Buying a home is at once an exciting and challenging venture. With commitment, planning, and learning, you can become a successful homeowner. This series covers everything you need to know to start the home buying process off right, including:
- Preparing for Homeownership
- Understanding Mortgages
- Getting a Mortgage
- Searching for a Home and Making an Offer
- Closing and Tax Benefits
Chapter#3 Getting a Mortgage
When to apply
Some people wait until after they make an offer on a home to get pre-qualified for a mortgage, but it is best to do it beforehand. Why?
- It lets your real estate agent know how much house you qualify for. This saves you and your agent time in only looking at homes you qualify for. Some agents won’t take you out to look at homes without a pre-qualification.
- It lets sellers know you are a serious buyer. Many sellers will not consider offers from those without pre-qualification.
- It gives you a limit as to what homes to look at. Why put an offer on a house that would require a $500,000 mortgage if you can only qualify for a $300,000 mortgage?
- You do not have to rush to find financing after your offer is accepted as your lending will be ready to begin processing your mortgage as soon as you have a ratified contract.
With a pre-qualification from State Department Federal Credit Union (SDFCU), you are given a pre-qualification letter with the amount of the mortgage you can afford along with an estimate of what interest rate you would qualify for and an estimated break down of your closing costs. The amount of mortgage you qualify for is based in part on your monthly income, your monthly debt obligations and the amount of funds you have available for your down payment and closing costs. Our pre-qualifications are good for 120 days. If you are just starting to look and not sure when you are going to buy, getting pre-qualified is a good idea. Being pre-qualified will help you narrow down your search for homes within your price range.
Finding a lender
Applying at financial institutions where you already have a pre-existing relationship like SDFCU is often a good place to start. SDFCU lets you apply for a mortgage online within its Mortgage Application Portal, which helps you identify the best loan type for you and will provide you a pre-qualification letter. You can also estimate monthly payments and closing costs. If you have specific questions, you may want to chat with someone in person over the phone by calling 703.739.3092.
Lenders like SDFCU consider many factors when deciding the amount of mortgage you qualify for. They typically include:
- Your credit score: The higher your score the easier it is to qualify for a mortgage and have a low rate. Make sure you know your current score and take steps to improve your credit when considering purchasing a home.
- The down payment amount and your other assets: Mortgage lenders typically set a maximum allowable loan to value ratio, which measures how much of the home purchase can be financed through the mortgage. For example, if a lender sets a 95% loan to value ratio, the loan cannot be for more than 95% of the purchase price of the house, meaning you need a down payment of at least 5%. Aside from the money for the down payment, most lenders like to see that you have additional assets that can be used to pay the mortgage in case of emergencies. If you are a first-time homebuyer, SDFCU offers a unique First-Time Homebuyer Mortgage option created specifically for those members buying a home that have not owned a home in the last 3 years with a low 3% down payment at a 97% loan to value ratio.
- Your employment history: In order to know that you are capable of handling a mortgage payment, lenders want to see stable
- Your income: Traditionally, SDFCU has required that the mortgage payments, including taxes and insurance, not exceed 28-33% of your gross income. This is called the housing expense or front-end ratio. You will likely have to provide two years’ worth of Form W-2s and/or paystubs or tax returns to document your employment/ income history.
- Your existing debt: Many lenders like SDFCU will require that your existing debt payments plus your mortgage payment do not exceed 43% of your gross income, although some lenders will allow a higher percentage. This is called the total debt or back-end ratio.
After collecting the necessary information, the lender will approve the loan or deny it. If the loan is denied, the lender is required to tell you the reason why. You will probably be disappointed, but use the feedback provided to make changes. If the loan is approved, the lender will tell you the amount of mortgage you qualify for.
Within three business days of receiving your loan application, the lender must give you a Loan Estimate disclosure, which shows the amount of the mortgage, the interest rate, the monthly payment and all closing costs associated with the mortgage. The Loan Estimate is in the same format for all lenders so that you can easily compare the mortgage offers from each lender to determine the best option for you. Be sure to read the statement carefully, and ask for clarification from the lender if you have any questions.
Examining your budget
If you are approved for a $350,000 mortgage, that means you can afford a $350,000 mortgage, right? Not necessarily. Lenders typically only look at a few factors, namely your income, debt, and down payment. However, you have more expenses than your debt. If you have to pay $1,000 a month in daycare, that reduces the money you have available for your mortgage. While your income and expenses can change after the home purchase (for example, net income often increases due to the tax benefits of owning a home, and utilities often increase too since houses tend to be larger than apartments), creating a budget gives you a better idea of what you can afford to spend than just basing it on a pre-approval amount. Subtract your expenses (minus what you are spending now for rent) from your income to get an estimate of the monthly payment you can afford. Don’t forget that you will have to pay property taxes and homeowners insurance. Depending on the property you purchase, you may also have to pay a monthly homeowners’ association fee or condo fee. If you need help creating your new home budget, take advantage of SDFCU’s online budgeting tools or check out our financial calculators.
Stay tuned for Chapter #4 Searching for a Home and Making an Offer. SDFCU has a free real estate program called the HomeAdvantage, which will provide you cash back to use towards your closing costs.
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