How do I know if I’m ready to buy a home?
You can find out by asking yourself some questions:
- Do I have a steady source of income (usually a job)? Have I been employed on a regular basis for the past two to three years? Is my current income reliable?
- Do I have a good record of paying my bills?
- Do I have few outstanding long-term debts, like car payments?
- Do I have money saved for a down payment?
- Do I have the ability to pay a mortgage every month, plus additional costs?
If you can answer “yes” to these questions, you are probably ready to buy your own home.
Why should I buy instead of rent?
A home is an investment. When you rent, you write your monthly check, and that money is gone forever. But when you own your home, you can deduct the cost of your mortgage loan interest from your federal income taxes and usually from your state taxes. (Consult your tax advisor.) This will save you a lot each year because the interest you pay will make up most of your monthly payment for most of the years of your mortgage. You can also deduct the property taxes you pay as a homeowner. (Again, consult your tax advisor.)
Additionally, the value of your home may go up over the years. Finally, you’ll enjoy having something that’s entirely yours — a home where your own personal style will tell the world who you are.
How can I determine my housing needs before I begin the search?
Your home should fit the way you live, with spaces and features that appeal to the whole family. Before you begin looking at homes, make a list of your priorities, such as location and size. Should the house be close to certain schools? Your job? To public transportation? How large should the house be? What type of lot do you prefer? What kinds of amenities are you looking for?
Establish a set of minimum requirements and a wish list. Minimum requirements are things that a house must have for you to consider it, while a wish list covers things that you’d like to have but aren’t essential.
How do I begin the process of buying a home?
Start by thinking about your situation. Are you ready to buy a home? How much can you afford in a monthly mortgage payment? How much space do you need? What areas of town do you like?
After you answer these questions, make a to-do list and start doing casual research. Talk to friends and family, drive through neighborhoods and look in the “Homes” section of the newspaper.
Should I use a real estate broker?
Using a real estate broker/agent is a very good idea. All the details involved in homebuying, particularly the financial ones, can be mind-boggling. A capable real estate professional can guide you through the entire process and make the experience much easier. A realtor will be well-acquainted with all the important things you’ll want to know about a neighborhood you may be considering — the quality of schools, the number of children in the area, the safety of the neighborhood, traffic volume and more.
He or she will also help you determine the price range you can afford and search the classified ads and multiple listing services for homes you’ll want to see. With immediate access to homes as soon as they’re put on the market, the broker can save you hours of wasted driving-around time. When it’s time to make an offer on a home, the realtor can point out ways to structure your deal to save you money. He or she may be able to explain the advantages and disadvantages of different types of mortgages — though your personal banker at Security State Bank will definitely be able to explain these differences!
A realtor can guide you through the paperwork and will be there to hold your hand and answer last-minute questions when you sign the final papers at closing.
How do I select the right real estate agent?
Start by asking family and friends if they can recommend an agent. Compile a list of several agents and talk to each before choosing one. Look for an agent who listens well and understands your needs and whose judgment you trust. The ideal agent knows the local area well and has resources and contacts to help you in your search.
Overall, you want to choose an agent that makes you feel comfortable and can provide all the knowledge and services you need.
How much money will I have to come up with to buy a home?
That depends on several factors, including the cost of the house and the type of mortgage you get. In general, you need to come up with enough money to cover three costs:
- Earnest money — the deposit you make on the home when you submit your offer to prove to the seller that you are serious about wanting to buy the house
- Down payment — a percentage of the cost of the home that you must pay when you go to settlement, ranging from 3.5-5% minimum up to 20%
- Closing costs — the costs associated with processing the paperwork to buy a house, which can often be rolled into your mortgage (with seller concessions)
When you make an offer on a home, your realtor will put your earnest money into an escrow account. If the offer is accepted, your earnest money will be applied to the down payment and closing costs. If your offer is not accepted, your money will be returned to you. The amount of your earnest money varies. The more money you can put into your down payment, the lower your mortgage payments will be. Some types of loan can be as much as 10–20% of the purchase price for a down payment.
Closing costs cover various fees your lender charges and other processing expenses. When you apply for your loan, your personal banker will give you an estimate of the closing costs and explain them to you so you won’t be caught by surprise.
How do I know if I can get a loan?
Using our simple loan calculator to see how much mortgage you could afford to pay is a great start! If the amount you can afford is significantly less than the cost of homes that interest you, then you might want to wait awhile longer.
But before you give up, why not contact one of our personal bankers to evaluate your loan potential? They’ll do this with a pre-qualification so you’ll know exactly how much you can afford to spend, and it will speed the process once you do find the home of your dreams!
Are there special homeownership grants or programs for single parents?
Help is available. Start by becoming familiar with the homebuying process (above) and pick a good real estate broker. Although a single parent won’t have the benefit of two incomes through which to qualify for a loan, consider getting pre-approved so that when you find a house you like in your price range, you won’t have the delay of trying to get qualified.
Contact one of the HUD-funded housing counseling agencies in your area to talk through other options for help that might be available to you. Also, contact your local government to see if there are any local homebuying programs that could help you. Look in the “blue pages” of your phone directory for your local office of housing and community. Another option is Habitat for Humanity if you’re willing to help in the building process.
In addition to the mortgage payment, what other costs do I need to consider?
Of course, you’ll have your monthly utilities. If your utilities have been covered by your rent, this may be new for you. Your real estate broker will be able to help you get information from the seller on how much utilities normally cost. In addition, you will have property taxes and mortgage insurance, unless you put 20% down on your home. Taxes and insurance are normally rolled into your mortgage payment. Again, your realtor will be able to help you anticipate these costs.
What are mortgages?
Generally speaking, a mortgage is a loan obtained to purchase real estate. The mortgage itself is a lien (a legal claim) on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.
What types of mortgages are available, and what are the advantages of each?
For fixed-rate mortgages, payments remain the same for the life of the loan.
- Housing cost remains unaffected by interest rate changes and inflation.
On the other hand, payments for adjustable-rate mortgages (ARMs) increase or decrease on a regular schedule with changes in interest rates. (Increases are subject to limits.)
- A balloon mortgage offers very low rates for an initial period (usually 5, 7, or 10 years); when time has elapsed, the balance is due or refinanced (though not automatically)
- Generally offer lower initial interest rates
- Monthly payments can be lower
- May allow borrower to qualify for a larger loan amount
What are the advantages of 15- and 30-year loan terms?
- 30-year — In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions.
- 15-year — The loan is usually made at a lower interest rate. Equity is built faster because early payments pay more than principal.
How do I choose the best loan program for me?
Your personal situation will determine the best kind of loan for you. By asking yourself a few questions, you can help narrow your search among the many options available and discover which loan suits you best:
- Do you expect your finances to change over the next few years?
- Are you planning to live in this home for a long period of time?
- Are you comfortable with the idea of a changing mortgage payment amount?
- Do you wish to be free of mortgage debt as your children approach college age or as you prepare for retirement?
Our personal bankers can help you use your answers to decide which loan best fits your needs.
What responsibilities do I have during the lending process?
To ensure you won’t fall victim to loan fraud, be sure to follow these steps as you apply for a loan:
- Be sure to read and understand everything before you sign.
- Refuse to sign any blank documents.
- Do not buy property for someone else.
- Do not overstate your income.
- Do not overstate how long you have been employed.
- Do not overstate your assets.
- Accurately report your debts.
- Do not change your income tax returns for any reason. Tell the whole truth about gifts, and do not list fake co-borrowers on your loan application.
- Be truthful about any credit problems, past and present.
- Be honest about your intention to occupy the house.
- Do not provide false supporting documents.
What is the best way to compare loan terms among lenders?
First, devise a checklist for the information from each lending institution. The Good Faith Estimate you receive from the first lender option will have a table for comparison purposes. You should include the company’s name and basic information, the type of mortgage, minimum down payment required, interest rate and points, closing costs and loan processing time.
Speak with lenders by phone or in person on the same day because interest rates can fluctuate daily. Remember that the monetary aspect is a big part of the decision-making process, but your comfort with a lender and your choice to keep your money in your community should also be considered in your decision.
Are there any costs or fees associated with the loan origination process?
At some institutions, yes, there may be an application fee. But there are no application fees at Security State Bank. There is a minimal “origination fee” that you’ll need to pay at loan closing, though you may be able to include the fees into your loan amount. The cost of an appraisal for the loan will be your responsibility whether you choose to go through with the loan or not.
How does the interest rate factor into securing a mortgage loan?
A lower interest rate allows you to borrow more money than a higher rate with the same monthly payment. Interest rates can fluctuate as you shop for a loan, so ask lenders if they offer a rate “lock-in,” which guarantees a specific interest rate for a certain period.
Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance and other fees included in the loan.
What happens if interest rates decrease and I have a fixed rate loan?
If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate 2% less than your current one, refinancing is smart. Refinancing may, however, involve paying many of the same fees paid at the original closing plus origination and application fees.
How does the lender decide the maximum loan amount that I can afford?
The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term debts as car or student loan payments, alimony or child support.
According to the FHA, monthly mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, should total no more than 41% of income. The lender also considers cash available for down payment and closing costs, credit history and so forth when determining your maximum loan amount.
What is a loan-to-value (LTV)? How does it determine the size of my loan?
The loan-to-value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: with a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000) and would have to pay $2,500 as a down payment.
The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV, the less cash homebuyers are required to pay out of their own funds. To protect lenders against potential loss in case of default, higher LTV loans (80% or more) require a mortgage insurance policy.
When do adjustable rate mortgages (ARMs) make sense?
An ARM may make sense if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates.
What will my mortgage cover?
Most mortgages have five parts:
- Principal — the repayment of the amount you borrowed
- Interest — the cost of the money you borrowed in payment to the lender
- Homeowners insurance — a monthly amount to insure the property against loss from fire, smoke, theft and other hazards required by most lenders on your property, divided by the number of mortgage payments you make in a year
- Property taxes — the annual city/county taxes assessed on your property, divided by the number of mortgage payments you make in a year.
- Mortgage insurance — a fee to be paid if the down payment was less than 20%
Most mortgages are for 30 years, although 15- and 20-year loans are available too. During the life of the loan, you’ll pay far more in interest than you will in principal — sometimes two or three times more! Because of the way loans are structured, in the first years you’ll be paying mostly interest in your monthly payments. In the final years, you’ll be paying mostly principal.
If you can, pay extra in the early years on your loan amount, you’ll end up paying down the principal sooner and can save quite a bit of money over the life of your loan.
How large of a down payment do I need?
There are mortgage options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you must borrow and the more equity you’ll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you’ll also need money for closing costs, moving expenses, and possibly repairs and decorating.
What is an escrow account? Do I need one?
Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner’s insurance, property taxes, and mortgage insurance or flood insurance (if applicable). Escrow accounts are a good idea and are sometimes required by law because they assure money will always be available for these payments.
If you use an escrow account to pay property tax or homeowner’s insurance, make sure you are not penalized for late payments since it is the lender’s responsibility to make those payments.
What factors affect mortgage payments?
The amount of the down payment, the size of the mortgage loan, the interest rate, and the length of the repayment term and payment schedule will all affect the size of your mortgage payment.
What are discount points?
Discount points allow you to lower your interest rate. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or 0.125) of a percentage point.
When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. Discount points are smart if you plan to stay in a home for some time, since they can lower the monthly loan payment. Points are tax deductible when you purchase a home, and you may be able to negotiate for the seller to pay for some of them.
What is RESPA?
RESPA stands for Real Estate Settlement Procedures Act. It requires lenders to disclose information to potential customers throughout the mortgage process. By doing so, it protects borrowers from abuses by lending institutions. RESPA mandates that lenders fully inform borrowers about all closing costs, lender servicing and escrow account practices, and business relationships between closing service providers and other parties to the transaction.
What is a loan estimate, and how does it help me?
It’s an estimate that lists all fees paid before and at closing, all closing costs and any escrow costs you will encounter when purchasing a home. The lender must supply it within three days of your application so that you can make accurate judgments when shopping for a loan.
Can I pay off my loan ahead of schedule?
Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Security State Bank allows loan prepayment, with no pre-payment penalty to do so.
Are there special mortgages for first-time homebuyers?
Yes. Lenders now offer several affordable mortgage options that can help first-time homebuyers overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don’t have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt or have experienced income irregularities.
Who can qualify for FHA loans?
Anyone who meets the credit requirements, can afford the mortgage payments and cash investment into a home up front, and who plans to use the mortgaged property as a primary residence may apply for an FHA-insured loan.
What types of closing costs are associated with FHA-insured loans?
Except for the addition of an FHA mortgage insurance premium (MIP), FHA closing costs are similar to those of a conventional loan. The FHA requires a single, upfront mortgage insurance premium to be paid at closing. This initial premium may be partially refunded if the loan is paid in full during the first seven years of the loan term. After closing, you will then be responsible for monthly MIP.
What can I use to pay the down payment and closing costs of an FHA loan?
Besides your own funds, you may use cash gifts from others.
What are the steps involved in the FHA loan process?
With the exception of a few additional forms, the FHA loan application process is similar to that of a conventional loan. With new automation measures, FHA loans may be originated more quickly than before.
How much income do I need to qualify for an FHA loan?
You must have a down payment of at least 3.5% of the purchase price of the home. Most affordable loan programs offered by private lenders require a down payment, with a minimum of 5% coming directly from the borrower’s own funds.
Can I roll closing costs into my FHA loan?
No. But while you can’t roll closing costs into your FHA loan, you may be able to negotiate with the seller and have the seller pay the closing fees.
Can I qualify for an FHA loan without a credit history?
Yes. If you prefer to pay debts in cash or are too young to have established credit, there are other ways to prove your eligibility. Talk to your lender for details.
Can I exceed this ratio?
You may qualify to exceed if you have:
- a large down payment
- a demonstrated ability to pay more toward your housing expenses
- substantial cash reserves
- net worth enough to repay the mortgage regardless of income
- evidence of acceptable credit history or limited credit use
- less-than-maximum mortgage terms
- funds provided by an organization
- a decrease in monthly housing expenses
Can I carry debt and still qualify for FHA loans?
Yes. Short-term debt doesn't count as long as it can be paid off within 10 months. And some regular expenses, like childcare costs, are not considered debt. Talk to our personal bankers about meeting the FHA debt-to-income ratio.
Are FHA loans assumable?
Yes. You can assume an existing FHA-insured loan, or if you are the one deciding to sell, allow a buyer to assume yours. Assuming a loan can be very beneficial, since the process is streamlined and less expensive compared to that for a new loan. Also, assuming a loan can often result in a lower interest rate. See your lender for details.