Creating a Financial Plan for Buying a Home
Buying a home can be a stressful time. One way to lower the stress often associated with the purchase of real estate is to do some pre-purchase financial planning. Financial planning will help you understand your budget, the costs of a mortgage, negotiating power, and down payment.
1. Good Credit
The first step to planning for a home purchase is to establish a good solid credit history. A good solid credit history will demonstrate your ability to repay your home loan. Lenders will give better rates and loan packages to persons whom have strong credit. Having good credit will save you thousands of dollars in interest over the life of the loan.
Establishing credit can take time. If you’ve had some bumps in the road, as long as you are responsible with your credit, the bumps will get evened out over time. Before speaking with a mortgage agent, we recommend contacting the three major credit bureaus to receive your credit report. Once you receive your report, check it for inaccuracies. Make sure to submit any corrections that need to be made. Also, note the spots in the report that may reflect poorly on your ability to repay. If you have questions regarding your credit report, contact one of the major agencies or the federal government for information under the Fair Credit Reporting Act. Once you know your credit status, it’s time for a mortgage pre-approval.
2. Mortgage Pre-Approval
The mortgage pre-approval is a process in which a mortgage lender will determine the dollar amount for which you qualify to borrow for the purchase of a home. This is different than pre-qualified.
Pre-qualified is more along the lines of, yes the person says they have a job and make “x” amount of dollars, if that is true, they may qualify for “y” amount of dollars for a loan.
A mortgage pre-approval will verify your financial status, check your credit, and offer you the best rate and maximum amount of loan available to you. This will help you in many ways, not only will it help you will determining your budget, it will give you negotiating power. Having a pre-approval letter will tell the seller that you mean business and if a deal can be reached, you are ready to close.
3. The Down Payment
The down payment is the amount of money you will pay towards the purchase of the home at closing. This is an amount in excess of the closing costs, yet is figured into your closing costs at settlement. The down payment is usually a percentage of the cost of the home. For instance, 5%, 10%, 20% or in some cases 3%. Some lenders will provide 100% financing as well. Be sure to investigate which situation is best for you.
4. The Mortgage
Depending on your financial status, you mortgage options may be varied or extremely limited. Either way, the costs of your mortgage will be unique to your situation. Regardless, there are several different types of mortgages that are seen more often and here is a brief overview:
1. Adjustable Rate Mortgage (ARM): This is a mortgage in which the interest rate changes according to market conditions over time. Rates can go up or down and can be adjusted accordingly at specified time intervals.
2. Fixed Rate Mortgage (FRM): A fixed rate mortgage is just that, a mortgage with an interest rate that does not change during the term of the loan.
3. Conventional Mortgage: This is a mortgage that is not part of the government housing program. Typically not more than $322,700.00, and is not insured by the federal government.
4. Jumbo Mortgage: This is a mortgage that typically exceeds $322,700.00 and is not insured by the federal government. Traditionally, these mortgages have higher interest rates.
5. Government Backed Loans: There are two types of government backed loans, FHA and VA. FHA loans are insured by Housing and Urban Development (HUD) and VA loans are insured by the Veterans Administration.
4. Closing and Other Additional Costs
Be sure to include in your financial plan any good faith deposit and closing costs. Closing costs can include attorney fees, taxes, mortgage lender fees, title insurance and registration, real estate agent commissions, and other miscellaneous expenses. In Alabama it is license law that your real estate agent provide you a estimated cost of closing when an offer has been written. Your agent can also explain the costs and answer your questions.
In conclusion, by understanding your credit status and budget, you can create a financial plan towards the purchase of a home. By creating this plan you will be able to negotiate and shop for the best mortgage loan as well as generate buying power through the use of a pre-approval letter. You will be able to determine which type of loan best suits your budget and go to closing understanding what it is really going to cost to buy a home. If you have any questions, one of our Birmingham real estate agents will be glad to assist you.
