Buying Advice
Planning
House hunting begins at home with planning. In today’s market, an affordable home is not so much determined by sales price as it is by the financing which translates that price into a monthly payment.
How Much House Can I Afford?
Things to consider:
1. How much you can invest in the down payment?
2. How much you can afford for the monthly housing payment? These payments include principal and interest on the mortgage loan, and property taxes and insurance, or PITI:
- Principal – The amount of the payment that goes towards paying down the loan amount. Since, for most loans, part of your mortgage payment gets applied towards principal, over time, your outstanding principal balance will go down.
- Interest – The interest rate lenders charge is the cost of the borrowed money. The interest and principal payments equal your monthly mortgage payment.
- Taxes – The local government where the home is located will assess your home and determine its real estate taxes. Most lenders will collect this as part of your monthly payment and then pay your local government on your behalf. This is commonly referred to as tax escrow.
- Insurance – Homeowner’s insurance (or hazard insurance) covers you in the event of damage to your property caused by fire, wind, or other hazards.
For some buyers, monthly housing costs may also include homeowner’s association dues, condominium fees, and mortgage insurance.
Pre-qualification vs. Pre-approval
Knowing your affordable price range will bring your house hunting into focus. How much money you qualify for will depend on a variety of factors including credit history, length of employment, and down payment amount.
Based on information you provide, your lender can estimate how much money you can borrow before applying for a loan. This non-binding process is called pre-qualifying.
Your lender can also take detailed look at your financial and credit profiles (including a credit check) and commit to lending you a specified amount of money pending specific property details. The lender will then provide you with a letter stating how much mortgage you qualify for. This process is called pre-approval. With a pre-approval letter, you can:
- Shop for a home knowing exactly how much you can afford.
- Show sellers that you can seriously afford to make a purchase.
- Discover any qualification issues early in the home buying process.
Because a pre-approval takes a closer look at your background and includes a credit check, it holds more weight with sellers than pre-qualification.
Mortgage Insurance
If you obtain a conventional loan, depending on your loan program and down payment amount, you may be required to buy private mortgage insurance (PMI). This insurance protects the lender in case you default on the loan, allowing the lender to approve a larger loan amount.
Mortgage insurance offers a variety of payment options, including making an initial payment at closing or making monthly payments with the house payment. You may even increase your interest rate and have the lender pay the insurance. Be sure to ask your lender to compare the benefits of the different plans.
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