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.
There are a number of benefits to owning your own home: it provides more housing security for you and your family; the equity you have in your home is a form of savings account, instead of paying rent to someone else; there are also tax benefits; and, let’s admit it, there’s a sense of pride in home ownership.
The majority of people will have to finance their home by obtaining a home mortgage from a lending institution. The purpose of this article is to provide a guide to homeowners covering the following 5 critical steps:
1. Calculate How Much Home You Can Afford
There are millions of homes to choose from and it can be daunting if you start house hunting without narrowing your search first. To set yourself up for success, the best place to start is to consider how much home you can afford.
Consider Your Income
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...
Consider Your Debts
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).
You can use a mortgage calculator or to put it simply, someone that makes $50,000 before taxes should probably target a home that is $250,000 or no more than 5 times their annual salary.
Consider The Down Payment
Most lenders prefer a down payment of 20% or higher to qualify for a conventional loan, but if you don’t have 20% there are still loan options you might consider where you can put down less!
For many would-be buyers, the down payment is a big factor that influences how much they can afford so we have written an entire section about down payments.
2. Compare Down Payment Options
Nearly all mortgage loans and lenders require some amount of cash as a down payment. The amount you've set aside for this could determine the kind of mortgage you qualify for. It will also impact how much you can afford to borrow for a home.
If you're searching for "how to buy a house" you might have already put away some savings - if that is you, congratulations and onward to step 3.
If you’re still saving, read on.
Loan Types with Lower Down Payments
Most lenders prefer a down payment of 20% or higher to qualify for a conventional loan, but 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 may also available.
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:
VA: Eligible veterans and their spouses can qualify for Veterans Administration loans. See if you qualify for a VA Loan with $0 Down and no mortgage insurance from our partner Veterans United.
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.
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, and on hypothetical rates no less, you can reach out to a lending specialist.
3. FIND THE RIGHT HOME FOR YOU
Now that you know how much you can afford and how much you’ll need to save for your down payment, you’re ready for the fun part: Finding the right home for you and your family.
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?
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 counter tops, 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. Learn about what a neighborhood is really like, including information about the neighbors, school ratings etc.
4. COMPARE MORTGAGE LENDERS
It can take some time, but you're going to have your mortgage for the next 30 years, so it's really worth prioritizing. To be completely transparent most lenders will be +/- 1/8 a point in interest and a few hundred dollars in fees. The rates changed on a daily basis so if I have the better rate it could be because I pulled on a better day. At the end of the day you want to choose someone you feel comfortable to work with and who responds and communicates with you in a timely manner.
To expedite this process, be sure to have all documents requested turned in as soon as possible.
Once you set aside some time to make a few inquiries, tell the truth. Mortgage quotes can vary based on your down payment, credit history, income, assets, and debt.
Fill out the form with honest information to get a reliable quote. They're going to verify this information anyway so putting in misinformation won't help you at all in the long term.
Qualifying for a mortgage loan in order to buy a home can often be a stressful and strenuous process. In the end, the pride, security, comfort, and freedom that comes from owning your own home makes all the effort worthwhile.
5. 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.