Home is where the heart is

    Home is where the heart is

    Mar 13, 2019

    Home ownership is a core component in establishing and living the American Dream. For most people, the ambition to acquire their own home is their most important goal, surpassing all others, and it is the primary influence and motivation for how they conduct their business, financial, and personal lives.

    Most people will have to finance their home ownership by obtaining a home mortgage from a lending institution. The purpose of this article is to guide a potential homeowner through all the steps that must be taken in order to qualify for a home mortgage loan.

    • 1. Finding the right home for you

    Before a prospective homeowner can begin the quest towards purchasing a home, there are many factors to consider, most of which are determined by some basic facts and assumptions. 

    How big is your family? What neighborhoods are you willing to consider? 

    Are schools a factor? Is a single-family home a requirement or is a condo an option? 

    Based on your income and assets, what kind of home can you afford?

    For some home buyers, living in a specific neighborhood takes precedence above all else, whereas for others, the home itself is more important. In a perfect world, you’d find the ideal home, in your neighborhood of choice, at a price you can afford, but realistically, most people will have to make some compromises.

    Make a list of the features you want in a home– the number of bedrooms, a fenced yard, granite countertops, a garage, etc.–and then rank them in terms of priorities. Decide whether the house or the neighborhood matters more to you, or whether you’re willing to make a longer commute in order to own a home with a larger lot. 

    These kinds of decisions need to be made before beginning the search for your new home.

    • 2. Save for a down payment

    Nearly all mortgage loans and lenders require some amount of cash as a down payment. The amount you've set aside for this will determine the kind of mortgage you qualify for. It will also impact how much you can afford to borrow for a home.

    Consider down payment assistance

    If you're searching for "how to buy a house" you've probably already put away some savings so onward to step 3.

    But it’s important to note there are more than 2,400 home buyer assistance programs in the United States that offer down payment help in the form of grants, low-interest or deferred loans, forgivable loans, and other programs. Help with closing costs is also available.

    • 3. Calculate what you can afford

    Many banks will require that your monthly costs can't exceed a percentage of your income (for example 28%). 

    That means if you earn $50,000 per year, your total monthly housing costs should not exceed $1166 (28% of your monthly income). But it's more than just your income that the bank will look at...

    In addition to your income, if you have recurring debts, the total monthly payments on existing debt plus new payments for your mortgage may not be allowed to exceed a certain threshold (for example 41%).

    Using the example above that would mean that if your monthly debt payments are in excess of $541 per month (bringing your total debt of $541 + $1166 = $1708 or 41% in total) 

    Most lenders prefer a down payment of 20% or higher to qualify for a conventional loan, but there are loan options where you can put down less. 

    However, you should be aware that with a smaller down payment, you’ll likely be required to pay for mortgage insurance, and your loan application will be subject to greater scrutiny.

    Here are several loan types that allow a smaller down payment amount:

    FHA: The Federal Housing Administration offers 3.5% down payment mortgages through participating lenders. FHA loans are also easier to qualify for and have slightly lower rates than conventional mortgages.

    GSE-backed loans: Fannie Mae and Freddie Mac are both currently insuring 97% loan-to-value loans. That enables lenders to offer 3% down payment mortgages to qualified buyers.

    USDA: Home buyers in rural and suburban areas may be able to qualify for home loans offered by the U.S. Department of Agriculture. USDA loans offer low rates and 100% financing.

    VA: Eligible veterans, as well as active duty service members and their families, can qualify for Veterans Administration loans. A VA mortgage requires no down payment or mortgage insurance.

    There are all kinds of online calculators that can help you determine what your down payment amount will be based on the type of loan, the price of your house, your location, and credit rating. 

    But if you don't want to do all the math yourself, you might simply move on to step 4 which is arguably the most common step people skip!

    • 4. Get pre-qualified

    By this point, you should have a pretty good idea about what kind of home you’re looking for, and the neighborhood you’d like to live in. 

    You also know how much you've saved for a down payment, which in turn will determine the type of loan you should pursue. If you've compared a few rates you should request a pre-qualification letter.

    In today’s competitive housing market, it is not uncommon for a seller to receive multiple offers on their home. Having a pre-qualification letter in hand could be the difference in your ability to purchase the house you desire. It proves to the seller that you are serious and provides you with bargaining power which could give you an advantage over other buyers.