monthly obligations. If you think there is a chance that you may buy a home in the near future, then do not buy a new car. At least not without discussing the implications with your lender.

In the example above, the person could afford $88k more if there was no car payment when applying for the loan.  The truth is that auto lending is much more lenient when it comes to qualifying. Once you are approved and close on your home loan, there is an excellent chance that you can then go and buy the car you want.

RESERVE FUNDS

The cash needed to buy a home is not just about the down payment and closing costs. Lenders will require a few months’ reserves (check with your lender). They want to be sure that if you have a job loss that you can at least make a few payments before you are out of money.

Realistically, you need to plan for a lot more than that. When you buy your home, do you think you may need some money to fix it up the way you want? Even with new construction, there are expenses.

Do you need to buy furniture? Do you own basic home needs like a lawn mower? This is also part of the planning process. Throwing everything you have into your initial purchase without anything left over makes you “house poor” and with one small setback can land you in a very difficult scenario where you could lose your home.

FINAL PERSPECTIVE

Once you have this plan developed with the assistance of a lender, then you can target price points and specific towns or neighborhoods. You will be able to spend time focusing on homes that are a true reality for you.

Developing a plan far in advance and sticking to it will also help make the home buying process much easier and will take the stress out of finding a mortgage. Your realtor will also be pleasantly surprised to know that you have taken the time to make sure you have the ability financially to purchase the home.

If you are thinking about looking for a home at some point in the future, contact a lender today to have a preliminary discussion.

Is This Your Situation: Looking for the Best Home in Your Budget?

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You’re neither rich nor poor, and you’re ready to buy your first home. You look around—all those homes on the market, but they all seem priced out of reach.
Cheer up. You’re not alone. With some solid real estate counseling and some help from your lender and/or sellers and others, you can not only get your foot in the door, you can own the house too. It just takes some creativity, a few inside tips and a bit of homework.

Examine Your Goals

How ironclad are your dreams? Can your dream of a formal dining room or a hot tub on a redwood deck be postponed? Must you have a two car garage? Lowering your expectations and starting out modestly (in decent housing that meets your needs) can lead to owning those dreams in time.

Start Saving

Get your priorities straight. Without taking all the fun out of life, what’s more important to you, weekends on the road and dinners out or stashing away at least part of your down payment? (Most lenders want to see that some of the money you invest is your own.)

Keep Your Credit Record Clean

When you go mortgage shopping, lenders will be looking over your payment records. Don’t let a late-payment habit rise up to haunt you. (Reformed late-payers can request creditors to erase the blots on their records—for a small fee).

Look for Financial Assistance

Your parents and other relatives may be able and willing to give you gifts that will get you over the down payment hurdle. (Loans from relatives will be counted as debts and will lower a number of mortgage payments your lender will allow you to carry).

Get Some Co-Signers

Parents, relatives (and unrelated investors) can either co-sign a loan or share the ownership of your home. With shared ownership, you’ll be the resident but your co-investor may share specified expenses (plus tax advantages and equity accrual) and will share in your profit on the sale.

Shop for Mortgage Loans

Qualifying for a mortgage can be managed in several ways to fit your down payment and monthly payment abilities. FHA and VA loans come with low down payment requirements, and lenders offer ARMs (adjustable-rate mortgages) at initially low-interest rates. (Look for an ARM that can be converted to a fixed rate should rates drop).

Consider Creative Financing

Also, new-home builders and other sellers may offer buy-downs that lower your interest rate in the first few years of a mortgage, thereby making a home more affordable. Balloon loans (if they have at least a 7-year term) can often bridge gaps and give you time to accumulate equity and/or cash to pay them off. Home sellers can sometimes help you financially—with a lease-purchase arrangement or a take-back loan. Lenders and sellers are constantly creating new ways to help buyers buy homes. We can help you check them out.

Look at Starter Homes

Once freed of the vision of “instant dream home,” you can look for housing that will start you on the equity-building path to realizing your dream. Condominiums and townhouses are often much less expensive than detached houses and buying one now can serve well as a stepping stone.

Search for Bargains

If you’re handy with tools, a fixer-upper home gives you the opportunity to buy inexpensively. Fix it up and in a few years, trade up. If you’re adventurous, auctioned properties in suitable neighborhoods can also be good values. If you don’t mind a longer commute to work, outlying areas frequently offer homes at lower prices than those found close to town.

Whatever route you choose toward buying your first home, keep cool. It may take time to find the right combination of elements, but there is a home out there for you and a way to obtain it. We’ll be happy to help you create your path to its door.

Call or email us today to help you discover the best home that your budget can buy.

5 Ways to Finance Home Repairs

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water pipe repair

There are a lot of great things about being a homeowner, but having to finance home repairs isn’t one of them. Repair costs often pop up unexpectedly and at inopportune times, such as a broken furnace in the dead of winter or an extensive roof repair right after you’ve come back from vacation. And they’re rarely cheap. In 2018, 88% of American homeowners had to take care of at least one major repair, with an average annual spend of almost $5,000.

A home is a big investment, and like many other big investments, you need to take steps to maintain and improve it if you want to make a return. And depending on the age and condition of your home, as well as the elements that it faces where you live, a large part of maintaining your investment is addressing home repairs. So how do you finance home repairs without completely depleting your savings? Alternately, how do you finance home repairs if you don’t have a lot of savings? Fortunately there are options to help with both cases.

Budgeting for Home Repairs

Even before you start looking into ways to finance home repairs you should be actively accounting for the possibility of repairs in your budget. There are a few ways that you may choose to do this, but many homeowners abide by either the 1% rule or the square footage rule. Here’s how they work.

The 1% rule dictates that you should set aside 1% of the purchase price of your home each year for potential repair costs. So if you bought your home for $250,000, that’s $2,500 allotted in your budget year after year for maintenance and repairs. The logic behind the 1% rule isn’t so much that your repairs are going to cost you that much every year, but that it’s a good way to set a guideline and encourage yourself to save.

Variations on this rule include saving 2-3% instead of 1%, or putting aside 10% of what you spend on your property taxes, mortgage payment, and insurance payment each month for repairs. With the latter rule, if you’re spending $2,000 a month on those combined expenses you’ll want to put an additional $200 a month into savings for repairs.

The square footage rule is a recommendation that you budget $1 per square foot of your home for repairs. A 2,200 square foot home means $2,200 in savings for repairs a year, for example, and a 3,000 square foot home means $3,000 a year. Again, this doesn’t mean that there’s a direct correlation between the square footage of your home and what you’ll spend in repair costs each year—it’s just a good way to ensure you’re saving a decent chunk of change toward these types of expenses.

How to Finance Home Repairs

Even with a well-executed savings plan it’s not uncommon to need extra funds when it comes to financing home repairs. If you save $2,000 a year for example, you’ll see it go quickly if you need a roof repair (averages $351 to $1,352, depending on whether the repair is minor or major) followed by a new water heater (averages $767 to $1,447 with the new unit and labor). And there’s always the possibility of needing a notoriously expensive repair, like a foundation repair (average cost of $4,511 but can range as high as $15,000) or needing to restore and repair after incurring water damage (average cost of $2,701).

As you might expect, many homeowners will at some point find themselves in need of having to finance home repairs. And fortunately, there are a few good options for how to do it. Here are five of them.

  1. Home Equity Line of Credit

    A home equity line of credit—often shortened to HELOC—is a loan that you take out using the equity that you own in your home. Think of it almost like a credit card, with the set limit that you can borrow being the amount of equity that you have when you first take out the HELOC. Most of the time, you’ll have a 10 year draw period during which you can pull out money from this fund, followed by a 20 year payback period.

    There are a few advantages of using a home equity line of credit to finance home repairs. To start, HELOCs generally have low interest rates—or at least lower than you’ll find with other loan options. That’s because lenders consider these loans to be less risky endeavors on their part, since you’ve already shown your ability to earn and pay that amount with your mortgage.

    Another advantage is that you can take out money as you need it, instead of taking all of your equity out as a lump sum. If you have $50,000 in equity to borrow from then, you can take out money multiple times during the draw period—perhaps $5,000 for a major roof repair one year, $2,500 for a new gas furnace another year, and so on. And you’ll only pay interest on the amount that you actually pull from the available limit.

  2. Cash-Out Refinancing

    A cash-out refinancing takes your existing mortgage and turns it into a bigger mortgage, meaning you end up with a new loan that puts more money in your pocket for things like home maintenance and repairs. You can get up to 80% of the market value of your home refinanced, and then take the difference in cash.

    Opting for a cash-out refinance to finance home repairs is a popular choice, since depending on market conditions and how much you’ve already paid toward your original mortgage you could end up with a large amount of cash that you can then put toward expensive repair needs.

    Unlike a home equity line of credit, cash-out refinancing doesn’t borrow off of your existing mortgage. Instead, it creates an entirely new mortgage for your property, complete with its own rates, lending terms, and repayment schedule. This means that you may be able to get extra benefits out of a cash-out refinancing if mortgage rates have gotten more favorable since you first bought your home.

  3. FHA Title-1 Loan

    A home equity line of credit or cash-out refinancing are great if you have lots of equity in your home, but what if you incur an expensive repair cost in your first year of home ownership or at some other point where you haven’t built up a substantial amount of equity? In that situation, you may want to consider an FHA title-1 loan, which allows you to borrow money specifically for many types of home repairs and improvements.

    There are some guidelines to be aware of with an FHA title-1 loan. To start, the maximum loan amount is $25,000 for a standard, single family home, and loans above $7,500 require you to put down your home as collateral (FHA title-1 loans below $7,500 do not need to be secured by your home). The loan repayment period for a single family home is 20 years.

    FHA title-1 loans are fixed rate, so you won’t have to worry about variable interest rates over the course of your repayment period. To qualify, you’ll need to have a debt-to-income ratio of 45% or below, and you must be applying the loan to an approved repair or improvement costs. You can find more info on what those are by visiting the Department of Housing’s FHA title-1 loan information page.

  4. Credit Cards

    Using a credit card to finance home repairs can be an easy way to go, especially if you have a high enough limit on your existing credit card to simply borrow money on there. If you don’t though, you’ll likely have no problem applying for and receiving a new credit card just for home repairs.

    It’s important to note though that credit cards aren’t always the best way to go. What you gain in convenience you may end up paying in high interest rates and high monthly payments with a shorter repayment period than you’d get with other types of repair financing loans. Look into the other options above before opting for a credit card if you’re facing a major repair cost and do a comparison on interest rates and other loan terms. If you just need to cover a basic and not too expensive repair though a credit card may be a good way to go.

  5. Personal Loan

    Finally, you could consider getting a personal loan just for home repairs. These tend to have higher interest rates than options like a home equity line of credit as well as shorter repayment periods, but you’ll have a lot of freedom to use the loan as you need to, and can usually borrow as much as $40,000.

    Check with your existing bank first to see what kinds of terms they offer for personal loans, and then expand your search to other lenders. If you can find a personal loan with favorable rates and terms, then it is certainly worth considering as a way to finance home repairs.

Final Takeaway

Home repairs pretty much always need to get done, even if you don’t have funds on hand. Look through the available options above and find a lending option that makes the most sense for your long term financial goals and your existing financial situation, and be sure to account for repair costs in your annual budget as well.

Building On Your Land – What You Need to Know

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The land we own can serve many purposes. Some buy land as a place to hunt or fish, while others plan to grow crops or start a farm. For others, it’s a place to build your dream home or vacation getaway. Regardless of your reason, if you’re planning to build a home, cabin or outbuilding on your land, there are a few things you need to know first.

Zoning

Before building any structure on your land, you need to determine whether it’s actually legal to do so. Zoning restrictions and topography may dictate that a home or structure may not legally be built, or it will be required to be in a certain area of the property. Be sure to check with an experienced local builder to help you navigate any potential issues.

Finding a Lender

Once you have any zoning issues sorted out, your next step should be to meet with a lender that’s experienced in construction loans so that you can be pre-approved for a loan based on your financial needs. In general, a build-on-your-lot or custom home will require a down payment of 20% to 25% of the entire cost of building the home, including permits and site preparations. Most lenders are willing to finance construction for a year. When the home or building is complete they will require you to refinance into a permanent loan for the property.

Building a Home

There are three primary options for having a home built on your land. Choose the one that fits your needs and budget best:

Build-On-Your-Lot Builder – Most of these builders will have a variety of pre-designed floor plans for you to choose from. Oftentimes they can offer you a choice of specific fixtures and appliances for your home. This can save you money, but make sure these products match what you’re looking for.

Design-Build – These firms work with you to plan your new home from the ground up. It’s a similar process to working with a build-on-your-lot builder, except your home will be a custom design. These firms usually have in-house architects or a contract with an architect who will work with the construction company.

Architect – Of course, you can always hire your own architect to build your new home or building. The architect can create the exact home you’re envisioning using your ideas and their expertise. If you choose to hire your own architect, be sure that the architect and builder are willing to work together and can confidently meet your budget.

Feel free to contact our office, we are happy to answer any questions.

The Realtors at Preferred Properties of Texas in Stephenville are here to help you buy and sell real estate for over 25 years!

 

Construction Loans: What You Should Know

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Construction Loans: What You Should Know

New Construction Guide to Colorado Springs

Building your own home can be a tremendously rewarding experience. You get to make choices about everything from location and floor plan to colors and landscaping. At the end of the process, you have a truly special place to live, something uniquely yours.

While a project like building your home can be both exciting and fun, there are many things to consider before you start building. Probably the most important consideration is how this type of project gets paid for. Stress over money and financing can ruin the entire home building experience.

Unless you have the cash on hand to fund your construction project, you are going to need a construction loan in order to finance the cost of the building project –and sometimes the purchase of the land itself.

A construction loan is a short term loan (12 to 18 months) that covers the cost of construction until the home is complete, and a traditional mortgage can be taken out.

However, it’s important to note that this type of funding isn’t the easiest to obtain; largely because this type of loan is considered far more risky than a traditional mortgage. New construction financing differs from resale finance because the home itself doesn’t exist. This means if the payments stop and the lender needs to foreclose, they must finish constructing the house first. Naturally, this makes construction loans riskier and lenders more wary.

Generally, construction loans are issued by a bank, rather than a mortgage lending company –and you’ll want to shop around at a few different banks to see what your options are and to find the best loan terms possible. Bear in mind that these loans will require at least a 20% down payment, but some lenders will require as much as 25% down. Also, the interest rates on these loans tend to be higher than traditional loans, so you’ll want to shop around to find the best option before you sign on the dotted line.

If you’re on the fence about building your own home –and curious about funding options, here’s a look at what you should know about new home construction loans. 

Different Types of Loans for Different Types of Homes

First up, it’s important to note that there are two basic options available when it comes to a new construction financing. The first is custom home financing, which is where the buyer owns the land and the house. The second is going through a tract home builder –which is where the builder owns the home during the construction process.

Let’s take a look at both options now:

  • Tract Home Builders

In very rare cases, the builder will be willing to carry the financing for the project. But this is usually only the case with large tract builders. With this option, you’d lose the flexibility that you’d have with a custom builder.

Here’s how it works:

Tract home builders handle the construction portion of their financing, and they own the home throughout the entire building process, and then at completion, they transfer the title to the buyer. This type of builder pays for the lot, and then builds the house to your specifications. When it’s done you close on a permanent 15 or 30-year mortgage.

Builders will often incentivize buyers to use their preferred lenders, as this gives them confidence that the buyer will be able to close. They may even give you credit towards closing costs or upgrades to use their preferred lender.

  • Custom Home Financing

This type of financing differs from tract style or production home financing, in that the buyer generally owns the land and the house during the entire building process. With this option, the builder is essentially employed by the homeowner as a general contractor to build the house, so you’d have a lot more freedom in terms of how the house is built.

At closing, the buyer pays off the construction loan with a permanent 15 or 30-year mortgage.

Different Types of Construction Loans

Construction Loans are usually short-term higher interest loans that last until the home is completed.

In most cases, the lender pays the funds directly to the contractor, rather than the borrower. These payments –also known as draws, often come in installments at different stages of development –rather than all at once.

Now, let’s get more specific, and look at some of the different types of custom home financing that are available today.

  • Construction Only Loan

Buyers who choose a construction only loan are usually looking for the best deal possible on the permanent loan.

With this loan, the lender will typically offer enough money to cover the cost of the project, and the borrower will usually make interest-only payments until it’s complete. The principal balance is commonly due in full once the project is complete, or one year later. This allows the borrower the freedom to apply for a mortgage with another lender once the project is complete. If the buyer chooses this route, make sure you know what to ask your lender before choosing a loan product.

  • Construction-to-Permanent Loan

With a construction-to-permanent loan, the buyer takes out a loan from the lender that’s essentially a line of credit, and the builder can draw from it at each stage of construction. There are inspections at the project site to approve each draw.

At the end of the project, this loan can be rolled into a permanent loan, usually with the same lender, just like a buyer would on a resale property.

The construction-to-permanent mortgage loan usually covers the cost of the construction project and the mortgage on the completed property. An interest-only payment option may still be available with this type of loan, typically for one year. There is only one closing with this type of loan because the borrower will be working with the same lender for the construction and the mortgage. The interest rate is usually different for the duration of the construction and will change once the mortgage payments begin. There may be a penalty if construction exceeds one year.

  • Single Close Loans

Single close loans are a newer loan product and are becoming very popular with homebuyers.

Normally, with a two-time closing loan, if anything were to happen to the borrower’s financial situation between the time construction starts and the time they are ready for the permanent loan, then they may have problems qualifying.

With the single close loan, though, once the borrower is approved they’re approved. The buyer closes one time. When construction is complete this loan becomes a permanent loan and the construction portion gets paid off from the permanent loan. 

The single close loan eliminates additional fees as well as the hassles that are usually associated with administering a construction loan. This loan requires only one application and once it’s approved there is no secondary approval process required.

  • VA and FHA Construction Loans

There are VA and FHA construction loans available as well. However, these loans can be difficult to qualify for, and may be hard to use because of loan limits. Learn more about these loan options.

At the end of construction, you’ll usually move into what’s known as permanent financing. At this point, you’ll also have to option to pay off the loan or convert it into a traditional home mortgage.

Qualifying for the Loan: What You’ll Need

In order to be approved for a construction loan, there are some terms and conditions that need to be met. Each lender will have different criteria that the borrower will need to meet, as a self-build loan is much riskier than traditional mortgages, the standards can be strict. 

As always make sure you speak with a lender before you begin, to see what you’ll need to do to qualify. 

Generally, though, they’ll want to see:

  • Qualified Builder

First up, the lender will want to see that you’re working a qualified builder. This means a construction company or a licensed general contractor who has a solid reputation for building quality homes. If you’re planning on being your own general contractor, you may have a difficult time being approved for a home construction loan.

  • Detailed Specifications

Next, it’s not enough to simply request a loan –you’ll need to provide the lender with detailed specifications on your plans. This is sometimes referred to as “the blue book.” This book should include everything from materials that will be used –like insulation and roofing, as well as the specifications on ceiling heights and room dimensions. These plans should be professionally drawn up and to scale.

  • Value Estimated by an Appraiser

The value of the home must also be assessed by an appraiser. The appraiser will consider the specs in the blue book, and the value of the land it’s built on. These calculations will then be compared with other similar houses in similar locations.

  • Proof of Income

Next, you’ll want to be ready to provide proof of income, so be prepared to provide bank statements or proof of income in the form of W2-s; or tax returns, if you’re self-employed.

  • Down Payment

As we touched on earlier, typically, you’ll need to put down a large down payment of at least 20% for a new home construction loan. Some lenders will even ask for 25%. This is due to the level of risk associated with the loan, as there’s no collateral in place, since the house hasn’t been built yet.

  • Good Credit Score

You’ll also need a good credit score. A score of at least 680 or 700 will generally be required.

  • The Numbers Line Up

They’ll also want to make sure that the loan to value (LTV) isn’t more than 80%, including the value of the land. And the loan to cost will need to be less than 85% as well.

Things the Lender Will Need From the Builder

In addition to the criteria you’ll need to meet, here are some things the lender will need to see from the builder as well:

  • Project description
  • Plans
  • Specifications
  • Building license
  • Proof of Insurance
  • Banking info, profit and loss statement
  • Budget for project
  • Signed contract with buyer
  • Specs that support the terms of the contract
  • Job cost
  • Timeline

Do You Have a Plot of Land?

Finally, be sure you have a plan for the land that you’ll be building on as well. If you don’t already own the land, then you’ll need to include it in the construction loan. In most cases, it makes sense to pay for the land upfront if you can to save yourself from a much larger down payment.

If you’re thinking of building your own home, you’ll want to make sure you take the time to lay the groundwork first. Start by meeting with a qualified lender, to see your options, and find out what you’ll need to do to be approved. Then, make sure you find a qualified home builder, and work with them to create a detailed outline of your project. Finally, make sure you have enough saved up for a down payment, as you’ll need at least 20% down.

 

Your Stress-Free Guide to Shopping for Home Loans

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Your Stress-Free Guide to Shopping for Home Loans

With this super-simple breakdown of loan types, you won’t get overwhelmed — you’ll find the right mortgage.

How to choose a mortgage when buying a house

When it comes to buying a house, most people know what they prefer: a bungalow or a condo, a hot neighborhood or a sleepy street.

Mortgages, too, come in many styles — and recognizing which type you should choose is just slightly more involved than, say, knowing that you prefer hardwood floors over wall-to-wall carpeting.

First things first: To pick the best loan for your situation, you need to know what your situation is, exactly. Will you be staying in this home for years? Decades? Are you feeling financially comfortable? Are you anxious about changing loan rates? Consider these questions and your answers before you start talking to lenders. (And before you choose a lender, read this.)

Next: You’ll want to have an understanding of the different loans that are out there. There are lots of options, and it can get a little complicated — but you got this. Here we go

Mortgages Are Fixed-Rate or Adjustable, and One Type Is Better for You

Let’s start with the most common type of mortgage, that workhorse of home loans — the fixed-rate mortgage.

A fixed-rate mortgage:

  • Lets you lock in an interest rate for 15 or 30 years. (You can get 20-year loans, too.) That means your monthly payment will stay the same over the life of the loan. (That said, your property taxes and insurance premiums will likely change over time.)

It’s ideal when: You want long-term stability and plan to stay put.

Here’s what else you need to know about fixed-rate mortgages:

  • A 30-year fixed-rate mortgage offers a lower monthly payment for the loan amount (for this reason, it’s more popular than the other option, the 15-year).
  • A 15-year fixed-rate mortgage typically offers a lower interest rate but a higher monthly payment because you’re paying off the loan amount faster.

Now let’s get into adjustable-rate, the other type of mortgage you’ll be looking at. 

An adjustable-rate mortgage (ARM): 

  • Offers a lower interest rate than a fixed-rate mortgage for an initial period of time — say, five or seven years — but the rate can fluctuate after the introductory period is over, depending on changes in interest rate conditions. And that can make it difficult to budget.
  • Has caps that protect how high the rate can go.

It’s ideal when: You plan to live in a home for a short time or you expect your income to go up to offset potentially higher future rates.

Here’s what else you need to know about adjustable-rate mortgages:

  • Different lenders may offer the same initial interest rate but different rate caps. It’s important to compare rate caps when shopping around for an ARM. 
  • Adjustable-rate mortgages have a reputation for being complicated. As the Consumer Financial Protection Bureau advises, make sure to read the fine print.

A general rule of thumb: When comparing adjustable-rate loans, ask the prospective lender to calculate the highest payment you may ever have to make. You don’t want any surprises.

Conventional Loan or Government Loan? Your Life Answers the Question

Which fixed-rate or adjustable-rate mortgage you qualify for introduces a whole host of other categories, and they fall under two umbrellas: conventional loans and government loans. 

Conventional loans: 

  • Offer some of the most competitive interest rates, which means you’ll likely pay less in interest over the period of the loan.
  • Typically you can get one more quickly than a government loan because there’s less paperwork.

Who qualifies? Typically, you need at least a credit score of 620 or above and a 5% down payment to qualify for a conventional loan.

Here’s what else you need to know about conventional loans:

  • If you put less than 20% down for a conventional loan, you’ll be required to pay private mortgage insurance (PMI), an extra monthly fee designed to mitigate the risk to the lender that a borrower could default on a loan. (PMI ranges from about 0.3% to 1.15% of your home loan.) The upshot: The lender has to cancel PMI when you reach 22% equity in your home, and you can request to have it canceled once you hit 20% equity.
  • Most conventional loans also have a maximum 43% debt-to-income (DTI) ratio which compares how much money you owe (on student loans, credit cards, car loans, and other debts) to your income — expressed as a percentage.

Fannie Mae and Freddie Mac set limits on how much money you can borrow for a conventional loan. A home loan that conforms to these limits is called a conforming loan: 

  • In most cities, the maximum amount for a conforming loan is $453,100. 
  • In high-cost areas, such as New York City and San Francisco, the limit is $679,650.
  • Limits are revisited annually and are subject to change based on each area’s average home price.

A home loan that exceeds these limits is called a jumbo loan:

  • Jumbo loans typically require a higher down payment (up to 30% for some lenders) and a credit score of at least 720. Some borrowers can qualify while putting down 20%, but their credit score has to be higher. 
  • They also tend to have stricter debt-to-income requirements, generally allowing for a maximum DTI ratio of 38%.

There are practical considerations to take into account before getting a jumbo loan too, mainly: Are you comfortable carrying that much debt? The answer depends on your current financial situation and long-term financial goals. 

Government loans:

  • Include loans secured by the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA) Rural Development.
  • Are meant to stimulate the housing market and enable folks who may be unable to qualify for conventional loans to still become homeowners.

Who qualifies? That depends on which government loan you’re looking at.

If you’ve had trouble qualifying for a mortgage because of income limitations or credit: 

FHA loans are used by a broad swath of people, including those with lower credit scores and income. 

  • You can get an FHA loan with a down payment of 3.5% if you have a minimum credit score of 580. You can still qualify with a credit score below 580 — even with no credit score — but the down payment and other requirements will be much higher.
  • FHA loans conform to loan limits set by county; these limits typically range from $294,515 to $679,650 in high-cost areas. You can view the FHA mortgage caps for your county at hud.gov.
  • If you get an FHA loan, you must pay an upfront mortgage insurance premium (MIP) and an annual premium of 0.85%. Currently, the MIP is 1.75% of the loan amount — so, $1,750 for a $100,000 loan. This premium can be paid upfront at the mortgage closing, or it can be rolled into the monthly mortgage payment. 

Also, a heads-up — the date an FHA loan was issued affects the MIP. 

  • If you received an FHA loan on or before June 3, 2013: You’re eligible for canceling MIP after five years, but you must have 22% equity in your home and have made all payments on time.
  •  If you received an FHA loan after June 3, 2013: To stop paying MIP, you’d have to refinance into a conventional loan and have a current loan-to-value of at least 80%.

If you’re in the military, a veteran, or a veteran’s spouse:

  • VA loans offer active or retired military (or a veteran’s surviving spouse) a mortgage with a 0% down payment. 
  • VA loans also can have more lenient credit requirements — typically around a minimum 620 credit score — and lower DTI requirements.
  • The VA only allows lenders to charge 1% maximum to cover the costs of originating and underwriting the loan, so you save money at closing. There is, however, an additional upfront, one-time funding fee of 2.15%. 

VA loans also don’t charge borrowers mortgage insurance — potentially helping you save a significant chunk of cash on your monthly payment.

Given the benefits, a VA loan is often the best mortgage option for people who qualify.

If your income is limited and you live in a small or rural town:

USDA loans are mortgages for limited-income home buyers in towns with populations of 10,000 or less, or that are “rural in character,” meaning that some areas that now have bigger populations are grandfathered in. You can see whether your town is eligible on the USDA’s website. 

  • USDA loans typically have lower interest rates than non-USDA loans.
  • Down payments can be as low as 0%. 
  • USDA mortgages also have more lenient credit score requirements than conventional loans. 
  • Income limits to qualify depend on location and household size. 
  • USDA loans charge an upfront mortgage insurance fee of 1% of the loan amount and annual mortgage insurance premium of 0.35%. 
  • And USDA loan borrowers must buy a “modest home” — a property with a market value deemed reasonable for the area, though the USDA does not set specific price limitations.

Only a select number of lenders offer USDA loans; here’s a list of USDA-approved lenders nationwide. 

If your job is to help people:

Niche programs, like the Neighbor Next Door from HUD, allows teachers, law enforcement officers, first responders, and government workers — as much as 50% — on eligible homes in revitalization districts. 

Note: Downpayment assistance programs offer qualified buyers such things as grants and interest-free loans. Start with your state’s housing finance agency to find options.

Now You Know the Basics. It’s Time to Call for Backup

Speaking of your lender: Ultimately, you’ll be working with your loan officer or broker to narrow down these choices, and to find a loan that works for you and your finances. (Just another reason why it’s important to choose a lender you’re comfortable with.)

Your real estate agent should be able to offer some insight, too. And because they don’t earn a paycheck from your loan selection, their advice about mortgages should be impartial.

You know your stuff. And you know whom to ask for help. Who’s overwhelmed? Not you.

 

 

 

 

 

Preferred Properties of Texas

(254) 965-7775|Contact Preferred Properties of Texas