The better part of your house buying process will entail searching for your dream home. Remember this is the place you’re going to live in, visit, make memories, and grow in. It is important that your home is somewhere you feel comfortable, safe, and one which you can afford.
Not only are you searching for your house, but this step on the road to home ownership may also include searching for professionals like a realtor, appraiser, mortgage broker and surveyor. Such people usually come in handy when it comes to getting the actual purchase done, and also guide you through the whole process. Don’t forget you’ll also need a lender, but we can get to that later.
If you’re thinking there is a lot to consider, you’re right. Which is why we’ve created a little check list full of information to help you through the process.
Determine how much house you can afford
You need to know what you can truly afford even before you start talking to sellers or making loan applications. The general rule is that you should be looking at homes whose prices are two to three times your annual earnings. That will ensure you don’t take on a mortgage responsibility that you can’t afford. Don’t forget to incorporate all the related costs (like fees and closing costs) and also factor in any savings that you may have. They will come in handy when making a down payment.
Other than the price of the house, you should also consider your monthly payments. Note that if you fail to make your mortgage payments, you will risk being foreclosed. It is recommended that your monthly payment (the sum of principal, interest, taxes, insurance, and any other additions) should not be more than 28% of your monthly gross income. Keep in mind that some areas require residents to pay homeowner’s insurance.
In fact, some lenders will not give you credit if the amount you are asking for will make your mortgage expenses to exceed a specified percentage of your gross income. That percentage depends on the lender and other factors, but the most common are 36% and 38%.
Since people have different situations, it is wise that you get a professional who will help you determine how much house you can afford. Here at MainStreet Lender’s we have years of experience helping customers successfully break down all the expenses, taking you step by step through the whole loan and repayment process.
Zero in on location
Once you know how much house you can afford it will be easier to identify the counties and neighborhoods where home prices are within your affordability range.
Start by making a personal analysis. Are you going to live alone, with a spouse or family? Each of those setups requires unique facilities and services. For example, if you are living alone the distance to the nearest school may not matter. But if you have kids, or are planning on having children in the future, then schools become important factors to consider. And so does the type of home. Will it be single-family detached, townhouse, condo or co-op?
After that now switch your focus to the neighborhood. Is the area good for raising a family? How safe is your neighborhood? Are the neighbors friendly? Are there parks and recreational facilities close by? Basically, you are trying to look at what the area has to offer to make you more comfortable. Think of what you are willing to compromise on and what you can’t live without. The more neighborhood options you have, the easier it will be to find a house that fits your criteria.
Know the types of loans available for you and the property
By now you have determined the type of home you want, its location and how much house you can afford. That should be enough information to help you evaluate your loan options. There are several ways to categorize loans:
- Government vs. conventional loans: your mortgage loan can either be conventional or government-backed. Government-insured loans are offered by the federal government through its administrative bodies (like FHA, VA, and USDA). The government insures the loans, making it possible for lenders to extend the credit to borrowers with little to no regards to their credit history. The application is done through credit companies like banks or approved mortgage lenders. The government mortgage loans available today are VA, USDA and FHA loans. Conventional loans are offered by lenders themselves and are not insured by the government.
- FRM vs. ARM loans: there are two types of interest rates, namely, fixed and adjustable. These terms refer to the different type of loan interest rates, which include either a fixed-rate mortgage (FRM) or adjustable-rate mortgage (ARM). The interest rate charged on a FRM does not change over the term (duration) of the loan. It remains the same regardless of market changes. There are three terms of FRM loans – 30, 15 or 10 years. On the other hand, the interest rate charged on an ARM fluctuates depending on market changes. When market rates increase so does the rate of your loan.
- Jumbo vs. conforming loans: a jumbo mortgage is a loan whose amount exceeds the limit set by Fannie Mae and Freddie Mac. That limit varies from county to county, but the base limit is $424,100. Some high-cost areas like San Francisco and New York City has a maximum loan amount of $636,150, before it is considered jumbo. If you take out a loan that is more than your local maximum limit, it is considered a jumbo loan. If it is within the limit, then it is a conforming loan.
Note that some properties are not eligible to be financed by a certain type of loans. And each loan comes with additional eligibility requirements that you must meet. Our advice, is to consult an expert who can help you navigate through the wide wonderful world of loans. Knowing the type of loan that you qualify for will point you in the right direction when shopping for a mortgage loan and lender.
Research on lenders
Speaking of shopping for a lender, the process is a little more detailed than it may seem on paper. You want a mortgage lender who will walk with you through the whole process, i.e. from the moment you start applying, to when you eventually clear off your mortgage loan. More often than not each lender will have tailored packages for different types of borrowers. So the best thing is to get a few quotes and compare, to see what suits your needs and financial capabilities.
When doing the homework, consider things like perks and benefits, no cost loans, interest rates, types of loans available, requirements for an applicant to qualify, whether you are allowed to have a co-signor, the amount you’ll be approved for.
A financial trial run is a great idea
Once you have acquired a few quotes, you may want to consider doing a trial run for your loan. This means taking the quote information you’ve received and running it through a mortgage calculator. You’re looking to see how much your monthly mortgage will be, if you can afford it, and how much money you’re left over with after paying your mortgage.
Ideally you’ll want to find a house where you’ll have no problem making payments on, even if your financial situation changes. Take some time to calculate lots of different situations, quotes, and scenarios. This is one of the most important steps in any home search, and with our tools, you don’t have to be a math whiz at all to do it.
From there you will be ready to become a homeowner.