Now, this is the biggest mistake that I see potential homebuyers make. They go shopping for a home before knowing how much they can afford. That’s like getting to the checkout line at the grocery store and not having any money to pay for all the groceries in the car. Before you go shopping for a home, find out if you qualify and how much you qualify for. And remember there are income requirements for buying a house, especially after the great sub-prime real estate crash in 2008-2009.
2. What type of loan is really best for me?
Did you know there’s literally hundreds of loan programs out there? It’s crucial to know which one is the best fit for your personal needs. And frankly, it really depends upon your own personal financial situation. Just like a doctor wouldn’t prescribe medication before examining your condition, great lenders will try to get to know more about you before they start throwing out all these different loan options.
So have them thoroughly explain the difference between a 30-year loan, a 15-year loan, a conventional loan, an FHA loan, a VA loan (if you qualify for it), fixed rate, adjustable, and ask them if they participate in any first time homebuyer programs. And did you know there’s loan programs out there for school teachers and frontline responders? There’s all kinds of different loan programs out there. So make sure that you ask your lender what type of loan is best for you.
3. What is my interest rate going to be?
Well, first of all the short answer depends on what the current interest rate is as set by the Federal Reserve, and then it depends on your credit score. Now, bad credit doesn’t mean you’re not going to get a loan; it just means that the lower the credit score, the less favorable terms you’re going to have since the lender is assessing the risk in loaning you, as the buyer, the money. So the better your credit score, the better the interest rate. The worse your credit score, the higher the interest rate. And the higher interest rate equals a higher monthly payment.
4. What is my monthly payment going to be?
This is super important to all of us, right? This goes in hand with the next question nvolving how much of a down payment you’re going to put down, your credit score, your interest rate, and what type of loan you decide upon. But when all that is decided, calculated, and factored in, you want to make sure you ask for the total amount for the monthly payment. That’s what’s called your PITI (Principal, Interest, Taxes, and Insurance), and your mortgage insurance premium if you have that on your loan. But you’ll want to know the whole enchilada, not just part of it or just your principal loan balance or just the interest on your loan month to month. You’ll also want to know what they’re adding in every month for your property taxes and your homeowners’ insurance. So when you ask what’s my monthly payment to be, make sure it includes all of it—your PITI.
5. How much is all this going to cost?
Let’s break that down into two specific areas. First, how much down payment is required? Depending on which loan program, down payments usually start at around 3-5% and then go up from there. This is why first-time homebuyers usually like to go with an FHA loan because the down payment tends to be lower for them. But if you don’t want to pay that mortgage insurance premium, then you’re going to need to probably put down 20% or more in order to avoid that extra charge.
The second part of the question: what are the rest of the fees and costs involved to do this loan? There are all kinds of fees that come with a home loan, and they vary from lender to lender so this is really important. There are lender fees, like loan origination fees; processing fees; underwriter fees; discount points; third-party vendor fees, like appraisals; credit report; title policy; escrow; recording fees; and taxes. So listen up—lenders are required by federal law to give you a document called a loan estimate with an estimated breakdown of all your fees. So ask for this before you formally apply for a loan.
Here’s something that happened pretty recently. My daughter and son-in-law are in the middle of buying a new house in Texas, and so they’re shopping for a home loan. When my daughter asked one of those three lenders she was considering for that loan estimate sheet, they kind of hummed and hawed like they really didn’t want give it to her. One word my friends—’next…’ Well, maybe two words, ‘ixnay’.