A home mortgage is the biggest debt most of us will ever carry, and a home is the most expensive purchase we will ever make. That’s why it is so important to avoid pitfalls, like making a major job change just before your home loan closes, or not anticipating long-term home ownership costs.
Don’t let the unfamiliarity and complexity of the situation scare you. It is still possible to obtain home loans with great interest rates, low fees and predictable, fixed monthly payments, and you can make a budget ahead of time to ensure you don’t get into debt over your head.
Follow these simple steps to turn yourself into a savvy borrower so owning your home will be a joy, not a burden, and will help you achieve your long-term financial goals:
Get pre-approved for a home loan. Carefully scrutinize your budget and calculate how much you can afford to spend before you go house shopping. Getting pre-approved will show what they will lend you based on your income, debts, credit score and current lending conditions. Remember, lenders are in the business of maximizing their earnings from interest, closing costs and the sale of mortgages to investors, not in making sure you don’t overextend yourself. Lenders will qualify you based on your gross (pretax) income, but they don’t account for many monthly expenses, such as insurance, utilities and child care, when determining your maximum approval amount. As a general rule of thumb, you should not spend more than 28 percent of your gross income on housing, including principal, interest, taxes and insurance.
Don’t ignore the true cost of home ownership. The sale price you agree to pay for the home you want isn’t the whole cost of owning the home. Along with your payment for principal and interest, you’ll also have expenses for property taxes, property insurance and mortgage insurance (depending upon your down payment). Thoroughly investigate the property tax system in your area, as you’ll be assessed taxes for schools, local government and special districts. Additionally, your lender will require that you maintain property insurance on your home, and several things may affect your premium, including locating in a designated flood zone. Other costs to consider are utilities, home maintenance and repairs. A qualified tax professional can help you determine the current tax benefits of home ownership with income tax deductions for mortgage interest and property taxes, etc.
Seek the assistance of a qualified mortgage lender in your area. Although you’ll see amazing promotional ads on TV and internet for mortgage loans, you’ll generally benefit from working with a local lender who is well-versed on the best loan programs for your area. Although fixed-rate mortgages are now priced a little higher than the record lows of a few months ago, you’ll still be better off financially if you stick to a fixed-rate loan, rather than an adjustable-rate mortgage, unless you’re planning to move within 5 to 7 years. Adjustable rate mortgages might offer a lower payment now, but it will eventually reset, most likely at a higher rate.
A local lender will also be able to help you evaluate the various loan programs available and help you make the best decision for your personal circumstances. You’ll want to evaluate overall cost of the loan, the down payment required and total loan closing costs. The amount of down payment and loan program will also dictate the amount of private mortgage insurance required by some loan programs, typically $25-$100 per month per $100,000 borrowed.
Never act like the loan is final until the closing. Just because a seller has accepted your offer and a lender has approved your mortgage doesn’t mean your home purchase is a done deal. Don’t quit your current job; lenders want to see two years of consistent employment, and they’ll verify it just before closing. Don’t open new credit cards, take out new loans or use any more of existing credit lines. If you have more debt, you won’t be able to borrow as much. Don’t even make a large purchase with cash, because lenders want to see that you have enough savings to keep paying your mortgage in an emergency. Finally, don’t miss any deadlines for returning loan paperwork.
Linda Hansen is a broker at Real Estate Out West in Rifle.