In order to qualify for a home loan, we’ll need to take a look at your finances. In particular we’ll need to know:
After we talk about your income, assets, credit and down payment, we may be able to Pre-Qualify you for a certain loan amount. I can send you a Pre-Qualification Letter that you can share with your realtor and begin looking at houses.
If you want to go a step further, we can verify your ability to get a loan with an underwriter. Doing this, you would be considered Pre-Approved. A pre-approval takes a little more time and documentation, but it also carries a lot more weight, especially when competing with other offers.
Pre-qualification is a good way to know what you qualify for, while Pre-approval is the best way to show sellers that you’re serious and ready to buy.
Buying “too much house” can quickly turn your home into a liability instead of an asset. That’s why it’s important to know what you can afford before you start looking at homes with your real estate agent.
I recommend keeping your monthly mortgage payment to 25% or less of your monthly take-home pay. For example, if you bring home $5,000 a month, your monthly mortgage payment should be no more than $1,250. Using our easy mortgage calculator, you’ll find that means you can afford a $288,000 home on a 30-year fixed-rate loan with a 20% down payment (at 3.00% interest rate).
With a conservative monthly mortgage payment, you’ll have extra to cover additional costs of homeownership, like repairs and maintenance, while saving for other financial goals.
I recommend putting at least 10% down on a home, but 20% is even better because you won’t have to pay private mortgage insurance (PMI). PMI is an extra cost added to your monthly payment that doesn’t go toward paying off your mortgage. Thus, it increases your monthly payment.
With a big down payment you’ll have built-in equity when you move into your home, you’ll need to finance less, and most importantly you with have no mortgage insurance payment.
Here are the most common mortgage loan types:
For example, a 15-year term does come with a higher monthly payment, so you may need to adjust your home-buying budget to get your mortgage payment down to 25% or less of your monthly income.
But the good news is a 15-year mortgage actually pays off in 15 years. Why be in debt for 30 years when you can knock out your mortgage in half the time and save six figures in interest?
High interest rates bring higher monthly payments and increase the overall interest you’ll pay over the life of your loan. A low interest rate saves you money in both the short and long term.
Of course, just like you can’t time the stock market, it’s nearly impossible to time your home purchase with the best interest rates. The past five years have held some of the most affordable interest rates ever, according to the Federal Home Loan Mortgage Corporation, and their recent forecast predicts the trend will continue for 2018.(1,2)
It may be hard to time your home purchase with the best interest rates, but there are things you can do to get a lower rate. For example, a benefit of the 15-year, fixed mortgage is that it has a lower interest rate than a 30-year, fixed mortgage. Sometimes a bigger down payment can also help you get a better interest rate.
The money you pay in interest doesn’t ever go toward paying off the principal balance of your home. That’s why it’s a smart move to get a low interest rate on your mortgage and then pay off your house as quickly as you can.
Because mortgage interest rates can change day to day, locking your rate is an important part of the mortgage process. Locking your interest rate guarantees a certain interest rate for a specific period of time, usually between 30 and 60 days.
In most cases, you can lock your interest rate as soon as your initial loan is approved. However, most buyers wait until they have found a specific home to purchase and are officially under contract.
Like I said earlier, mortgage interest rates go up and down and there’s no way to time it perfectly. You simply don’t know what the future holds. No one does. So don’t spend time trying to time the market; instead, rely on your lender’s expertise. If they say it’s a good time to lock down your rate, trust them.
Some lenders charge a fee to lock your interest rate. Ask questions on the front end so you know what to expect.
Discount points are a way to lower your interest rate.
Each mortgage point equals 1% of your home’s value. That means if you’re getting a $250,000 loan and have two discount points, you’ll pay $5,000. In most cases, a point can reduce your interest rate by one-eighth to one-quarter of a percent.
I don’t recommend discount points because of how long it takes to break even on that cost. In most cases, you’ll sell your house or could even pay it off before you recoup the money you paid up front in points. Skip the points and focus on putting as much money into your down payment as you can.
So what happens when you send in that mortgage payment every month? Here’s what the typical monthly mortgage payment includes:
If you want to pay more on your mortgage, be sure to specify that you want any extra money to go toward the principal only, not an advance payment that prepays interest.
Your mortgage payment may include additional costs like your homeowner’s insurance and property taxes. These are annual expenses that are part of homeownership, and the lender is at risk if you don’t make those payments.
Your lender can add the monthly portion of each of those accounts to your mortgage payment. That money is held in an escrow account that is managed by a third party to make sure those costs are paid on time.
You should definitely think about refinancing if:
It’s probably not worth it to refinance if you could lower your interest rate by half a percent. But let’s say it’s going to take another eight years for you to pay off your house and you could lower your interest rate from 6% to 4%.
On a $200,000 mortgage, lowering your interest rate from 6% to 4% could save you about $200 a month. Over the course of eight years, that adds up to more than $19,000. Closing costs to refinance a $200,000 loan cost an average of $2,000.(3) Is it worth it to pay $2,000 in closing costs to save $19,000 over the long term? Probably so!
When it comes to adjustable-rate mortgages, refinancing to a fixed-rate mortgage is almost always a good idea. An adjustable-rate mortgage can go up and down, drastically changing your monthly payment. That’s not a risk I want you to take. A fixed-rate mortgage is your best option, even if you have to write a check for the closing costs.
Don’t refinance to anything longer than a 15-year, fixed-rate mortgage. Remember, the goal of refinancing is to pay off your house faster, not stay in debt longer!
If you already have a good interest rate on a 30-year, fixed loan, you don’t have to refinance just to get a shorter term. It’s easy to pay extra on your mortgage.
The average time to close on a house is currently around 40 days. Factors such as your loan type, your financial situation, and the length of your contract can either lengthen or shorten that time frame.
When you close, that new house and mortgage are officially yours. At the closing, you’ll sit down with the professionals involved in your real estate transaction and sign all the legal documents needed to give you ownership of your new place. That’s pretty exciting!
You’ll also be responsible for paying closing costs as part of the closing process. Closing costs are typically 3–4% of your home’s purchase price. You’ll receive a Closing Disclosure three days before closing so you know exactly what you can expect.
What if they don’t go down? I use this example to confirm that clients are comfortable with their financing in the long run.
Let’s say you have a $400,000 loan amount at 3.00% on a 30-year fixed. The monthly principal and interest payment would be $1,686
Then let’s say rates go up to 5.00%. The monthly principal and interest payment would then be $2,147
The difference is $461