This FAQ section is dedicated to Millennials thinking of purchasing their 1st home. A simple question that comes to mind is: What information do I need to have, to start the process?
Step 1: Check Your Credit:
There are three major credit reporting companies – Equifax, Experian, and TransUnion. You can get a free copy of your credit report once per year from all three companies at www.annualcreditreport.com.
Look on your credit reports for any debts or credit cards you don’t recognize. Also check for disputed items that still show up even though they were resolved in your favor. A late or missed payment isn’t an error if it actually happened.
- Review each report.
- If you find any errors on your reports, file a dispute to get them corrected as soon as possible
Additionally – focus on paying down your credit cards, paying your bills on time and raising your credit score. A score of 720 and above is generally considered good, and 750 to 850 is excellent. You'd prefer to start the conversation with your future mortgage lender off on a positive note by having a score of at least 720.
Checking your own credit won’t hurt your credit scores.
When you check your own credit reports or scores, the request is processed differently than when a lender checks your credit. Checking your own credit won’t hurt your scores.
Step 2: Start Putting Money in the Bank:
Prospective homeowners are often thinking about the magic words "down payment" when they 1st think about buying a home. However, There are additional items that may be required of you when it comes time to close on the house of your dreams -- things like (a) excess cash reserves in your bank account (b) property taxes in escrow (c) title insurance and (d) fully funded homeowners' insurance you'll need before you get the keys.
Saving for these items before you start looking for a home can alleviate the stress of buying a house.
Step 3: Figure out Financing Before you Start your Process:
Many experts have suggested in the past that you have at least 20 percent of the house's purchase price saved as a down payment. You can certainly buy a house without that – and many people do – but there are plenty of options where you can put down less than 20 percent and still become a homeowner.
By putting 20% down, you will almost certainly avoid paying private mortgage insurance (PMI), or you won't have to pay it for long. PMI is typically 1 to 2 percent of the value of the loan, split into monthly payments. It may not seem like much, but if it adds, say, $100 to your monthly mortgage payment, you can see why you'd like to avoid it.
There are several alternatives to putting 20 percent down -- but it is important to know the details.
The FHA mortgage requires just 3.5% down. But most first-time buyers don’t know that the down payment can be sourced from a financial gift or approved down payment assistance program.
VA mortgages require 0 percent down. Plus, they require no monthly mortgage insurance, helping you buy more house for less money. 100% of the closing costs can come from a seller concession or via gift funds from family. Those with current and former military service are likely eligible. These loans are offered by most lenders across the country.
Conventional loans offer down payments as low as 3%.
- HomeReady™: Allows non-borrowing household members to contribute toward qualifying income. Also, use roommate income and mother-in-law unit rental income to qualify
- Home Possible® Advantage: A Freddie Mac 3% down loan offering reduced mortgage insurance
- Conventional 97: Fannie Mae’s low down payment loan with no income limits and no first-time buyer requirement
USDA home loans require nothing down.
Be sure you understand that less money down in the form of a down payment = higher monthly costs. The more money you can save towards a down payment, the more equity you will have in your home when you become a homeowner.
Step 4: Consider Your Loan Options
Your down payment amount affects the type of loan you can get, your interest rate, and--as a result--you total loan costs.
In general, the higher your down payment, the less your loan is likely to cost.
- In most cases, you need a down payment of at least 3 percent of your target home price. Many loan types and lenders require 5 percent down or more.
- You can often save money if you put down at least 10 percent of the home price, and you’ll save the most if you put down at least 20 percent.
- When lenders decide the interest rate and loan costs to offer you, they typically look at your down payment in increments of 5 percent. There are usually no savings for putting down “almost” the required amount. For example, if you have enough saved for a down payment of, say, 8 percent of your target home price, think about whether you could save up a little more before buying, or choose a slightly cheaper home, so you can hit the 10 percent mark.
- If you’re unsure about what to do, consider talking to a HUD-certified housing counselor.
Step 5: Estimate Your Closing Costs
In addition to your down payment, there are many costs associated with "closing" or finalizing your loan and home purchase. Closing costs depend on a lot of things – the price of the home you buy, your down payment amount, the lender costs, the kind of loan you choose, and the location of your new home. Since you’re still early in the process, it’s hard to make a precise estimate at this stage.
- You can make a rough estimate now, using a home price that is typical for the neighborhoods you’d like to live in. Come back and refine your estimate as you move forward and gather more information.
- Typically, closing costs (not including your down payment) range from 2-5% of the home purchase price.
Your lender is required to outline your closing costs in the Loan Estimate and Closing Disclosure forms you receive before the big settlement day. Take the time to review them closely and ask questions about things you don’t understand.
Here’s a closer look at the closing costs you’ll face.
Appraisal fee: The bank needs to verify that the amount you need for a loan is justified, and the bank also wants to make sure it can recoup the value of the home if you default on your loan. The average cost of a home appraisal by a certified professional appraiser ranges between $300 - $500.
Home inspection: Most lenders require a home inspection, especially if you’re getting a government-insured mortgage. Before lending you hundreds of thousands of dollars, a bank needs to make sure the home is structurally sound and in good enough shape to live in. If the inspection turns up troubling results, you may be able to negotiate a lower sale price.
Application fee: This covers the cost of processing your request for a new loan and includes costs such as credit checks and administrative expenses. The application fee varies depending on the lender and the amount of work it takes to process your loan application.
Assumption fee: If you take over (“assume”) the remaining balance of the seller’s mortgage, you may be charged a variable fee based on the balance.
Attorney’s fees: 11 states — Alabama, Connecticut, Delaware, Georgia, Massachusetts, New Jersey (northern only), North Carolina, New York, Rhode Island, South Carolina and Vermont — require an attorney to be present at the closing of a real estate purchase. Depending on how many hours the attorney works your case, the fee can vary dramatically.
Prepaid interest: Most lenders require buyers to pay the interest that accrues on the mortgage between the date of settlement and the first monthly payment due date, so be prepared to pay that amount at closing; it will depend on your loan size.
Loan origination fee: This is a big one. It’s also known as an underwriting fee, administrative fee or processing fee. The loan origination fee is a charge by the lender for evaluating and preparing your mortgage loan. This can cover document preparation, notary fees and the lender’s attorney fees. Expect to pay about 1% of the amount you’re borrowing (a $300,000 loan, for example, would result in a loan origination fee of $3,000).
Points: By paying points, you reduce the interest rate you pay over the life of your loan, which results in more competitive mortgage rates. 1 point equals 1% of the loan amount. So if the loan were $500,000, a 1-point payment would be $5,000.
Mortgage broker fee: If you work with a mortgage broker to find a loan, the broker will usually charge a commission as a percentage of the loan amount. The commission averages from 1% to 2% of the home’s purchase price.