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1. Research & Mortgage Qualifications | 2. Shopping for a House | 3. Contract & Mortgage Application
4. The Title & Settlement Process | 5. Closing & Move In
Before you begin, think about whether owning a home is right for you. Becoming a homeowner takes time, energy and money – but it's worth the effort! Ask Yourself...
- Do I have a steady, reliable source of income?
- Have I been employed regularly for the last 2 years?
- Do I pay my bills on time?
- Is my total debt (all credit cards, car loans, etc.) manageable? Can I afford those debts and a mortgage?
- Do I have some money saved for a down payment?
- Do I have some money saved for closing costs?
- Can I afford both the mortgage and other expenses, such as electric, water, repair and maintenance costs?
- Do I plan to live in the house for at least 2 years – long enough to build some equity?
- Do I have time to take care of a house – including responsibilities like mowing the lawn and repairing my property each spring?
- Do I have time to devote to buying a home right now? Or are other commitments, like night school, a priority?
If you can answer "yes" to most of these questions, you are probably on your way to owning your own home. If you think that you might not be ready, click below to get more information. Begin With Your CreditHow Much Money Do I Need to Buy a Home?Low-Down-Payment Options Begin With Your Credit When you look for a mortgage, lenders will review your credit report. Your credit report is a history of how you have managed your finances and repaid debt. It provides information on money you have borrowed and a history of your payments.
Your credit history is pulled together into a credit report by three private companies: Equifax, Experian and Trans Union. These companies sell your credit report to banks and other creditors so they can review mortgage and loan applications. Your credit report includes:
- A list of debts, such as credit cards and car loans, and a history of how you have paid them.
- Any bills that have been referred to a collection agency. This can include items like phone and medical bills.
- Public record information, such as tax liens or bankruptcies, even if these have happened several years ago.
- Inquiries made about your creditworthiness. An inquiry is made when you request credit. Many times your report will also show if you were given credit based on the inquiry.
Most of the information in your credit report is deleted after 7 years (a bankruptcy is deleted after 10 years) and is continuously updated to reflect the latest information. It's important that you look at your credit reports from each of the three companies to make sure they are correct. Your credit report may vary from one company to the other. How Much Money Do I Need to Buy a Home? You'll need money for:
- A down payment
- Closing costs
- Other housing-related costs – mortgage payments, maintenance and repair costs
The down payment is a percentage of the value of the property. The percentage will determine the type of mortgage you select. Down payments usually range from 3 to 20% of the property value. You may be required to have Private Mortgage Insurance (PMI or MI) if your down payment is less than 20%. Closing Costs Closing costs include points, taxes, title insurance, financing costs and items that must be prepaid or escrowed and other settlement costs. These costs generally range between 2-7% of the property value. You will receive an estimate of these costs from your lender after you apply for a mortgage. Calculating Down Payment & Closing Costs
- Determine the property value on homes that interest you.
- Review different mortgage products and compare their required down payment amounts to the money you have available.
- Get an estimate of your closing costs from the mortgage lender or a real estate professional.
- Add the down payment requirements and the closing costs together to determine the amount of money you will need.
- If you don't have enough money, you will need to begin saving for the difference.
Funds for your down payment can come from the following sources:
- Savings account, bonuses, and commissions
- Mutual funds
- Securities
- Proceeds of life insurance
- IRA, 401(k) or Keogh funds
- Charitable organization gift programs
- Government grant programs and subsidized secondary financing
You can use gift money from a relative towards a portion of your down payment. Some mortgage lenders may require that a certain amount of the down payment come from documented savings that you have accumulated personally. Ask your lender about their gift money requirements. The amount of the gift may also be limited in some mortgage programs. Usually the mortgage lender requires a gift letter verifying that the gift is not a loan and that you do not have to repay it.
Saving enough money for a down payment can be hard and meeting lender underwriting requirements can be challenging. Sometimes this prevents people from buying a home. Some mortgage lenders offer low-down-payment fixed-rate mortgages and mortgages with more flexible underwriting. Below is an overview of low-down-payment options available with some mortgages. Be sure to contact your lender for all the specifics related to loans with this type of option. Some mortgages need as little as 3% down payment. Others raise the maximum debt-to-income ratio, allowing you to qualify for a mortgage payment that is a larger percentage of your monthly income. Ask your lender about fixed-rate mortgages with low-down-payment features like:
- Small down payments (3% to 5%)
- Additional sources of money for the down payment, like a federal, state or local government agency, nonprofit organization, employers, private foundation or family member
- Expanded debt-to-income ratios (sometimes, up to 33% of gross monthly income for housing expenses and 38% for total monthly debt expenses)
- Options for people with limited incomes in high-cost areas
- Homebuyer education programs
- Lower mortgage insurance costs
- Seller contributions to your closing costs
Mortgage Rates When looking at different lenders, start researching current mortgage rates. Freddie Mac's Primary Mortgage Market Survey has regional mortgage rate information. This survey is one of the most reliable sources of mortgage rate trends used by the mortgage industry. http://www.freddiemac.com/dlink/html/PMMS/display/PMMSOutputYr.jsp Mortgage Types There are many different types of mortgages. It's important to find the mortgage that's right for you. Shop around. Mortgages and rates vary. Keep in mind that interest rates change frequently, even daily, so contact several mortgage lenders on the same day to comparison shop. The type of mortgage is also an important part of the decision. Some of the most common mortgages available today include:
Take Another Step To understand how different types of mortgages will affect your payment, use our calculator. The lowest mortgage rate may not always be the best choice for you. Rates are important, but also consider the overall cost of the loan. Look at other costs such as loan and origination fees, and discount and origination points. Be sure to ask the lender exactly what he or she is quoting to you. Ask what the annual percentage rate (APR) of the loan is. The APR takes into account the interest rate and fees. Ask for a "good-faith estimate" in writing from each lender that you work with so you understand all of the costs and you can compare lenders. Getting a Ratified Sales Contract So now you're pre-approved. You find your dream house and make an offer. If the offer is accepted, the next step is to get a ratified sales contract from the sellers. You will need the ratified sales contract when you return to the lender to complete the mortgage process. A ratified sales contract is simply the offer you made to the seller that the seller accepted and you both signed off on. This offer may include:
- Sale price of the house
- Contingencies, such as getting mortgage financing of a certain type and rate, satisfactory inspection, and any repairs that need to be made
- Closing and occupancy dates
The next chapter contains a more complete list of items that may be included in your ratified sales contact. When you meet with your mortgage lender, be sure to specify all of the terms in your ratified sales contract. It's a good idea for an attorney to review the sales contract before you sign it. Earnest Money Deposit As part of the ratified sales contract, you will submit an earnest money deposit to show that you are a serious buyer. This money will be placed in an escrow account and applied to your closing costs. Your mortgage lender will probably want to see a receipt for the earnest money along with your ratified sales contract so it's a good idea to bring both of these items with you when you apply for the mortgage. The earnest money is usually not returnable if you don't complete the terms of the contract. Applying for a Mortgage Once you choose a mortgage lender and you decide on a mortgage product, you will need to fill out a mortgage application. If you were pre-approved, you may have already done this. Mortgage Application Steps
- Complete the "Uniform Residential Loan Application" which requests your income, assets, liabilities and a description of the property.
- Pay the application fee which covers the lender's processing costs. Find out if there is a refund policy.
- Submit the application by mail, e-mail, fax or online
Online mortgage applications include a review of your credit score. When your credit score is pulled, an "inquiry" will be placed on your credit report. It's important that you understand about inquiries. Every time a lender asks to see your credit history an inquiry is noted on your report. If you have too many inquiries, lenders will be concerned that you are trying to get more credit than you can handle. Don't make too many requests for credit – it can damage your credit score. All mortgage loan inquiries in a 2-week period are counted as one transaction. To keep inquiries on your report to a minimum, apply to different lenders within a 2 or 3 week period. Shopping Online for a Mortgage
- Security : Verify that the Internet site uses security measures and that they protect your financial information.
- Privacy : Look at the site's privacy policy to know who has access to your information.
- Accuracy of Indication Rates : Understand how lenders decide on rates. A rate may be based on credit score or amount of down payment. You may need to complete an application to get a rate based on your information. Compare different lenders.
- Application Process : Applying for a mortgage online may be the easiest and most convenient way.
- Decision Time Frame : Find out the approval time frame; some online decisions can come in minutes.
- Application Fee : Compare online fees with your local lenders. Many sites will allow you to complete an application and get your decision before paying an application fee.
- Closing Costs : Make sure online closing costs are accurate and realistic. Closing costs, transfer taxes and property taxes vary widely across the country. Ask your real estate agent to get you this information.
- Documentation : After you complete your loan application, ask your lender what documentation you will need to provide. Documentation requirements vary among lenders and may be dependent on your credit, earnings and employment history.
- Customer Support : Review the customer support resources, such as customer service hours and availability, provided through an online lender.
- Closing Arrangements : Ask the online lender how the company will arrange for a closing in your area.
Your Documents Your lender is required by law to provide you with several kinds of documents once you apply. They include:- Truth-in-Lending Disclosure : Federal law which requires disclosure of a truth in lending statement for consumer loans. The statement includes a summary of the total cost of credit such as the APR and other specifics of the loan.
- "A Home Buyer's Guide to Settlement Costs" : A government publication that describes the closing or "settlement" process and its costs as well as information on your rights.
- ARMs Disclosure : Information on the important terms and costs of an adjustable-rate mortgage, the past performance of the index to which the interest rate will be tied and a copy of the booklet, "Consumer Handbook on Adjustable-Rate Mortgages."
- Your Annual Percentage Rate or "APR" : This is the cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fee and certain other charges that the borrower is required to pay.
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