Financing

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1. Develop a family budget. Instead of budgeting what you’d like to spend, use receipts to create a budget for what you actually spent over the last six months. One advantage of this approach is that it factors in unexpected expenses, such as car repairs, illnesses, etc., as well as predictable costs such as rent.

2. Reduce your debt. Generally speaking, lenders look for a total debt load of no more than 36 percent of income. Since this figure includes your mortgage, which typically ranges between 25 percent and 28 percent of income, you need to get the rest of installment debt—car loans, student loans, revolving balances on credit cards—down to between 8 percent and 10 percent of your total income.

3. Get a handle on expenses. You probably know how much you spend on rent and utilities, but little expenses add up. Try writing down everything you spend for one month. You’ll probably see some great ways to save.

4. Increase your income. It may be necessary to take on a second, part-time job to get your income at a high-enough level to qualify for the home you want.
 
5. Save for a down payment. Although it’s possible to get a mortgage with only 5 percent down—or even less in some cases—you can usually get a better rate and a lower overall cost if you put down more. Shoot for saving a 20 percent downpayment.
 
6. Create a house fund. Don’t just plan on saving whatever’s left toward a downpayment. Instead decide on a certain amount a month you want to save, then put it away as you pay your monthly bills.
 
7. Keep your job. While you don’t need to be in the same job forever to qualify, having a job for less than two years may mean you have to pay a higher interest rate.
 
8. Establish a good credit history. Get a credit card and make payments by the due date. Do the same for all your other bills. Pay off the entire balance promptly. 
  

 
The first step in getting yourself in financial shape to buy a home is to know what you make and what you spend now. List your income and expenses below.
 

Income
 
Take-Home Pay/All Family Members
 
Child Support/Alimony
 
Pension/Social Security
 
Disability/Other Insurance
 
Interest/Dividends
 
Other
 
Total Income
 

 

Expenses
 
Rent/Mortgage
 
Life Insurance
 
Health/Disability Insurance
 
Vehicle Insurance
 
Homeowners or Other Insurance
 
Car Payments
 
Other Loan Payments
 
Savings/Pension Contribution
 
Utilities
 
Credit Card Payments
 
Car Upkeep
 
Clothing
 
Personal Care Products
 
Groceries
 
Food Prepared Outside the Home
 
Medical/Dental/Prescriptions
 
Household Goods
 
Recreation/Entertainment
 
Child Care
 
Education
 
Charitable Donations
 
Miscellaneous
 
Total Expenses=
 
Remaining Income After Expenses=
 

 
 
 
Credit scores, along with your overall income and debt, are a big factor in determining if you’ll qualify for a loan and what loan terms you’ll be able to qualify for.
 
1. Check for and correct errors in your credit report. Mistakes happen, and you could be paying for someone else’s poor financial management.
 
2. Pay down credit card bills. If possible, pay off the entire balance every month. However, transferring credit card debt from one card to another could lower your score.
  
3. Don’t charge your credit cards to the maximum limit.
  
4. Wait 12 months after credit difficulties to apply for a mortgage. You’re penalized less for problems after a year.
  
5. Don’t purchase big-ticket items for your new home on credit cards until after the loan is approved. The amounts will add to your debt.
  
6. Don’t open new credit card accounts before applying for a mortgage. Having too much available credit can lower your score.
  
7. Shop for mortgage rates all at once. Too many credit applications can lower your score, but multiple inquiries from the same type of lender are counted as one inquiry if submitted over a short period of time.
  
8. Avoid finance companies. Even if you pay the loan on time, the interest is high and it will probably be considered a sign of poor credit management.
 
This information is copyrighted by the Fannie Mae Foundation and is used with permission of the Fannie Mae Foundation. To obtain a complete copy of the publication, “Knowing and Understanding Your Credit,” visit http://www.homebuyingguide.org .
 
 
 
Helpful Hint: Under the FACT Act amendments to the Fair Credit Reporting Act, you are entitled to one free Personal Credit Report in a 12-month period. Don’t pay unless you need more!
 
Experian (formerly TRW)
 
 
 
Credit scores range between 200 and 800. Scores above 620 are considered desirable for obtaining a mortgage. These factors will affect your score.
 
1. Your payment history. Whether you paid credit card obligations on time.
 
2. How much you owe. Owing a great deal of money on numerous accounts can indicate that you are overextended.
 
3. The length of your credit history. In general, the longer the better.
 
4. How much new credit you have. New credit, either installment payments or new credit cards, are considered more risky, even if you pay promptly.
 
5. The types of credit you use. Generally, it’s desirable to have more than one type of credit—installment loans, credit cards, and a mortgage, for example.
 
For more on evaluating and understanding your credit score, go to http://www.myfico.com/CreditEducation/.
 
 
 
Not only does owning a home give you a haven for yourself and your family, it makes great financial sense, too.
 
This calculation assumes a 28 percent income tax bracket. If your bracket is higher, your savings will be, too.
 
Rent: _________________________
 
Multiplier: X 1.32
 
Mortgage payment: __________________
 
Because of tax deductions, you can make a mortgage payment—including taxes and insurance—that is approximately one-third larger than your current rent payment and end up with the same amount of income.
 
For more help, use Ginnie Mae’s online mortgage affordability calculator and worksheet .
 
 
 
Be sure you find a loan that fits your needs with these comprehensive questions.
 

1. What are the most popular mortgage loans you offer?

2. Which type of mortgage plan do you think would be best for us? Why?

3. Are your rates, terms, fees, and closing costs negotiable?

4. Will I have to buy private mortgage insurance? If so how much will it cost and how long will it be required? NOTE: Private mortgage insurance usually is required if you make less than a 20 percent downpayment, but most lenders will let you discontinue the policy when you’ve acquired a certain amount of equity by paying down the loan.

5. Who will service the loan? Your bank or another company?

6. What escrow requirements do you have?

7. How long is your loan lock-in period (the time that the quoted interest rate will be honored)? Will I be able to obtain a lower rate if they drop during this period?

8. How long will the loan approval process take?

9. How long will it take to close the loan?

10. Are there any charges or penalties for prepaying the loan?

 
Used with permission from Real Estate Checklists & Systems.
 
 
 

1. W-2 forms or business tax return forms if you’re self-employed for the last two or three years for every person signing the loan.

 

2. Copies of one or more months of pay stubs from every person signing the loan.

 

3. Copies of two to four months of bank or credit union statements for both checking and savings accounts.

 

4. Copies of personal tax forms for the last two to three years.

 

5. Copies of brokerage account statements for two to four months, as well as a list of any other major assets of value, e.g., a boat, RV, or stocks or bonds not held in a brokerage account.

 

6. Copies of your most recent 401(k) or other retirement account statement.

7. Documentation to verify additional income, such as child support, pension, etc.

8. Account numbers of all your credit cards and the amounts of any outstanding balances.

9. Lender, loan number, and amount owed on other installment loans—student loans, car loans, etc.

10. Addresses where you lived for the last five to seven years, with names of landlords, if appropriate.

 
 

If your income and savings are making buying a home a challenge, consider these options: 

1. Investigate local, state, and national down payment assistance programs. These programs give loans or grants to cover all or part of your required down payment. National programs include the Nehemiah program (http://www.getdownpayment.com) and the American Dream Down payment Fund from the U.S. Department of Housing and Urban Development ( http://www.hud.gov).  NOTE: Down Payment Assistance Programs funded by the seller will end on October 1, 2008. 

2. Get the seller to provide financing. In some cases, sellers may be willing to finance all or part of the purchase price of the home and let you repay them gradually, just as you do a mortgage. 

3. Consider a shared-appreciation, or shared equity, arrangement. Under this arrangement, your family, friends, or even a third-party may buy a portion of the home and thus share in any appreciation when the home is sold. The owner/occupant usually pays the mortgage, property taxes, and all maintenance costs, but all investors’ names are usually on the mortgage. There are companies that can help you find such an investor if your family can’t participate. 

4. Get help from your family. Perhaps a family member will loan you money for the down payment and/or act as a cosigner for the mortgage. Lenders often like to have a cosigner if you have little credit history. 

5. Lease with the option to buy. Renting the home for a year or more will give you the chance to save more toward your down payment. And in many cases, owners will apply some of the rental amount toward the purchase price. You usually have to pay a small, nonrefundable option fee to the owner. 

6. See if you can qualify for a short-term second mortgage to give you the money to make a higher down payment. This may be possible if you have a good income and little other debt.

 

 
 
The lender must disclose a good faith estimate of all settlement costs. Often these closing costs are paid in part, or in full, by the seller. It is possibly that with a sizeable earnest money check, you may not need any additional funds to close your purchase.  Any amounts you must pay at closing typically must be wired to the closing attorneys` bank account.   The attorney conducting the closing will tell you the required amount for:
  • Down payment
  • Loan origination fees
  • Points, or loan discount fees, you pay to receive a lower interest rate
  • Appraisal fee
  • Credit report
  • Private mortgage insurance premium
  • Insurance escrow for homeowners insurance, if being paid as part of the mortgage
  • Property tax escrow, if being paid as part of the mortgage.
  • Deed recording fees
  • Title insurance policy premiums
  • Survey
  • Inspection fees—building inspection, termites, etc.
  • Notary fees
  • Prorations for your share of costs, such as utility bills and property taxes 

About Escrow:  Lenders often keep funds for taxes and insurance in escrow accounts as they are paid with the mortgage, then pay the insurance or taxes for you. 

About Prorations: Because such costs are usually paid on either a monthly or yearly basis, you might have to pay a bill for services used by the sellers before they moved. Proration is a way for the sellers to pay you back or for you to pay them for bills they may have paid in advance. For example, the gas company usually sends a bill each month for the gas used during the previous month. But assume you buy the home on the 6th of the month. You would owe the gas company for only the days from the 6th to the end of the month. The seller would owe for the first five days. The bill would be prorated for the number of days in the month, and then each person would be responsible for the days of his or her ownership.
 
 
 
  • It’s an objective opinion of value, but it’s not an exact science so appraisals may differ. 
  • For buying and selling purposes, appraisals are usually based on market value—what the property could probably be sold for. Other types of value include insurance value, replacement value, and assessed value for property tax purposes. 
  • Appraised value is not a constant number. Changes in market conditions can dramatically alter appraised value. 
  • Appraised value doesn’t consider special considerations, like the need to sell rapidly. 
  • Lenders usually use either the appraised value or the sale price, whichever is less, to determine the amount of the mortgage they will offer. 

Used with permission from Kim Daugherty, Real Estate Checklists and Systems.

 
 
 

Mortgage term: Mortgages are generally available at 15-, 20-, or 30-year terms. The longer the term, the lower the monthly payment if the same amount is borrowed. However, you pay more interest overall if you borrow for a longer term. 

Fixed or adjustable interest rates: A fixed rate allows you to lock in a low rate for as long as you hold the mortgage and is usually a good choice if interest rates are low. An adjustable-rate mortgage (ARM) is designed so that interest rates will rise as interest rates increase; however they usually offer a lower rate in the first years of the mortgage. ARMs also usually have a limit as to how much the interest rate can be increased and how frequently they can be raised. ARMs are a good choice when interest rates are high or when you expect your income to grow significantly in the coming years. 

Balloon mortgages: Balloon mortgages offer very low interest rates for a short period of time—often three to seven years. Payments usually cover only the interest, so the principal owed is not reduced. However, this type of loan may be a good choice if you think you will sell your home in a few years. 

Government-backed loans: Government-backed loans, sponsored by agencies such as the Federal Housing Administration (www.fha.gov) or the U.S. Department of Veterans Affairs (www.va.gov), offer special terms, including lower down payments or reduced interest rates to qualified buyers.  

Slight variations in interest rates, loan amounts, and terms can significantly affect your monthly payment. For help in determining how much your monthly payment will be for various loan amounts, use Ginnie Mae’s online mortgage calculators .

 
 
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