One of the most confusing and intimidating things about buying a home is dealing with financing. For most people, buying a home is the largest financial transaction they will ever make. It's a big decision, you are looking at big dollar amounts, and you need to find a lender you can trust. My advice to anyone getting ready to buy is to get an idea of your finances before you even start looking at homes. I have been in meetings where people are blindsided by something in their credit report, or find out they won't be able to get a loan at all, and it is hard to see the disappointment. It is true that right now interest rates are historically low, but lenders have really tightened up on who they will make a mortgage for. It is smart to get your credit in order before you even talk to a lender. It is smart to meet with more than one, each lender will have slightly different rules for credit cutoffs, etc.
This article I am including an excerpt of is a little dated, but it gives good information. Right now, the three most common loans are Conventional Loans (which you can get financed with as little as 5% down, but more commonly this kind of loan is if you have 20% to put down), FHA Loans and VA loans. FHA loans are NOT just for first time home buyers, which is confusing to some people. This isn't to be confused with the first time home buyer credits the government was giving out a few years ago! FHA loans let you put as little as 3% down and are a great option for first time home buyers. VA loans are for Veterans only, and allow as little as 0% down!
Another thing that is good to know, is that in my area of Ohio, it is very common for part if not all of closing costs to be paid by the seller. It is not a guarantee, but it is something to consider.
I hope this information is helpful, if you have questions, contact me, or just leave a comment and I will try to get more information for you!
Jennifer
Finances and Buying a House
For most people, buying a house involves a double financial whammy.
First you have to assemble a pile of cash for the down payment and closing costs. Then you must convince a bank to lend you an even more staggering sum - generally 80% or more of the purchase price.
So your first step, even before you start the actual hunt for a property, should be to get your financial house in order.
Start with your credit.
Credit reports are kept by the three major credit agencies, Experian, Equifax, and TransUnion. Among other things, they show whether you are habitually late with payments and whether you have run into serious credit problems in the past.
A credit score is a number calculated from a formula created by Fair Isaac based on the information in your credit report. You have three different credit scores, one for each of your credit reports.
A low credit score may hurt your chances for getting the best interest rate, or getting financing at all.
So get a copy of your reports and know your credit scores. Try Fair Isaac's MyFICO.com for reports and scores from Equifax and TransUnion. Experian scores and reports can be accessed from www.experian.com.
Errors are not uncommon. If you find any, you must contact the agencies directly to correct them, which can take two or three months to resolve. If the report is accurate but shows past problems, be prepared to explain them to a loan officer.
Know what you can afford
Next, you need to determine how much house you can afford. You can start with one of the Web's many calculators. For a more accurate figure, ask to be pre-approved by a lender, who will look at your income, debt and credit to determine the kind of loan that's in your league.
The rule of thumb here is to aim for a home that costs about two-and-a-half times your gross annual salary. If you have significant credit card debt or other financial obligations like alimony or even an expensive hobby, then you may need to set your sights lower.
Another rule of thumb: All your monthly home payments should not exceed 36% of your gross monthly income.
The size of your down payment will also determine how much you can afford.
Line up cash
If you haven't already, you'll need to come up with cash for your down payment and closing costs. Lenders like to see 20% of the home's price as a down payment. If you can put down more than that, the lender may be willing to approve a larger loan. If you have less, you'll need to find loans that can accommodate you.
Various private and public agencies - including Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Department of Veterans Affairs - provide low down payment mortgages through banks and mortgage companies. If you qualify, it's possible to pay as little as 3% up front. For more, check out Fanniemae.com or Freddiemac.com.
A warning: With a down payment under 20%, you will probably wind up having to pay for private mortgage insurance, a safety net protecting the bank in case you fail to make payments. PMI adds about 0.5% of the total loan amount to your mortgage payments for the year. So if you finance $200,000, your PMI will cost $1,000 annually.
Once you've considered the down payment, make sure you've got enough to cover fees and closing costs. These may include the appraisal fee, loan fees, attorney's fees, inspection fees, and the cost of a title search. They can easily add up to more than $10,000 - and often run to 5% of the mortgage amount.
If your available cash doesn't cover your needs, you have several options. First-time homebuyers can withdraw up to $10,000 without penalty from an Individual Retirement Account, if you have one, though you must pay taxes on the amount. You can also receive a cash gift (from a close family member only, check with your lender for current rules and limits).
Check on whether your employer can help; some big companies will chip in on the down payment or help you get a low-interest loan from selected lenders. You can also tap a 401(k) or similar retirement plan for a loan from yourself.
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