Is the opportunity of historically low mortgage rates and the surmounting cost of rent enticing you to purchase your first home? Homeownership is a huge, yet beneficial, financial decision. We want our homebuyers to understand the benefits of homeownership, the mortgage process, the costs of their mortgage, and their overall homeownership affordability, so we've compiled a list of common first-time homebuyer questions and answers.
Why should I buy instead of rent?
In April 2016, rental price growth stood 3.7% higher than the year before, making it the same 12-month increase for five months straight and the highest year-over-year price increase since before the financial crisis.
According to Bloomberg News, economists are predicting 2016 to be one of the highest periods of rent growth on record.
Though homeownership isn’t the right path for everyone, in most areas, it makes financial sense, even for Millennial buyers.
According to Trulia’s Millennial Rent vs. Buy Report, buying was cheaper than renting for Millennials in 98 of the nation’s largest 100 metros and 23 percent cheaper overall.
How much can I afford?
The first step of buying a home should be a pre-approval or loan commitment. Not only does this important step give you power in a multiple-offer purchase but gives you an idea of how much home you can afford to purchase.
Mortgage affordability is dependent on many factors, including what you're comfortable paying and your financial plans. Most lenders recommend that your mortgage payment, including principal, interest, taxes and insurance (known as PITI), be less than 28 percent of your gross monthly income.
Lenders will analyze your debt-to-income ratio, which includes your monthly obligations, such as credit card bills, student loans, alimony, child support, and car loans, along with PITI. Lenders look at this ratio to ideally be at or below 36 percent of your gross monthly income.
For more factors that weigh on affordability, click here.
What are my costs outside of the mortgage payment?
Closing costs are charged by your lender and third parties related to your home purchase and typically range from 2 to 5 percent of a home's purchase price. These costs are a separate charge than a buyer's down payment.
Under TRID, your lender is required to send you a loan estimate within 3 business days of taking your loan application. This will include an Estimated Cash-to-Close worksheet with fee details related to your mortgage. Your final closing costs will be sent to you at least 3 business days prior to closing. There are ways to minimize your closing costs, including talking to your lender about a no-closing cost mortgage, if you don't have available funds.
On top of closing costs and down payment, as a homebuyer you will need to factor in the cost of routine maintenance for your home and utility costs into your personal budget. Check with utility companies about the average monthly cost of utilities for your prospective home and factor that in to your home budget.
I don't have the greatest credit. Can I still buy a house?
Your credit score is used to determine how risky of a borrower you are. It not only affects your eligibility for home financing but can also determine what interest rate you will qualify for.
A minimum of 620 is required by all mortgage loans delivered to Fannie Mae, but individual lending establishments may have a higher credit score requirements depending on the loan type and program. Compass Mortgage has the ability to finance FHA loans for qualified borrowers with credit scores as low as 560.
If your credit score falls below the minimums, there are several ways to improve your credit score for future home financing. If you want to know where your credit score falls in regards to home financing, contact one of our mortgage bankers.
How much do I need to save for a down payment?
Contrary to popular belief, today's homebuyers no longer need a 20 percent down payment to purchase a home. Little-to-no down payment programs include:
When you apply for a mortgage, your lender will ask for various documents to verify the information you provided on your mortgage application. Though these documents may not be necessary for your initial meeting, it is a good idea to have them gathered beforehand to keep the loan process moving forward and on schedule. Click here for a general loan application checklist.
For more information about buying your first home, download our free Mortgage 101 Handbook, a great resource for first-time homebuyers.