I really want to own my own home, but I'm not sure I can afford it. Where do I start?
Lots of people don't even consider buying a home because they're afraid they can't afford it. But for most people, home ownership is within reach - especially with some of the special programs for first-time home buyers. In fact, for many, home ownership is as affordable as renting - in some cases even more affordable.
How do I know how much house I can afford?
Before you start looking at homes, you need to have some idea of what you can afford. As a general guide, you can purchase a home with a value of two or three times your annual household income, depending on your savings and debts. However, you may be able to take advantage of special loan programs for first time buyers to purchase a home with a higher value.
If you'd like to know exactly how much you can afford, talk to a mortgage lender. If you're working with a RealtorŪ, he or she can help you with this, too.
When should I talk to a mortgage lender?
The short answer: when you start thinking about buying a home. It's true you can't actually apply for a mortgage until you've chosen your home and signed a contract to buy it. But you shouldn't wait until then to start talking with a mortgage lender.
Any reputable mortgage lender will be happy to help you as you look for a home. The lender will work with you to determine how much house you can afford, help steer you to special mortgages for first time home buyers, and perhaps make suggestions that could make it easier to get the best mortgage for you.
Another advantage: you'll already have a good relationship with a lender when it comes time to apply for your mortgage.
How do I choose a mortgage lender?
When most people think about choosing a mortgage lender, they think about finding the lowest rate. Period.
Of course, financial considerations are important to every home buyer, and you certainly should consider the different rates lenders in your area offer on comparable loans. But you also want a lender you can trust, and someone you can work with effectively. So don't let rates be your only criterion. Here's the process we recommend:
Aren't there really just two kinds of mortgages: fixed and adjustable rate?
You could say that, because all mortgages fall into one of these two categories -- that is, the interest rate you pay is either the same (fixed) for the life of the mortgage, or it can change (adjust) over the life of the mortgage.
With this type of mortgage your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.
Fixed-rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also "bi-weekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.)
Adjustable-Rate Mortgages (ARMS)
These loans generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home.
However, the interest rate changes at specified intervals ( for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also.
There are also mortgages that combine aspects of fixed and adjustable rate mortgages - starting at a low fixed-rate for seven to ten years, for example, then adjusting to market conditions. Ask your mortgage lender about these and other special kinds of mortgages that fit your specific financial situation.
How do I know which type of mortgage is best for me?
There isn't a single, simple answer to this question. The right type of mortgage for you depends on many different factors:
Your current financial picture;
How you expect your finances to change;
How long you intend to keep your house;
And how comfortable you are with your mortgage payment changing from time to time.
For example, a 15-year fixed-rate mortgage can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher. And an adjustable rate mortgage may get you started with a lower monthly payment than a fixed-rate mortgage -- but your payments could get higher when the interest rate changes.
The best way to find the "right" answer is to discuss your finances, your plans and financial prospects, and your preferences frankly with a mortgage lender.
Do they really need to know everything about me for the application?
It may seem that way -- but actually all your mortgage lender needs to know about you is your employment and finances, and information about the home your buying.
However, you will need to provide quite a few details about these topics, and your application process will go much more smoothly if you're prepared. Be sure to ask your mortgage lender what information you'll need to complete your application.
How much will my credit history affect my ability to get a mortgage?
Many home buyers are very worried about this issue. We've even heard one story that an applicant was denied a mortgage because he had returned a rented videotape late!
Of course, that could never happen. And most people don't need to worry about the effects of their credit history. However, you can be better prepared if you get a copy of your credit report to review before you apply for your mortgage. That way, if there are any errors you can take steps to correct them before you make your application.
If you have had credit problems, be prepared to discuss them honestly with your mortgage lender -- and come to your application meeting with a written explanation. Responsible mortgage lenders know there can be legitimate reasons for credit problems, such as unemployment, illness or other financial difficulties. If you had a problem that's been corrected, and your payments have been on time for a year or more, your credit will probably be considered satisfactory.
How much will I need for the down payment?
It's probably less than you think. Many first-time buyers are surprised to learn there's no set answer to this question. Generally, though, your down payment can be anywhere from three to twenty percent of the home's value. Down payments can be lower for some special, first-time buyer loans, and veterans or those on active military service can obtain loans with no down payment at all.
What does my mortgage payment include?
For most homeowners, the monthly mortgage payments include three separate parts: a payment on the principal of the loan (that is, the amount borrowed); a payment on the interest; and payments into a special account (called an escrow account) that your lender maintains to pay for things like hazard insurance and property taxes. These elements are called P.I.T.I. (Principal-Interest-Taxes-Insurance).
What happens after I've applied - and how long will it take?
Your lender will begin the work of verifying all the information you've provided. This process can take anywhere from one to six weeks, depending on the type of mortgage your choose, whether you're buying a home outside your local community, and other factors.
Within three business days after your application, the lender must give you an estimate of your closing costs. (The closing is the actual settlement of your loan.) You'll also get a statement that shows your estimated monthly payment, the cost of your finance charges, and other facts about your mortgage.
For many home buyers, this waiting period can be nerve-wracking. So stay in touch with your mortgage lender, be prepared to answer any questions that might come up -- and remember that mortgage lenders are in the business of making loans, not denying them.
Some homebuyers find the closing process to be one of the most intimidating aspects of buying a home because it's so unfamiliar. Ask your mortgage lender what to expect at your closing.