There are three main parts to financing a home – qualifying for the loan, a down payment and closing costs. Here are brief details of what you should know, but a reputable mortgage lender can talk with you in detail about your particular situation. If you don’t already have a lender, one of our agents will be happy to recommend a couple of people. We don’t recommend shopping online for a lender.
Loan Qualification
Ideally you should do this before you begin looking for a home. If you’ve already started looking, get pre-qualified as soon as possible! A lender will review your credit, income, debts, and assets to determine if you are qualified for a loan and how much you can borrow. Poor credit doesn’t mean you can’t get a loan, but you will pay a higher interest rate - which may affect how much house you can afford. Contacting a lender before you make an offer gives you the chance to work out any problems that may arise without the pressure of contract deadlines. A qualification letter from your lender will also put you in a stronger position when you make an offer, especially if you are competing with offers from other buyers.
Down Payment
If you have the cash, a 20% down payment is your best option because it eliminates the need for mortgage insurance (PMI or MIP). This is a fee you pay for having a lower down payment and possibly being at greater risk of defaulting on your loan. However, many people don’t have 20% to put down and that should not stop you from pursuing the dream of home ownership. Most lenders have low down payment programs (3.5% or 5% of the sales price down) so there’s usually an option for everyone. There are other programs (VA and USDA) with very low or zero down payment. However, both have very specific criteria for eligibility.
Borrowing from relatives, cashing in stock, or selling “toys” such as a boat or extra car are all options for raising down payment money. Your lender will probably need some documentation for any money obtained in this way.
Closing Costs
No matter which home you buy, there will always be closing costs. These can include the fees your lender charges to give you the loan, title insurance, attorney’s fees, recording fees, appraisal fees, survey, inspection fees, and notary fees. Usually these fees are due in cash at the time of closing, but sometimes they can be included in your mortgage. Your lender can best estimate these fees by providing you with an estimate of closing costs. If you want to try to include closing costs in your loan talk about this with your agent when writing the offer.
Choosing a Lender
You should not only look for competitive interest rates, but reasonable closing costs too. This is where the closing cost estimate from the lender is very helpful. The federal government requires all lenders to use the same format in disclosing their fees, which makes it a little easier for you to compare them. It’s still tricky to make comparisons if you aren’t familiar with all the fees. A good agent will be happy to review them with you. Once you’ve chosen a lender, you will need to fill out an application and provide supporting documentation. You can start gathering the documents you’ll need now:
- Social Security Number
- W-2s from the past 2 years
- Bank Statements (checking and savings) past 3 months
- Pay Stubs from the past 2 months
- Federal Tax Returns past 2 years
- Creditor Information: vehicle loans, student loans, credit cards, child support
- Assets: stocks, bonds, IRA/retirement, life insurance, other income sources
Want to get serious about searching for your next home? Check out our current listings, and let us know if you see yourself in any of these homes! If you’re ready to buy or sell, or just have questions, talk to one of our experienced agents here at Inhabit Real Estate Group.
