House hunting begins at home - with planning. The first step toward buying a house is to sit down. Before you grab the road maps and hit the streets, you need to do a little planning. 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. Many lenders, for a small "up-front" fee, will send out all required verification and pre-approve you for a mortgage, allowing you the opportunity to negotiate as a cash buyer.
How much house you can afford to buy depends on
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 homeowners association dues, condominium
fees, and mortgage insurance.
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 (P.I.T.I.) that fit that budget.
Even though there are many ways to qualify to buy a home, make sure the monthly payment makes sense for you. How large a payment you qualify for will depend upon a variety of factors. These factors include credit history, size of down payment, and length of employment. Everyone's circumstances are different.
The key items are the size of the down payment, interest rate, and monthly property fees, and the amount of the mortgage. The down payment might be zero in the case of VA-backed mortgages. A down payment of 20% or more on a conventional loan will eliminate the need for mortgage insurance. Your Long & Foster Sales Associate can be very helpful to you in determining just how much house you can afford.
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.
If you obtain a conventional loan, you may make a down payment of 5% or less. Through the lender, you will be required to buy private mortgage insurance (PMI). This insurance provides protection for the lender in case of default, allowing the lender to approve a larger loan amount.
Mortgage insurance offers a variety of payment options. You may make an initial payment at closing and monthly payments with the house payment. You may make only an initial payment or only monthly payments. You may even increase your interest rate and have the lender pay the insurance. Be sure to ask your lender for a comparison of the benefits of each of these plans.
The larger the down payment, the less money you need to borrow. This 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.
New types of mortgages exist featuring help for first-time buyers and flexible terms for current home owners. These help home buyers to "afford more house" and to buy sooner by expanding qualification criteria.