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What should I know about buying a home? |
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How much house can I afford? |
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How do I compare loans? |
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What are the components of a monthly payment? |
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What should I know about buying a home? |
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Here are some tips that could save you a lot of time, money and trouble.
Plan ahead. Establish good credit and save as much as you can for the down payment and closing costs.
Get pre-approved online before you start looking. Not only do real estate agents prefer working
with pre-qualified buyers; you will have more negotiating power and an edge over homebuyers who
are not pre-approved.
Set a budget and stick to it. Our Online Calculator can help you determine a comfortable price range.
Know what you really want in a home. How long will you live there? Is your family growing? What
are the schools like? How long is your commute? Consider every angle before diving in.
Make a reasonable offer. To determine a fair value on the home, ask your real estate
agent for a comparative market analysis listing all the sales prices of other houses in the neighborhood.
Choose your loan (and your lender) carefully. For some tips, see the question in this section about
comparing loans.
Consult with your lender before paying off debts. You may qualify even with your existing
debt, especially if it frees up more cash for a down payment.
Keep your day job. If there is a career move in your future, make the move after your loan is
approved. Lenders tend to favor a stable employment history.
Do not shift money around. A lender needs to verify all sources of funds.
By leaving everything where it is, the process is a lot easier on everyone
involved.
Do not add to your debt. If you increase your debt by financing a new car,
boat, furniture or other large purchase, it could prevent you from qualifying.
Timing is everything. If you already own a home, you may need to sell your
current home to qualify for a new one. If you are renting, simply time
the move to the end of the lease.
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How much house can I afford? |
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How much house you can afford depends on how much cash you can put down and
how much a creditor will lend you. There are two rules of thumb:
- You can afford a home that's up to 2 1/2 times your annual gross
income.
- Your monthly payments (principal and interest) should be 1/4 of
your gross pay, or 1/3 of your take-home pay.
The downpayment and closing costs - how much cash will you need?
Generally speaking, the more money you put down, the lower your
mortgage. You can put as little as 3% down, depending on the loan,
but you'll have a higher interest rate. Furthermore, anything less
than 20% down will require you to pay Private Mortgage Insurance (PMI)
which protects the lender if you can't make the payments. Also, expect
to pay 3% to 6% of the loan amount in closing costs. These are fees
required to close the loan including points, insurance, inspections
and title fees. To save on closing costs you may ask the seller to pay
some of them, in which case the lender simply adds that amount to the
price of the house and you finance them with the mortgage. A lender
may also ask you to have two months' mortgage payments in savings when
applying for a loan. The mortgage - how much can you borrow? A lender
will look at your income and your existing debt when evaluating your
loan application. They use two ratios as guidelines:
- Housing expense ratio. Your monthly PITI payment (Principal,
Interest, Taxes and Insurance) should not exceed 28% of your monthly
gross income.
- Debt-to-income ratio. Your long-term debt (any debt that will
take over 10 months to pay off - mortgages, car loans, student
loans, alimony, child support, credit cards) shouldn't exceed
36% of your monthly gross income.
Lenders aren't inflexible, however. These are just guidelines. If you
can make a large downpayment or if you've been paying rent that's close
to the same amount as your proposed mortgage, the lender may bend a
little. Use our calculator to see how you fit into these guidelines
and to find out how much home you can afford.
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How do I compare loans? |
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At Shearsons Mortgage, we offer a number of loan products for all
sorts of borrowers. Yet, you may also wish to compare our loan
programs with other lenders. So here are some questions that can
help you sort it all out:
What type of loan will be best for me?
A good lender can point out other loan options you may
not be aware of.
What will my closing costs be?
Ask your lender for a general summation of the fees and
commissions that will be required of you at closing.
Will I be charged points?
Sometimes a loan is only available if you pay points, so
ask your lender if the loan quoted requires points.
What items must be prepaid?
Your lender should let you know what items, such as property
taxes and insurance, must be paid in advance.
How long will I be guaranteed the quoted interest rate?
This is called "locking in" a rate. Ask your lender how long
your rate can be reserved and if there's a fee involved.
How long will the approval take?
This varies, so get an estimate, especially if you're on a
deadline.
Does the loan have a prepayment penalty?
If you think you may refinance or pay off the loan early, you
should ask if there's a fee involved for doing so.
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What are the components of a monthly payment? |
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Your monthly payment is the sum of four factors, commonly referred
to as PITI (Principal, Interest, Taxes, Insurance). You may also
be required to pay PMI on a monthly basis.
Principal - The amount of the payment that is applied to the
loan balance.
Interest - The charge paid for borrowing money.
Taxes - Property taxes. May also be paid separately to your
local government.
Insurance - Lenders require you to maintain adequate insurance
to protect your home. This may also be paid separately.
PMI (Private Mortgage Insurance) - For a detailed explanation of
PMI, consult the question about Private Mortgage Insurance in this
section, or see Mortgage Insurance in the Glossary.
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Equal Housing Lender. Casa Blanca Mortgage, Inc., DBA Shearsons Mortgage. Some products may not be available in all states. ©2005 Shearsons Mortgage. All rights reserved.
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