When you put less than 20% down, you have to pay for some kind of insurance to protect the lender from the higher risk that you may default. With FHA loans, mortgage insurance is built into the payment. With conventional mortgages, you will have to buy private mortgage insurance, but some private mortgage insurers are not willing to do business.
With credit issues and foreclosures running rampant, you should maintain a credit score of 760 or more. It is the minimum you need for a mortgage with the best interest rate. For free credit scores, try quizzle.com or creditkarma.com; see your credit report at annualcreditreport.com.
All financial experts agree that the important message for all home-buyers is that "you can't afford not to save." If you have nine months of expenses in the bank to protect yourself in case of job loss or disability, then purchasing a home will be worry-free for you and your family.
How long will you be in your home? If you will not have to move in the next five to seven years for work or any other reason, then you are ready to buy. Make sure you think through career change possibilities, whether you will be moving when you are done with school, or whether additions to your household will necessitate an upgrade soon.
If you move too soon, the costs you pay up front could result in a not-worth-it situation. If you are prepared to maintain the house in terms of time, labor, and expense and are able to set aside 1 to 2 percent of its value per year for upkeep, as well as emergency repairs or upgrades, then you are ready for home ownership.
Knowing the loan approval process can take weeks--if not months--to be completed will certainly test your desire to own a home. If you are on a tight deadline or looking to avoid any hang-ups, have all the necessary documents ready and completed. Having all of the paperwork in advance will ensure there are no delays which can be costly.
You should not assume a mortgage broker or lender will find or create the ideal loan for their financial situation. Mortgage brokers and loan officers will typically look at the usual programs available. You need to know what your goals are and all of your financing options with your lender or broker.
Are you prepared for additional costs? Understand all the fees that are included, what will be due at closing, or before closing, and the payment and amortization schedule. Sometimes there are fees that may come as a surprise to you. Lenders are required to provide borrowers with a "Good Faith Estimate" which lists the anticipated costs for the loan.
However, sometimes fees and other costs become an issue and inflate the total loan cost. You should compare costs with several lenders because the processing charge for collecting and packaging the loan information can cost between $500 and $1,000, while the underwriting fee can hit $800 to $1,500. Remember, though, the origination fees, application fees and the underwriting fees can be negotiated.
Do you have a stable budget? Is your income stable enough to make regular mortgage payments? Make sure that you can keep up with your payments, and that the reliable portion income can handle your mortgage. Do a mock budget with home ownership that includes estimated taxes, HOA fees, maintenance costs, utilities, repairs and other expenses on top of your monthly principal and interest payment.
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