Planning
Pre-qualifying Your Purchase
House hunting begins, not by combing through different communities with a map and a dream, but by first sitting down at home and considering your present circumstances. We call it "pre-qualifying". Simply, it's determining how much house you can afford to buy. Knowing your affordable price range will bring your house hunting into focus.
How much house you can afford to buy depends upon two things: how much you can afford for the monthly housing payment, and, how much you can invest in the down payment. Monthly payments include principal and interest on the mortgage loan, and property taxes and insurance against fire and other hazards. These four costs are often abbreviated P.I.T.I. (For some buyers and lenders, monthly housing costs may also include homeowner association dues, condominium fees and mortgage insurance).
Factors In Qualifying
In today's market an "affordable" home is not so much determined by sales price as it is by the financing which translates that price into a monthly payment. A house hunter's first step is to set a housing budget, then go shopping for the house (price) and payments (PITT) that fit that budget.
How Much House Can I Afford?
The key items to consider are the size of the down payment and the amount of the mortgage. A HomeLife Higher Standards Sales Representative will work with you to determine exactly how much house you can afford.
Sources for Your Down Payment
The obvious source of money for your down payment is either your savings or the proceeds from the sale of a home you already own. But there are some other not so obvious sources. In recent years, for example, "parent power" has taken some new twists for first-time buyers.
Home Equity Loan. Parents often have considerable equity built up in their own homes and many are tapping that asset through home equity loans to make a gift to their children.
Shared Equity/Profit-Sharing. In return for providing a part of the down payment the lending party shares in the "profit" or net equity of the house when the homeowners eventually sell it.
Stocks and Bonds. If you feel the market doesn't warrant selling your stocks or bonds now you may be able to secure a bank loan using your portfolio as security.
Mortgage Insurance Can Reduce Down Payment
If you need a conventional loan, there is a way to put down only 5 or 10 percent. Through the lender, you will be required to buy private mortgage insurance (PMI). This insurance provides protection for the lender in case of default, and allows the lender to approve a larger mortgage amount.
In a common approach, you'd pay an initial amount at closing. Then, included in your monthly payments for your mortgage, you would pay an additional amount of the mortgage balance. This payment will usually continue until dropped at the discretion of the lender unless a stop point is specifically written into the deed, such as accumulating a 20% equity. Ask your lender for specific figures for any loan program you are considering as the amount of mortgage insurance varies by the type of loan.
One Caution
The larger the down payment, the less money you need to borrow, which means a lower monthly payment. However, remember that in addition to your down payment and monthly payments you will need money to pay for closing costs, moving, appliances, household setup, a reserve for family emergencies and other miscellaneous items. So don't plan to put your last penny down on the closing table.
More Mortgage Help
New types of mortgages such as graduated payment mortgages, flexible payment mortgages and deferred interest loans, feature monthly payments that start lower than usual in the early years, and thus help home buyers "afford" more house and buy sooner by qualifying on a lower mortgage payment.
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