As a first-time homebuyer, it can be a challenge to make sense of financing options and the alphabet soup of PITI, FHA, VA, escrow and many other terms. Your American Federal Banker can help you identify the best options and help you through the process of financing a new home.
Let an American Federal Banker help you think through the questions and help you with the answers on your way to turning your dream of Home Ownership into reality.
When thinking about buying or building a house, some homework and a little research can help you reach your goal.
Steps to your first home:
How much house can I afford to buy?
What will it cost to purchase a home?
If you need financing, the value of the home you buy needs to be greater than the loan amount. There will be the cost of a down payment, pre-paid expenses and closing costs.
The size of the down payment depends on whether you are a first-time or a repeat buyer. In some cases, private mortgage insurance (PMI) can lower the amount needed for a down payment. Gift funds from a parent or grandparent can help increase the amount of the down payment.
Pre-paid expenses include home owners insurance, property taxes and flood insurance. Typically, homeowners set aside funds in an escrow account to pay for these expenses each year.
Additionally, allow a cushion for the incidentals that can come with home ownership, such as home appliances, window treatments, landscaping and yard upkeep equipment.
What are closing costs?
Closing costs vary based on the loan amount and the costs incurred during the home loan mortgage process. They usually include the costs of an appraisal and title opinion of the property, a credit report and an origination fee. There can be commitment, underwriting, processing, recording and flood zone fees associated with a home loan mortgage.
Should I get pre-qualified for a home loan before I make an offer?
Absolutely! If you are shopping for a home, you want to be prepared to make an offer. Many sellers will not consider an offer if the buyer does not include a pre-qualification letter from a lender.
What information should I gather before meeting with an American Federal Banker to become pre-qualified for a home loan?
You will want to demonstrate your capacity to re-pay a home loan and prove you have sufficient funds to close a loan.
Bring a copy of documents with you (and your spouse, if you wish to be pre-qualified based on two incomes):
- two months of complete bank statements (financial institution name, account holder name, account number & transaction history)
- two current paystubs, or electronic payvouchers, dated within the last 30 days
- most current two years W-2s
- names, monthly payments and balances of any loans or consumer debt
- other real estate owned
For pre-approval for a VA loan, you’ll need a copy, or the ability to obtain, a Certificate of Eligibility and DD214 from the branch of military service.
If you are self-employed, bring two years of personal and business tax returns.
Finding a loan to fit your needs:
What steps should I expect in the process of getting a home loan?
Step 1) complete a mortgage loan application
Step 2) obtain an initial home loan approval from an underwriter at the bank
Step 3) consider locking in an interest rate before you close the loan
Step 4) obtain an appraisal of the property value of the home you want to buy
Step 5) obtain a title opinion and an updated abstract of the property, and
Step 6) close your loan with the title company.
How do I decide how much to offer on a home?
Consider the asking price of similar homes in the neighborhood and comparable property in the area. Having the property appraised and talking with real estate agents will help you make this decision. Ask for seller-paid closing costs, called concessions, as part of your offer.
How can I lower the interest rate on a home loan?
There are several options.
- Increase the amount of the down payment
- Escrow property taxes and home owners insurance
- Opt for a shorter term of the loan
- Pay discount points
- Improve your credit score
Do I have to escrow?
You may receive a discount on your home loan interest rate if you escrow your property taxes, special assessments and home owners insurance. A savings or a money market account is an alternative to escrowing, if you have the discipline to fund an account on your own. Establishing a monthly systematic direct deposit from a checking account to a savings account ensures you will have the funds you need each year to pay home owners insurance, real estate taxes and special assessments. Establishing your own savings account for these expenses allows you to earn interest on the funds and it allows you to manage the itemizations on your federal tax return.
How important is my credit history?
A borrower’s credit history and credit report score are part of the home-loan-approval process. Your credit history is reviewed to determine if you make your payments in a timely fashion; how much debt you have and the capacity for more; if there have been a multitude of recent inquiries into your credit report; if you have any outstanding collection items; and if you have declared bankruptcy in the past. Click Understand your Credit Report Score to learn more about credit reports.
Is Local Servicing of my home loan important?
Yes, if you want to keep your home loan “local” (versus selling it on the secondary market). This allows you to make your payments to the bank that provided the financing, versus sending payments somewhere else, often out-of-state. With local servicing, you speak to your American Federal Banker if you have a question or problem with a payment. Local servicing is available with variable-rate conventional home loans.
What kind of mortgage will fit best?
Consider the mortgage type (fixed, adjustable, VA, FHA), the term length and the interest rate. Your American Federal Banker can show you which options can help you reach your goal of home ownership.
Locating your dream home:
Will the house fit my needs?
Do you plan on having a family, expanding, remodeling, or are you looking for a home that has everything? Knowing what kind of house you are looking for will make it easier to narrow the search and understand how much you can afford.
What condition is the house in?
Make sure to have the home inspected by a professional to avoid any surprises after the purchase, such as a leaky roof or a wet basement.
Do you like the location?
Moving again within the first few years of buying a house can increase the risk of losing money in the re-selling process. Is the location near a school, close to work, or in a neighborhood with a history of good home values? Is the property in a flood zone, subject to additional special assessments or adjacent to commercially-zoned property? What is the traffic like? Are health services and shopping nearby? These are some of the important questions to research before you make an offer or decide to build.
How frequent and how long has the house been on the market?
If a house has been on and off the market or if it’s been listed for a long time, find out why. There may be a flaw in the house or a problem with the neighborhood and zoning or it could simply be a stagnant housing market.
How do I decide which builder to select, if I want to build a home?
Select a professional builder with a solid business reputation in the market. Visit several homes the builder has constructed and speak with the homeowners to understand the challenges they experienced during construction. Understand who will finance the home and provide insurance for it while it is under construction. Consult an attorney to review any documents before you sign an agreement to build. Building a new home requires many decisions. Staying within the allowances in your contract is key to avoiding cost overruns that can impact financing for a new home.
Are there other considerations?
It’s a good idea to review your life insurance coverage when you make a change in the amount of debt you have. You’ll want to be sure your most important asset–your family–is protected should something happen. A minimum coverage rule of thumb calls for enough life insurance to pay off all debt plus the equivalent of five years’ earnings.
Owning a new home is also a good time to establish a will and an estate plan, and to review your banking services to make your life more convenient.
This information offers general advice and is not intended to be legal or tax advice. Consult your attorney, tax accountant or other professional.