Some of the most important requirements for buying a home include a down payment, a good credit score, and an acceptable debt-to-income ratio. Homebuyers should also be prepared for closing costs, which are due before final home documentation is signed. When it comes to your financial history, lenders simply look for a pattern of paying bills, mostly on time. With each of these types of loans, you may have the opportunity to choose between a fixed-rate mortgage or an adjustable-rate mortgage (also called an ARM).
As you probably guessed from the names, fixed rates are static; adjustable rates can go up or down. You'll also need to choose the term of the mortgage. Thirty-year mortgages are the most common, but terms of 10, 15, or 20 years may be available. You know the property you want to buy and how much you will have to pay for it.
You will now choose a lender to get a mortgage (you can go with a lender that has previously approved you or start from scratch with a different one). Even with an online first lender, you will often work closely with a loan officer to complete the actual application. Forms W-2 from the past two years (possibly longer, if you have changed employers). Paid receipts for the last 30 to 60 days.
In addition to a down payment, prospective homebuyers must have enough money set aside to cover closing costs, which can range from 2 percent to 4 percent of the purchase price. When budgeting your monthly mortgage payment, consider not only the amount of principal and interest, but also property taxes, homeowners insurance, homeowners association fees (if applicable), plus private mortgage insurance if you're putting in less than 20 percent. Don't forget to set aside money for ongoing maintenance and unexpected repairs that are sure to come up as well. To avoid private mortgage insurance, or PMI, you'll need to save at least 20 percent of the purchase price of the home for the down payment.
Some lenders offer non-PMI mortgages with lower down payments, but expect to pay a higher interest rate. Mortgage approval involves presenting your income, credit history, employment information, and other details needed to obtain a mortgage. The mortgage lender will review your financial information and tell you how much money you can spend on a home. This is usually an approximate number that will guide you through the buying process.
Pre-approval of the mortgage will also help you spend less time looking for homes that may be out of your budget. One thing you'll want to know right away is the difference between a mortgage pre-approval and a mortgage prequalification. Getting pre-approved for a mortgage is an important first step in the homebuying process, as it signals sellers that you are serious about buying a home. Mortgage pre-approval should not be confused with prequalification, since prequalification does not involve a thorough financial review of the way pre-approval does.
Prequalification can be easily obtained online and allows prospective landlords to enter their income information without verifying numbers. For that reason, prequalification can provide misleading information at times and could tell prospective landlords that they qualify for more or less than they would if they obtained prior approval. In terms of the down payment amount, it's generally recommended to put in 20% when buying a home. When you pay less than 20%, you'll usually have to pay mortgage insurance, which is set up to protect the lender in the event of a loan default.
Homebuyers who put in less than 20% are considered financially risky for a lender, so mortgage insurance is established. If you can't afford to put 20% on the home, there are several mortgage options that allow buyers to deposit as little as 3% or 5%. Some mortgage options, such as VA loans and USDA loans, don't require a down payment. Saving enough money to cover a 20% down payment can take a considerable amount of time, so getting a loan that allows you to deposit little or no money can be attractive.
However, while making a small down payment for a home can help speed up the buying process, a larger down payment can help you get a better interest rate, lower charges, and more equity in your home. Those who deposit more money are considered less risky and won't have to pay as many recurring monthly insurance fees. However, if you're going to struggle to make your monthly mortgage payments, if you put too much into the house, it's best to wait to buy a home or put less up front. It's also important to remember that you'll need cash after buying the home to keep up with maintenance and take care of other home-related items.
If you put all of your savings toward a down payment, it may be more difficult to pay for future repairs and maintenance. The stronger your credit rating, the more likely you are to qualify for a mortgage. Mortgage lenders generally evaluate your credit payment history, the types of credit you have open, the amount owed, the length of your credit history, and any new lines of credit that you have recently opened. While having a lower credit score may indicate to mortgage lenders that you are a riskier borrower, you may still qualify for a mortgage.
However, lenders generally charge higher interest rates or may require borrowers to provide a larger down payment. There are several types of mortgage lenders available to homebuyers, including direct lenders, mortgage brokers, correspondent lenders, wholesale lenders, and portfolio lenders. Here's how to choose a mortgage lender if you're starting the process of researching people to work with. Mortgage brokers are licensed individuals who connect mortgage lenders with borrowers who need a loan.
Mortgage brokers are paid by the prospective landlord or lender, but never both. They generally charge about 1 or 2 percent of the loan amount for their services. Some mortgage brokers may obtain rates and mortgage offers that would be difficult for a homeowner to obtain on their own directly through a lender. On the other hand, some mortgage brokers like to work only with certain lenders, which can influence the advice they give you.
Before working with a mortgage broker, it's best to talk to them about their terms and charges and ask if they have any requirements on their part, such as a minimum down payment. While the benefits of working with a real estate agent are numerous, buyers are not responsible for paying the real estate agent's commission, so working with an agent comes at no cost to them. The seller's agent normally pays the commission on behalf of the buyer, which makes everyone win for the buyers. A real estate agent who works with buyers is called a buyer's agent.
When starting your initial home search, contacting a buyer's agent can help you save considerable time and money during the home search process. To begin with, the buyer's agent can provide guidance on who to contact when starting the prequalification process. After receiving the prequalification, your buyer's agent will most likely contact you to discuss what you should have in a home. They will most likely ask you what area you want to live in, how many bedrooms you need, what type of outdoor space is preferable, and other information about your ideal home.
They will then spend time on the MLS (multiple listing service) and online to search for homes that meet their criteria. From there, they will establish a visitation program for you to visit the houses in person. If you have any questions about the listed homes, the buyer's agent will consult directly with the seller or the seller's agent to answer any questions you need. Sometimes they can also provide suggestions on housing finance and provide guidance on types of loans, banks, etc.
In addition to completing a home inspection, it's also important to spend time going room by room and doing an inspection on your own, together with your real estate agent. While home inspectors are often extremely detailed and knowledgeable, they may miss something that you detect. It's normal and common for a house to need repairs; no house is perfect. Problems to watch out for include mold or mildew, water damage, any signs of pests, or foundation problems, such as unbalanced floors.
Work with your real estate agent to negotiate home repairs. If this is your first time buying a home, ask your realtor for recommendations on insurance agents, as you'll want to put homeowners insurance on your new home. If you currently own a home and are buying a new residence, you can contact your current insurance agent and ask them to create a new policy for the home. Homeowners insurance protects your home in the event of fire, flood, and other natural disasters and is almost always required by mortgage lenders, because they want to make sure that the asset they lend you money for is fully protected.
If you don't have a mortgage, it's still important to get homeowners insurance and protect your property in the event of damage or destruction. After hiring your home, your real estate agent will most likely have a real estate lawyer with whom they can connect you. The role of the real estate attorney involves reviewing the contract for the sale of the property to ensure that any issues are clear and that all terms of the contract are met, including seeking title to ensure that the property is actually owned by the seller. You can also purchase title insurance through your real estate attorney.
The lawyer will inform you of how much money you need to bring to the closing table. You'll also need a photo ID. The lawyer will conduct the closing with you, your real estate agent, and the seller's agent present. As with most other aspects of the homebuying process, you can also consult with your real estate agent about recommended moving companies.
We've put together a moving checklist for those moving to Raleigh. We've also put together other great moving guides for people moving to Charlotte. . .