Buying a home is one of the biggest financial decisions in life. Homebuyers need to take a lot of informed decisions during the process of buying a house. If homebuyers don’t have complete knowledge on aspects such as credit score, type of mortgages, interest rates, property title documents, and loan-to-value ratio, they would not be able to make informed decisions. This guide is a savior for homebuyers who do not know the nitty-gritty of purchasing a suitable house. As you explore this home buying guide, you gain knowledge on vital steps involved in buying your dream home.
Get Started
The following steps would help you get started with the process of finding a suitable home.
Buying Home vs. Renting Home
At the outset, you should decide whether it is good to purchase a house or continue to stay in a rented home. You should first analyze the advantages of buying a home vs. renting. Buying a home is not a good decision for everybody; having a realistic evaluation helps you identify if buying a home is the best option for you.
Planning for Your Family Needs
A house should be convenient for everybody who resides in it. How many people will be living in the house? What are their physical needs? What are their priorities? Having a realistic discussion with family members can help you find a suitable house that fits the requirements.
Deciding on Property
This involves deciding on the location, number of bedrooms, and layout. For instance, you may want to choose a property that has accessibility to workplaces, schools, hospitals, shopping malls, and parks. If multiple generations live together, you may need to purchase a bigger-sized home that gives privacy space to everybody to engage and interact.
Mortgage 101
Identifying the right property is just the beginning of the home buying process. The next stage is to gather the sources of finance to purchase the house. Most people don’t have sufficient money to make an outright payment to purchase a house. This is where the concept of the mortgage comes into the picture. Over 63% of houses in the United States were under mortgage in 2017.
Downpayment
Downpayment is the initial up-front partial payment that a homebuyer makes while purchasing a house. No house is ever 100% financed by banks or financial institutions. Most lenders prefer to keep the loan-to-value (LTV) ratio at 80% or lower. However, homebuyers can avail of higher LTV ratios typically at higher interest rates. Lenders may offer a higher LTV ratio on residential properties if the borrower is willing to offset the risk by purchasing private mortgage insurance (PMI). The homebuyer might need to make a downpayment of $100,000 for a $500,000 worth house, for which lenders offer an LTV of 80%. So, the first step in financing a house is to gather the money for the downpayment.
Credit History
Credit history is the record of the financial behavior of an individual in repaying debts. It reflects the attitude and ability of an individual in clearing financial liabilities. Your credit history determines the fate of your mortgage application. Typically, the credit score ranges from 300 to 850. According to Experian, a credit score lower than 580 reflects the poor credit history of the borrower. A credit score of higher than 800 is considered exceptional. The homebuyer may need to check his credit history and take appropriate steps to improve it (in case of a low credit score) before applying for the mortgage.
Select a Suitable Type of Mortgage
The five commonly availed mortgage types are conventional mortgage, fixed-rate mortgage, adjustable-rate mortgage, government-insured mortgage, and jumbo mortgage. Each type of mortgage has its merits and demerits.
A conventional mortgage is a house loan that isn’t insured by the Federal government. The borrower may need to have a credit score of higher than 620 and a Debt to Income (DIT) ratio of 50% to avail conventional mortgage. A conventional loan is ideal for people with stable income, a reasonably good credit score, and the ability to pay at least 3%-20% of downpayment.
A jumbo mortgage is ideal for buying an expensive house. If you require a loan that exceeds the maximum conforming federal loan limit for a single-family home, you may consider availing of the jumbo mortgage. The conforming federal loan limit for a single-family home in 2021 is $548,250 ($822,375 for high-cost areas).
Whilst the fixed-rate mortgages have the same interest throughout the loan term, the adjustable mortgages have fluctuating interest rates that can go up or down based on Federal decisions and market conditions. We suggest you use the fixed-rate vs adjustable-rate mortgage calculators available on the internet to make an informed decision.
Government-Insured Loans are classified into the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans), and the U.S. Department of Veterans Affairs (VA loans).
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- FHA loans are suitable for people who don’t have huge money saved up for downpayment or poor credit scores. You can avail FHA loan with a credit score of as low as 500 and an FHA debt to income ratio of 55%.
- USDA mortgages are suitable for low-income borrowers in rural areas.
- VA loans are low-interest mortgages designed for U.S military people and their families.
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Get in Touch with Lenders
Have a discussion with a few banks or lenders and choose the one with the lowest possible interest rate, low mortgage cost, and mutually beneficial loan terms. If needed, submit required documents, including income proof, salary receipts, bank statements, and income tax return forms to get the pre-approval of the mortgage.
Make an Offer and Close the Deal
If you have the money saved up for the downpayment and a pre-approval for the mortgage, just go ahead and close the deal. Remember to do the following things before closing the deal:
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- Scrutinize title and link documents.
- Check if the property has approvals from relevant authorities
- Get legal advice if needed.
- Negotiate for a better deal.
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Home-buying terms you should know
Loan-to-Value Ratio: Loan-to-Value expresses the ratio of the loan amount that a borrower receives to the value of the asset he purchases.
LTV = (Loan Amount/Asset Value) x 100
Debt-to-Income (DIT) Ratio: It expresses the amount of debt an individual has to his overall income. Lenders prefer offering loans to people whose debt-to-income ratio is less than 36%.
DIT = (Total Monthly Debt Payment /Total Monthly Gross Income) x 100
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