Sug Jandu's Blog
There are so many factors that go into finding and securing the financing to buy a home. While lenders require quite a bit of information for you to get a loan, you still need to be aware of your own financial picture. Even if you’re pre-approved for a certain amount of money to buy a home, you still need to dig into your finances a bit deeper than a lender would. The bottom line is that you can't rely solely on a lender to tell you how much you can afford for a monthly payment on a home. Even if you’re approved to borrow the maximum amount of money for your finances to buy a home, it doesn’t mean that you actually should use that amount. There are so many other real world things that you need to consider outside of the basic numbers that are plugged into a mortgage formula.
Run Your Own Numbers
It’s important to sit down and do your own budget when you’re getting ready to buy a home. You have plenty of monthly expenses including student loan debt, car payments, utility bills, and more. Don’t forget that you need to eat too! Think about what your lifestyle is like. How much do you spend on food? Do you go out to the movies often or spend a regular amount of cash on clothing? Even if you plan to make adjustments to these habits when buying a home, you’ll want to think honestly about all of your needs and spending habits before signing on to buy a home.
Now, you’ll know what your true monthly costs are. Be sure to include things like home insurance, property taxes, monthly utilities, and any other personal monthly expenses in this budget. If you plan to put down a lower amount on the home, you’ll also need to include additional insurance costs like private mortgage insurance (PMI).
The magic number that you should remember when it comes to housing costs is 30%. This is the percentage of your monthly income that you should plan to spend on housing. Realistically, this could make your budget tight so this is often thought of as a maximum percentage. By law, a lender can’t approve a mortgage that would take up more than 35% of your monthly income. Some lenders have even stricter requirements such as not allowing a borrower to have a mortgage that would be more than 28% of monthly income. This is where the debt-to-income ratio comes into play.
As you can see, it’s important to take an earnest look at your finances to avoid larger money issues when you buy a home.
Many people own homes through a mortgage agreement. Traditional mortgages are primarily fully amortized or gradually paid off with regular payments over the lifetime of the loan. Each payment contributes to both the principal and the interest.
A balloon mortgage is a short-term home loan with fixed-rate monthly payments that only take care of accrued interest on the loan for a set period. It also has a large “balloon” payment to cover the rest of the principal.
The payment plan is based mainly on a fifteen- or thirty-year mortgage, with small monthly payments until the due date for the balloon payment. These low regular payments partly cover the loan but require paying the remainder of the unpaid principal as a lump sum. Selling the house or refinancing the balloon loan before the payment is due is how most buyers approach this situation.
Key Issues with Balloon Mortgages
Lenders present a deadline by which the balloon payment is due (three- to seven-year period). The enormous amount is often more than borrowers can easily handle at once.
Paying only interest on a loan does not allow equity to build. Many homeowners use equity as a means to complete home improvements or other projects. Building equity also helps homeowners when it comes time to sell their home because a traditional mortgage reduces over time.
Why People Opt for Balloon Loans
It is possible to refinance a balloon mortgage or sell the property before the balloon payment is due but it can be difficult to do so. A dry housing market, job loss, or low credit score are potential obstacles. Lay-offs and depressed home values can trap buyers in their balloon loans. Without the option to sell, refinance, or fulfill their balloon payments, borrowers may end up in foreclosure.
The One True Strategy
Traditional loans are generally safer than balloon mortgages. To keep housing costs at a minimum, use a balloon mortgage if you are sure you can exit before the balloon payment comes due. Otherwise, it is best to remain in the realm of traditional loans.
Review the pros and cons of taking a balloon loan before committing to it. Speak to your financial planner or realtor for professional guidance.
The closing cost is the last sum of money home buyers to pay after which there will be no further payment. The closing price can be surprisingly huge. This bill ranges from 3% to 6% of the mortgage. Do the math, and this means that the closing cost on a $300,000 home is around $9,000 to $18,000.
It is understandable that many home buyers are eager to complete their payment and move in, but there is a need to compare prices just as you research prices of a similar product when you set to buy a refrigerator, TV, or a car. Here are some strategies that will enable you to lower your closing cost:
Request a ‘Loan Estimate’ from the Lender
Asking your lender for a ‘Loan Estimate' form is the first step to take towards minimizing your closing cost. The ‘Loan Estimate' form is a three-page document that your lender will issue to you within three working days.
A loan estimate allows you to make a comparison between companies and also lets you some specific fees that are peculiar to the lender you have chosen.
Be aware of where the savings are
You will find the total closing cost as well as the amount you need to close the loan at the base of the first page of the Loan Estimate form. Check page two, section C of the Loan Estimate form, there you find the heart of your savings.
Push back on the charges of the lender
Some lenders might charge a flat fee that covers services like originating and underwriting while others charge may have a separate price for each of the services. There is no problem with charging a separate fee for such services, but when there are more than one or two lines of itemized charges, you should be cautious when dealing with such a mortgage company. Also, take note of the names of the fees, demand for a further explanation from your lender if you notice a charge with a vague title.
Ask your Seller to contribute
You can ask your seller to provide money to meet your closing cost demands. However, this contribution depends mainly on the market situation as well as the home because sellers may not oblige if there is aggressive competition among buyers.
Go for a mortgage without a closing cost
Going for a no-closing-cost mortgage is another strategy to consider. If you don't have enough cash, a no-closing-cost mortgage will be of great benefit. This strategy works like this – you won't have to pay the closing cost, but it will add up to your monthly mortgage payment.
If you are thinking of buying a home in the near future, there’s one three-digit number that could be oh so important to you. That number is your credit score. Read on to find out how a credit score can affect you and the steps you can take to be sure that your credit is in good standing when you head to apply for a mortgage.
What Is A Credit Score?
Your credit score is checked by lenders of all kinds. Every time you apply for a loan or a credit card, there’s a good chance that your credit score is being pulled to see if you qualify for the loan. Your credit score is calculated based on the information on your credit report. This information includes:
Length of credit history
New credit accounts opened
The areas with the most impact on your score is your payment history and your debt-to-credit ratio. This means that on-time payments are super important. You also don’t want to get anywhere close to maxing out your credit cards or loan amounts to keep your score up.
What’s A Good Score?
If you’re aiming for the perfect credit score, it’s 850. Most consumers won’t reach that state of perfection. That’s, OK because you don’t have to be perfect to buy a house. If your score is 740 and above, know that you’re in great shape to get a mortgage. Even if your score is below 740 but around 700 or above, you’ll be able to get a good interest rate on your mortgage. Most lenders typically look for a score of 620 and above. Keep in mind that the higher your credit score the better your interest rate will be.
What If You Lack Credit History?
Most people should get a credit card around age 20 in order to begin building credit. You can still qualify for a mortgage without a credit history, but it will be considerably harder. Lenders may look at things like your rent payments or car payments. Lenders want to know that you’re a responsible person to lend to.
What If Your Score Needs Help?
It doesn’t mean you’re a hopeless case if you lack good credit. Everything from errors on your credit report to missed payments can be fixed. The most important thing that you can do if you’re buying a home in the near future is to be mindful of your credit. Keep an eye on your credit report and continue to make timely payments. With a bit of focus, you’ll be well on your way to securing a mortgage for the home of your dreams.
If you’re in the market to buy a home, you’re probably learning many new vocabulary words. Pre-approved and pre-qualified are some buzz words that you’ll need to know. There’s a big difference in the two and how each can help you in the home buying process, so you’ll want to educate yourself. With the proper preparation and knowledge, the home buying process will be much easier for you.
This is actually the initial step that you should take in the home buying process. Being pre-qualified allows your lender to get some key information from you. Make no mistake that getting pre-qualified is not the same thing as getting pre-approved.
The qualification process allows you to understand how much house you’ll be able to afford. Your lender will look at your income, assets, and general financial picture. There’s not a whole lot of information that your lender actually needs to get you pre-qualified. Many buyers make the mistake of interchanging the words qualified and approval. They think that once they have been pre-qualified, they have been approved for a certain amount as well. Since the pre-qualification process isn’t as in-depth, you could be “qualified” to buy a home that you actually can’t afford once you dig a bit deeper into your financial situation.
Getting pre-approved requires a bit more work on your part. You’ll need to provide your lender with a host of information including income statements, bank account statements, assets, and more. Your lender will take a look at your credit history and credit score. All of these numbers will go into a formula and help your lender determine a safe amount of money that you’ll be able to borrow for a house. Things like your credit score and credit history will have an impact on the type of interest rate that you’ll get for the home. The better your credit score, the better the interest rate will be that you’re offered. Being pre-approved will also be a big help to you when you decide to put an offer in on a home since you’ll be seen as a buyer who is serious and dependable.
Things To Think About
Although getting pre-qualified is fairly simple, it’s a good step to take to understand your finances and the home buying process. Don’t take the pre-qualification numbers as set in stone, just simply use them as a guide.
Do some investigating on your own before you reach the pre-approval stage. Look at your income, debts, and expenses. See if there is anything that can be paid down before you take the leap to the next step. Check your credit report and be sure that there aren’t any errors on the report that need to be remedied. Finally, look at your credit score and see if there’s anything that you can do better such as make more consistent on-time payments or pay down debt for a more desirable debt-to-income ratio.