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Buying a home? Budget for more than just mortgage costs
Buying a home is one of the most important purchases you’ll make in your lifetime so it’s important to make sure you set realistic expectations about how it will affect your monthly budget. Your mortgage payment will make the largest impact, but there are additional costs you should consider before signing on the dotted line.
Bigger house, bigger bills
Chances are you’re living in an apartment or smaller accommodations before purchasing your new home. You probably have a good idea of the types of expenses you’ll incur, but with more square footage, expect those expenses to increase, like heating and air conditioning and gas and electricity. Will you have a luscious green lawn that needs watering? Count on a higher water bill, too. And if you’re looking forward to a second TV in your new man cave then even your cable bill will be bigger!
In the south, a termite bond is often needed. Pest control is recommended quarterly. You may pay homeowner association fees if you live in a subdivision or condominium, plus homeowner’s insurance and higher property taxes. You should also set aside a little cash each month for repairs and maintenance.
When you close on your home, you’ll also have to pay the moving company. Obviously not a monthly cost, but it could be a hefty one that you should consider. There’s also the cost of furniture or appliances that you’ll need…a refrigerator, washer, and dryer, lawnmower, or anything else you’ll need relatively soon. Will you use credit to purchase these items? They can easily turn into monthly expenses by way of a credit card bill, so be sure to account for those payments, too.
Knowing is the key
This list of expenses is not meant to deter you from home ownership. People manage their expenses every day living in their dream homes—and you can, too. If you are aware of the additional expenses you can make the necessary adjustments. Maybe you prioritize some other purchases or even consider a smaller sized home so financially you can live more comfortably within your budget.
Knowing what you can afford is the first step in making a smart, educated decision. By tallying up your monthly expenses along with your mortgage payment before you make a purchase, you’ll be better prepared for happily ever after in your new home.
Todd’s Mortgage Minute: Pre-Qualification vs Pre-Approval. What’s the difference?
Purchasing a home is one of the most important and stressful events you’ll experience in your lifetime. It’s also one of the most exciting. Homeownership offers financial benefits like tax savings and wealth building, but it also offers some social benefits. Homeowners have a stronger sense of belonging and some even say it helps to build a stronger family unit. If you’re ready to take the leap, you’ll need to know exactly where to start.
What’s the difference between pre-qualification and pre-approval?
Although they may sound similar, there is a distinct difference between pre-qualification and pre-approval. Based on a buyer’s credit rating and the amount of income he has verbally communicated to the mortgage lender, a buyer can be pre-qualified for a specific home-buying dollar amount. It is not, however, based on any official verification of income and is not a guarantee of loan approval.
Pre-approval is based on a buyer’s credit rating and submission of an official loan application. When the buyer is pre-approved, his application, which includes documented income and asset information, has already been submitted and reviewed by the underwriter and is a step closer to final approval.
Do you need one vs. the other?
Most real estate agents make it their standard practice to require their clients to be pre-qualified before they begin showing homes. While it can be an anxious and exciting time searching for your dream home, it can also be a stressful time for the seller. Requiring pre-qualification for potential buyers ensures the agent and the seller that the buyers are serious, are ready to move forward, and are respectful of everyone’s time and efforts.
Conversely, having pre-approval prior to viewing any homes is not necessary, nor is it common practice. It could, however, demonstrate a stronger commitment, especially upon submission of an offer. After all, the pre-approval step is substantially farther along in the loan approval process than pre-qualification and could potentially shorten the time it will take to close the loan.
When do you need pre-approval?
When a buyer submits a purchase offer, it will typically include a finance contingency. The finance contingency will identify the number of days in which the buyer must obtain loan pre-approval from the mortgage lender. Typically, the number of days is fifteen, however, it can be any number that the seller and buyer agree upon. During this time, it is critical that the buyer submits a loan application and any supporting documentation to the mortgage lender on a timely basis. By satisfying the contingency and supplying a pre-approval letter, the seller gains a stronger sense of confidence that their buyer’s financials qualify them to purchase the home and that the loan will close.
If you’re in the market to purchase a home, your first step should be to meet with a qualified, reputable mortgage lender to review your financial health, discuss your budget, and obtain a pre-qualification letter. Then, start gathering your supporting documentation so that when you find your dream home, your loan pre-approval will be a smooth and simple process.
What to expect from changes to mortgage application process
If you applied for a mortgage and purchased a home before October 2015, you likely remember the overwhelming amount of loan paperwork you needed to complete and the sometimes confusing language in the documents. Many times the information on the forms overlapped or was not entirely clear, and the process seemed inefficient. If that was your experience, you’re not alone. At the end of the day, it appeared that not all borrowers were entirely confident that they understood the details of what was presented.
“Know Before You Owe”
The Consumer Financial Protection Bureau (CFPB) responded to concerns from homebuyers with the implementation of the TILA-RESPA Integrated Disclosure rule, which is often referred to as “TRID,” but more commonly known as the “Know Before You Owe” rule. This initiative was designed to empower consumers to make more informed mortgage decisions by simplifying the mortgage process.
Two significant changes
The Know Before You Owe Rule made two critical changes to the mortgage process:
First, it consolidated some of the required loan disclosures. The Good Faith Estimate and the initial Truth-in-Lending disclosure were combined to create the new Loan Estimate Form. Under the new rule, the mortgage lender must provide the applicant with a loan estimate, which includes loan terms, amount, payments, and rate, no later than three business days after the application is received. Also, the Closing Disclosure replaced the HUD-1 settlement statement and the Truth-in-Lending disclosure.
Second, it changes some of the timing in the mortgage process. The mortgage lender must now provide the Closing Disclosure to the borrower three business days prior to closing. These three days allow ample time for the borrower to review the loan terms, address any concerns, and make any necessary adjustments. In the case of any change to the document, however, a new Closing Disclosure must be delivered, and the three-day review window must be restarted, which could potentially delay your closing date.
An important step
The changes that accompany the Know Before You Owe rule bring greater clarity and transparency to a historically complicated process. Purchasing your dream home should be an exciting time and the mortgage process, even with all its complexities, shouldn’t dampen that spirit. It’s one of the biggest financial decisions you’ll make in your lifetime, so it’s important that you have a complete understanding of your agreement.
How an appraisal can affect your home loan
After months of searching, you’ve finally found the perfect home and can already picture your family relaxing in the den. The last thing you want is a problem during the loan process to derail your dream. Understanding the home buying process is critical to making things go smoothly, and one key item you need to know is the home appraisal.
What is an appraisal?
When purchasing a home and applying for a mortgage, one of the first steps the lender will do is order an appraisal. The house will need to be evaluated by an independent, unbiased professional appraiser in order to estimate the home’s current market value. A home appraisal is an expert’s opinion of the value of a given property.
What is an appraisal based on?
The value of a home is based on its general condition and age, the location, and it’s size. The number of bedrooms and bathrooms is an important factor, as are any major structural improvements, like remodeled rooms or additions. Amenities are also a consideration—Is there a swimming pool on the property, or a boat dock? Features such as hardwood floors or majestic views are also positive influencers when it comes to value.
The purchase price of comparable properties within in a given radius is one of the most critical components, however. These prices demonstrate what the market is willing to pay for a home similar to the one being appraised and generally carry the most weight.
Because the home will be used as collateral for the mortgage loan, the mortgage company needs to be assured that the amount of money being loaned to the buyer doesn’t exceed the value of the home, should the buyer default on the loan and the bank have to sell the property to recoup their money. The lender will typically order the appraisal, but the cost of the appraisal, generally between $300-$400, is paid by the buyer.
The appraiser will visit the home and conduct a visual inspection of the interior and exterior. He’ll take some measurements and note any conditions that might positively or adversely affect the property’s value. He’ll research recent home sales in the areas and then deliver a final appraisal report that includes an opinion of value.
What if the appraisal is lower than the sale price?
If the appraisal value is lower than the sale price, you’ve reached a fork in the road. The mortgage lender is not willing to approve a loan for more money than the home is worth. You can either use a low appraisal to encourage the seller to lower the price of the home, or you can choose to make a larger down payment so the amount you need to borrow is less than the appraised value of the home.
If you feel strongly that the value was understated, you could also challenge the appraisal or get a second opinion. Sometimes home values are depressed due to foreclosures or short sales in the area. You may be able to convince your appraiser that this was the case with some of the comparables while, at the same time, prove that your home is in significantly better condition than those that were sold at a discount.
What if the appraisal is higher than the sale price?
If the appraisal value is higher than the sale price, this transaction can keep moving along as planned. The expert opinion of the appraiser is that the value of your soon-to-be new home is higher than what you’ve agreed to pay. Congratulations—you already have equity in your new home!
The value of the appraisal
The appraisal process isn’t meant to put a roadblock between you and your dream home. It’s there to protect both you and the lender. You don’t want to unknowingly overpay for a home, especially if you need to sell it in the short-term. It could be worth less than you owe and that’s an unfortunate situation for everyone. From the bank’s perspective, they don’t want to own a house that they can’t sell to cover the outstanding loan balance in the event of a loan default.
In the home-buying process, the appraisal is just one of many things that need to be done in order to get to the closing table. Regardless of whether your appraisal comes in high or low, understanding the process is your best defense to managing the hurdles until you get to your home sweet home.
Three factors that determine what your interest rate will be
If you’re purchasing a home and applying for a mortgage, you’ll learn that a variety of factors affect the interest rate that you’ll be offered. Banks and Credit Unions assume a certain amount of risk when they loan money, and so they look at factors such as your current financial health, payment history, and debt obligations before setting your rate. Let’s take a closer look at three key factors and what they mean for you…
1. Credit score
Your credit score is a three-digit number that generally carries the most weight when it comes to determining your individual creditworthiness. When a lender is extending credit, it is the best predictor of risk. Some of the major factors that influence your credit score are your payment history, amount of credit utilization, length of established credit, types of credit, and the number of any recent applications for credit. Negative activity, like a missed or late payment, will lower your score, while responsible activity, like timely repayment and low credit card account balances, will raise your score. The higher your score, the greater the lender’s confidence in your ability to make your mortgage payments.
2. Loan-to-value ratio
The loan-to-value (LTV) ratio is calculated as the amount of the loan divided by the appraised value of the property and is expressed as a percentage. The higher the percentage, the less equity you have in your new home, which lenders believe brings more risk to the equation. For example, if the appraised value of your home is $125k and you finance $100k, your LTV is 80% (100k/$125k=.80).
In the eyes of a lender, borrowers with a higher loan-to-value ratio are more likely to default on their mortgage, and if that happens, the lender runs the risk of having to sell the property for less than the outstanding mortgage balance. Lenders prefer a lower LTV so that if the home goes into foreclosure, they stand a better chance of recouping enough money to satisfy the remaining loan balance.
In general, anything less than an 80% loan-to-value ratio requires additional private mortgage insurance, which protects the lender in the event the borrower defaults on the loan.
Borrowers with an elevated debt-to-income ratio carry a higher risk of default when it comes to loan repayment. That’s because debt-to-income is an indicator of cash flow. It is the percentage of income that is already dedicated to paying the borrower’s fixed expenses, like monthly bills, insurance, taxes and other financial obligations. With limited cash, one extra expense can easily derail a mortgage payment. The preferred DTI can vary from lender to lender, but the general consensus is around 36%.
When you apply for a mortgage loan, the lender assumes some level of risk by extending credit to you. The interest rate they charge is the cost of borrowing money, but it also includes a premium, which is based on the amount of risk. If your credit rating isn’t stellar or your numbers are in the red, you’ll probably pay more to borrow money from your lender in the form of a higher interest rate.
If you’re thinking about purchasing a home, be sure to check your credit rating, calculate your current debt-to-income ratio and consider homes that keep your LTV at a reasonable percentage. By being aware of your current financial health and working to improve these numbers, you could save a considerable amount of money when you’re ready to apply for a mortgage.