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.
The best place to start is with a mortgage lender
affiliated with the Mortgage Bankers Association of America; a lender can help you explore
all the options of home ownership.
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:
- Build a list of lenders. Talk to people you know who have
bought or refinanced a home recently. Check the newspaper's real estate or business
section. Or just look in the yellow pages under "Mortgages."
- Talk to a loan officer. Call or visit the lenders on your
list. Get a feel for what it will be like to work with them, and how they approach your
needs. If you're still uncertain, ask for references -- recent home buyers like yourself
-- and talk to them.
- Compare rates for similar loans. Among the things you'll
want to discuss with prospective lenders are the rates they offer on mortgages. But when
comparing rates between lenders, be sure the rates are for comparable loans -- and
remember to include fees and other costs so you're really comparing apples to apples.
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.
Fixed-Rate Mortgages
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.
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