Financing Your Home
Get Pre-approved
Before your start hunting for your first
home, it is wise to find out what your price range is. I cannot stress
how important this first step is. This is done by the simple process of
obtaining a pre-approval from a lending institution, such as a bank or
mortgage company. Getting pre-approved is a smart move for the serious
home buyer because it shows sellers that you come to the negotiating
table ready to complete the transaction. In fact, most sellers will not
even look at an offer on their property unless the buyer is
pre-approved. For a free pre-approval, contact one of the mortgage
lenders HERE. If a
lender charges you for a pre-approval, go elsewhere.
Even if you don't plan on buying a home for several
months, now is the time to start getting your finances in order.
Do not buy that new car or furniture on credit until you buy your home.
Every time you use your credit (unless you pay it off each month) you
will lower the amount of mortgage you qualify for. Your qualification
for a mortgage is base on the ratio of how much you make, and your total
monthly payments on all your credit cards and loans. If you have an
additional $300 car payment, that could lower the amount of mortgage
that you qualify for by as much as $50,000! Wait until after you buy
your home before you buy anything else on credit. In fact, once you own
a home and start making monthly mortgage payments, your credit score
goes up! Creditors consider home owners a better credit risk than
renters.
If you
talk with a good mortgage person, he/she can give you advice on what
steps you need to take to raise your credit score (also known as FICO
score), and what you can do to qualify for a better interest rate. You
will also find out how much of a down payment you will need, and the
approximate closing costs you will have to pay (in most cases, we can
get the seller of a home to pay your closing costs). You will also want to run your credit report
with all 3 major credit reporting companies -
Experian,
Transunion and
Equifax. Make sure
there are no errors contained in any of your reports that could lower your
credit score. It can sometimes take several months to get any erroneous
information removed, which is why you want to do this now and not wait
until you are about to make an offer on a home.
By law, you are entitled to obtain a
free credit report once a year by going to
www.annualcreditreport.com.
This is the only legitimate web site for obtaining a free credit report.
The others that you hear advertise may say they are free, but require
you to enroll in a program to obtain your report - ie:
freecreditreport.com. It is a good idea to obtain your credit report
once a year just to make sure everything is correct, even if you don't
plan on obtaining financing in the near future.
Your lender can help you with all aspects of your financing. Again,
if your lender is not helpful and does not answer all your questions, get
another lender. There are plenty of banks and mortgage companies out there
willing to bend over backwards to get your business. In many
cases, homebuyers qualify for more money than they thought (or may want to
spend!)
Types
of Mortgages
Mortgages come in a wide variety of types and sizes to meet a
wide variety of needs. Below is a list of some of the more
common types, though it can vary from lender to lender.
|
Type of Loan |
Benefits |
Who is it good for? |
Fixed Rate
Interest rate remains the same for the
life of the loan, usually 15-30 years. |
Provides protection against rising interest
payments. Predictable payments make budgeting for the
future easier. |
Especially
attractive when interest rates are low. Ideal when you
plan to stay in your home for at least 5 years. |
Adjustable Rate
(ARM)
Interest rates and payment can rise or
fall as a result of an annual rate adjustment. Initial
rate is normally fixed for a period of 1-7 years. |
Initial
interest rates and payments are lower than that of a
fixed rate mortgage. |
May be a good
choice homebuyers who do not plan on keeping their home
for more than a few years, or if you need a lower
rate to qualify for financing a particular home. |
Convertible ARM
Offers the option to convert your adjustable rate to a
fixed rate mortgage after a certain period of time. |
Start
off with a lower initial rate and convert to a fixed
rate when you can afford it to prevent further increases
in payment. |
When you need a
initial lower rate that an adjustable rate offers. May be good
for someone who expects an increase in income in the
near future. |
Balloon Loan
Offers fixed payments for a period of time followed by
one balloon payment for the balance of the loan at the
end of the term (usually 5-7 years) |
Interest rate is lower than that of a fixed rate
mortgage. |
A choice of a
home buyer who will be moving or refinancing in 5-7
years. |
Renovation Loan
Could be a fixed or adjustable rate. Examples are the
FHA 203K and MassHousing Rehab loans. |
The
amount of funds that can be borrowed is based on the
future value of the property after remodeling. |
Perfect for the
home buyer looking to purchase a "fixer-upper" or
"handyman special". Perfect for bank-owned and
short sale properties that usually need work. |
New Construction
Loan
Finances the construction of of a new home. |
Loans
for new construction offer options such as an extended
rate lock of bridge loan. |
Home buyers
building their own home or purchasing from a builder. |
Under each of the above loan types are many different
programs are available such as interest only loans, jumbo
mortgages and many more...too much to explain here. Your best
option is to talk to your mortgage consultant and decide what is
best for your particular situation.
There are many programs
that are specifically designed for first time home buyers.
FHA and
MassHousing
are two government agencies that have great mortgage programs that require
less of a down payment than most standard mortgages. Also many towns
have special matching downpayment programs for first time home buyers.
This can double the amount of money you put down on a home, and reduce
your mortgage payment.
NEXT STEP:
WHAT TYPE OF HOME DO YOU WANT?
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