Important Parts of the Buying Process

The Process of Buying A Home 

Before you step foot into the first home to look, you should:

1.  Thoughtfully determine your wants and needs, and KNOW the difference between the two!

2. Get PRE-QUALIFIED with a reputable lender.

3. Understand the steps in the home-buying process and the decision points on your part. 

If you plan from the beginning to approach the homebuying process intelligently and with confidence, you are much more likely to buy the home you’ve always wanted, and have the confidence that the best decisions were made. 

LOANS AND DOWNPAYMENTS 

The good news is that there are lots of folks out there who are very interested in lending you as much as 95% of the purchase price of your home, at very favorable interest rates. Furthermore, they are willing to spread out the payments over a long period of time so that you can afford the house you want. Home loans typically are offered in amounts of 80%, 90% and 95% of the price you are paying for the house. You are expected to pay the remaining amount in cash from your own funds. 

The smaller the down payment, the greater the requirements are on a buyer’s financial condition. The reason a lender is willing to lend up to 95% of the value of the house is that history has shown real estate to be such an excellent investment. Lenders expect that the home will be worth more in the future than it is today - so their investment in your home is considered very safe. 

That's also why the interest rate you can obtain on a home loan is one of the best around. Consider that America's largest and strongest corporations borrow at what is called the "prime rate," and that today you can borrow a home loan (fixed at the same rate for many years) at substantially less than the prime rate. Lenders have found that home loans tend to be excellent investments, and you benefit every month when you make your loan payment. 

A homebuyer may have excellent credit and the ability to make the monthly mortgage payment, but not have the cash for the down payment. Homebuyers should not despair and assume that a home is out of reach. There are many loan options available for many different financial situations. 

WHAT CAN I AFFORD

 There is a rule of thumb that says that if you have the capacity to repay the mortgage, you can afford a single-family house that costs up to two and one-half times your annual gross income. (Annual gross income is the amount you make before taxes are deducted.) Like other rules of thumb, this is a general idea of how large a mortgage you can afford. But, because it is so simple, it doesn't take into account all the information that will help you feel comfortable with your mortgage payments. 

If you are buying a house with someone else (spouse, parent, adult child, partner/companion, brother or sister or other relative), you should consider your co-purchaser's earnings and existing debts as well. Remember, if you apply for a loan with somebody else, you and your co-borrower are both legally responsible for repayment of the mortgage. 

Your buying power depends on how much you have available for the down payment and how much a financial institution will agree to lend you. 

Depending on the lender and loan type, you may be able to get a mortgage with as little as 3 percent or 5 percent down. However, putting less than 20 percent down often means you will be required to purchase private mortgage insurance. Private Mortgage Insurance (PMI) helps protect the lending institution in case you fail to make payments on your mortgage.  There are loan products that allow you to avoid the PMI component of the payment – ask your lender for the details. 

In addition to the down payment, you will also need to consider closing costs. The closing is the final step during which ownership of the house is transferred to you. 

Closing costs generally range from 3 percent to 6 percent of the amount of the mortgage. So, if you were to buy a $100,000 house with a 5 percent ($5,000) down payment, you could expect to pay between $2,850 and $5,700 on your $95,000 mortgage. Sometimes, you can negotiate with the seller of a property to pay some of your closing costs, which will reduce the amount of money you will need to bring to closing. 

HOW MUCH CAN YOU BORROW

 Apart from having available funds for a down payment and closing costs, the other major factor limiting how expensive a house you can buy will be how much you can borrow. 

When you apply for a mortgage, the lender will consider both your earnings and your existing debts in determining the size of your loan. Lenders generally use the following two qualifying guidelines to determine what size mortgage you are eligible for: 

1.      The amount of money you owe for mortgage payments, property taxes, insurance, and condominium or co-op fee, if applicable, should total no more than 28 percent of your monthly gross (before-tax) income. This is called the Housing Expense Ratio.

2.      The amount of money you owe for the above items plus other long-term debts should total no more than 36 percent of your monthly gross income. This is called the total Debt-to-Income Ratio.

Lenders feel that if they follow these guidelines, homeowners will be able to pay off their mortgages fairly comfortably.  These lender ratios are flexible guidelines. If you have a consistent record of paying rent that is very close in amount to your proposed monthly mortgage payments or if you make a large down payment, you may be able to use somewhat higher ratios. Some lenders offer special loans for low and moderate-income home buyers that allow them to use as much as 33 percent of their gross monthly income for housing expenses and 38 percent for total debt. 

When you go to apply for a mortgage, the lender will use all the relevant data -- your income, your existing debts, the purchase price of the house, your down payment, the interest rate on the loan, and the cost of property taxes and insurance -- and calculate whether you qualify to borrow the amount of money you need to buy the house. 

In a nutshell, most lenders don't want you to take out a loan that will overload your ability to make all of your debt payments – NOT just your home.

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