Buying a home 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.
Image courtesy of Stuart Miles at FreeDigitalPhotos.net
Why should I buy instead of rent?
In 2014, U.S. renters collectively paid over $441 billion in rent, up nearly 5 percent or $20.6 billion from 2013, according to a Zillow report. Rent inflation hit its highest acceleration rate in 6 years in November 2014 and is expected to increase another 4 percent by the end of 2015. In 2014, homeownership was 38 percent cheaper than renting. This infographic depicts the cost of buying versus renting.
How much can I afford?
The first step of buying a home should be a pre-approval. 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.
After October 1, 2015, 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 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 580.
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:
What do I need to take with me when I apply?
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.
Liz Bandstra
As the Digital Content Strategist at Compass Mortgage, Liz shares news, tips, and information relevant to home buying, home financing, and homeownership.
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Neal Paskvan is a full time Realtor specializing in Downers grove, Darien,Woodridge, Westmont and Du page county Real Estate
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