Getting Ready to Buy
Financial preparation is the first -- and perhaps the most important -- step in the homebuying process. Get ready for your purchase by taking a careful look at your finances, especially your savings, credit, income, and debt.
Buying a home doesn't necessarily mean having to make a large down payment. We provide a variety of options that can help you buy a house using little or no cash down payment options.
If you have a down payment goal in mind, you'll reach it more quickly if you stick to these simple rules:
Pay yourself first. When you pay your monthly bills, the first check you write should be to your savings or investment account.
Avoid unnecessary purchases. The less you spend on big-ticket items that you don't really need, the sooner you'll become a homeowner. Keep that goal in mind when you shop.
Set realistic goals. Take an objective look at your monthly income and expenses, and decide how much you can really afford to put aside. If saving for a home causes you to fall behind on your other obligations, it will defeat the purpose.
The way you use credit is an important part of the mortgage equation. Your lender takes your credit history into account when deciding whether to approve you for a mortgage, and what interest rate you will have to pay.
If you've experienced financial difficulties that may have impacted your credit, it doesn't mean you can't get financing to buy a home. Learn how our flexible programs may help you move beyond credit challenges by building a solid homeownership foundation.
Income and Debt
Guidelines vary, but lenders usually prefer that the amount you spend on monthly debt and housing expenses be no more than 28% of your gross monthly income. Try to avoid taking on any new debt in the months leading up to your purchase.
Even if your debts add up to more than 28% of your income, that doesn't have to mean you can't get a mortgage. Our financing programs help make homeownership a reality for people from a variety of financial backgrounds
Although each individual home financing package has its own variety of features, the concept of a mortgage is really quite simple: a mortgage is a loan made to help you finance a home. Your lender advances you a certain amount of money, which you repay over a specified period.
Rates, Discount Points & Origination Charge
The total cost of your mortgage is determined by a number of different factors, most notably the interest rate, discount points, and origination charge. The expenses that contribute to the cost of your loan can be expressed as the annual percentage rate (APR).
- Interest Rate refers to the percentage of your outstanding loan balance that you pay the lender each month as part of the cost of borrowing money. Your interest rate will be based on the current overall rate environment, as well as your financial profile and the specific features of your loan.
- Discount Points allow you to "buy down" your interest rate at closing. One point equals 1% of your loan amount, and the more discount points you pay, the lower your interest rate will be, and the less you will have to pay each month. How much your rate will decrease with each discount point you pay will depend on the specific features of your loan.
- Origination Charge is one amount that includes all charges (other than discount points) that all loan originators (lenders and brokers) involved in the transaction will receive for originating the loan. This includes any fees for application, processing, and underwriting services and payments from the lender to the broker for origination.
When considering loan pricing, keep in mind that rates, discount points and origination charges should be considered together. The interest rate alone only tells part of the story.
Your Monthly Mortgage Payment
Mortgage payments can generally be divided into four parts: principal, interest, taxes, and insurance. These are often referred to with the acronym PITI.
- Principal refers to the amount of money you borrow to buy a home, and to the outstanding loan balance at any point during the mortgage term.
- Interest is the cost of borrowing money. As noted above, the amount of interest you pay each month is determined by your interest rate.
- Taxes assessed by your local government will likely be collected by your lender as part of your monthly payments, and then paid annually or semi-annually on your behalf. This process is known as an escrow.
- Insurance, like property taxes, is normally collected by the lender in an escrow account. Insurance offers financial protection, and has two major components:
- Homeowner's insurance, also called hazard insurance, protects you against damage to your property caused by fire, wind, or other hazards.
- Mortgage insurance protects your lender in the event that you fail to repay your mortgage. Whether you must pay mortgage insurance usually depends on the loan program and the size of your down payment.
Note that the loan's APR doesn't figure into the calculation of the monthly payment. The APR reflects all the costs of your mortgage, including not only the quoted interest rate (used to calculate the principal and interest) but also other costs such as origination charge, loan discount points, pre-paid interest, and mortgage insurance, prepaid interest, discount points paid on the loan, any fees paid to the lender for making the loan, and any mortgage insurance premiums you may have to pay.
Choosing a Loan
Selecting the right mortgage is central to the homebuying process -- that's why it's so important to understand your options. You'll need to consider two things at the outset: which loan type best meets your homebuying needs, and which loan term offers the ideal repayment schedule.
Most home loans fall into one of two general categories: fixed-rate and adjustable-rate mortgages (ARMs).
- Fixed-rate mortgages have interest rates that stay the same for the entire life of the loan.
- You will have predictable monthly payments throughout the life of the loan.
- You'll be protected from rising rates, so your principal and interest payments do not change, no matter how high interest rates rise.
- Adjustable-rate mortgages have interest rates that adjust periodically based on market conditions.
- The initial rate is fixed for an introductory period (usually three to ten years), and is typically lower than for a fixed-rate mortgage. After that, the rate adjusts annually or semi-annually depending on the product and based on a market index, but it can't go above a predetermined adjustment cap.
- Because of the lower initial rate, some borrowers may be eligible for a larger loan amount with an ARM than with a fixed-rate mortgage.
The "term" of a loan is the period of time you will spend repaying it. There are loans with various repayment terms, longer and shorter.
Whether you're better off with a longer-term loan or a shorter-term loan depends on a number of factors, most notably your monthly income and your long-term financial goals. Comparing two fixed-rate loans with different terms:
- The longer-term loan will offer lower monthly payments. This may be a good option if you're on a tight budget or would prefer to direct your monthly cash flow toward other investments or expenses.
- The shorter-term loan will mean higher monthly payments, but you'll be repaying the loan faster and potentially reducing loan interest.
Besides the nature of the interest rate and the loan term, other important features of a mortgage loan include:
- Whether the loan amount is above or below what is known as the "conforming loan limit" set by Fannie Mae and Freddie Mac1. Mortgages larger than this amount are termed "jumbo loans" and require higher rates than similar conforming loans.
- Whether the loan has flexible qualifying guidelines, which may be able to accommodate borrowers with credit challenges, excessive debt, or previous bankruptcy, foreclosure or tax delinquency. If you've experienced financial challenges, we may be able to help you build a secure future through our credit solutions for homeownership.
We offer a wide variety of product options to meet your unique homebuying needs. Our home mortgage consultants can help you find the right combination of loan features to support your financial goals
Find Out How Much You Can Borrow
A preapproval letter from a lender lets you know how much you may be able to borrow, subject to a property appraisal, credit check, and other stated conditions. This can be a good move for serious homebuyers because it shows sellers that you come to the negotiating table ready to complete the transaction.
What are the advantages
Preapproval, subject to a property appraisal, income verification, credit check and other stated conditions, can provide a number of advantages over waiting to apply for a mortgage until after you've found a home. It:
- Helps you shop confidently because you know how much you may be able to borrow.
- Can provide an advantage over other buyers.
- Lets you find out about and address problems early in the homebuying process.
- May allow for a faster closing, since much of the work has already been done.
How does the process work?
Before you begin shopping for a home, submit your financial information to us. We'll review your loan application and then, if you meet qualification requirements, we'll provide you with a preapproval letter for up to a specified mortgage amount, subject to a property appraisal, income verification, credit check and other stated conditions. It is important to note that a preapproval is not a commitment to lend. A loan commitment is contingent upon verification of application information, satisfying all underwriting requirements and conditions, and providing an acceptable property, appraisal, and title report.
Choosing a Home
One of the most important parts of the homebuying process is finding the right home for you and your family. After all, you will probably be living there for years to come, so it should be a place where you will be happy.
Envisioning Your Home
The first step is figuring out what is most important to you in a home, and then trying to find the one that comes closest to what you've envisioned. Here are some basic points to keep in mind during your search:
- Location. Where your home is located can be just as important as what it looks like or how big it is. Do you need to be in a particular school district, or close to a job, bus line, or day-care facility? Remember, even the perfect home will not seem so perfect later on if you are not happy with the surrounding neighborhood.
- Size and special features. Before you start your search, sit down with your family and make a "wish list" of all the features and amenities you want in your new home. How many bedrooms and baths do you need? Do you need central heating or air conditioning? Make sure you distinguish your "wants" from your "needs". Rank each item according to its importance, and look for a home with the most important features first.
- Types of homes. A single-family home is not the only housing style you have to choose from. Condominiums, town homes, and co-ops all offer different lifestyle and ownership options.
Even if you have to do without some of the items on your wish list, your home should be a place where you can be comfortable —you should not have to settle for a place that isn't right for you. Educate yourself, think about your options, and take the time you need to make the right choice.
Advantages of working with a REALTOR®
Relying on newspapers ads and driving around hoping to spot "For Sale" signs in neighborhoods you like is a time-consuming way to find your home. Working with a real estate professional can help you to maximize both your purchasing power and your time.
Not every real estate agent is a REALTOR®. What's the difference? REALTORS® are licensed professionals who are members of the National Association of REALTORS®, who subscribe to a strict ethical code, and serve clients with a unique blend of training and knowledge of industry trends.
Once you've secured your financing, working with an agent who is a REALTOR® can bring some distinct advantages to your home search:
- The assurance of ethical behavior. As a member of the National Association of REALTORS®, every REALTOR® adheres to a strict code of ethics that embodies honesty, integrity and commitment. This long-standing symbol of pride and distinction ensures that REALTORS® can help to protect buyers and sellers.
- Professional advice and representation. Whether you're buying or selling a home, a REALTOR® helps you navigate the transaction properly and safely. Count on this trained professional to guide you hrough what seems like a complicated process, especially in a heated real-estate market.
- The benefits of marketplace experience. It's comforting to know that REALTORS® have a handle on the market — house-by-house, street-by-street — with access to up-to-date information that the Internet cannot match.
- Buyer's advantage. A REALTOR® who understands your property and location needs can help you the most. REALTORS® reach out to their network to gather first-hand information on upcoming homes for sale. Clearly, working with a REALTOR® gives you an advantage — as the buyer positioned to make the first and best offer on a home.
- Seller's advantage. It's wise to seek the guidance and experience of a REALTOR® to sell your home. Going it alone is a huge undertaking, especially when it comes to accurately pricing your home and bringing in qualified buyers.
Deciding what you want in your home and getting professional assistance from a REALTOR® are important steps in finding the home that's right for you. Once you locate the home that meets your needs, you're ready to begin the purchase process.
Making the Purchase
Once you've found a home you want to buy, you'll need to negotiate a price with the seller and agree to a purchase contract.
Making an Offer
Unlike many major purchases which have a specific price tag, homes sell for whatever amount the buyer and seller negotiate. Your real estate agent or legal counsel should help you determine the appropriate amount for your initial offer. When you make the offer, keep these things in mind:
- Put it in writing. All negotiations should be handled in writing -- not verbally -- to ensure that there is a clear understanding between the parties. If you must negotiate verbally, at least follow up in writing.
- Have your preapproval from your lender to give you maximum leverage. Sellers usually prefer offers from buyers who have already been preapproved for mortgage financing. A preapproval is subject to a property appraisal, income verification, credit check and other stated conditions.
- Be prepared to submit an earnest money deposit (also called a "good faith" deposit) to show your commitment to the transaction. This deposit, the amount of which varies by locality, will go into an escrow account until the transaction is complete.
The purchase contract, or purchase agreement, is a signed agreement between the buyer and seller describing all the terms of the transaction. Like other contracts, this document represents a legally binding agreement, so approach it with care. Depending on what state you live in, an attorney, real estate agent, or title company may help negotiate and draft the contract. Purchase agreements typically include these items:
- The home address and legal description of the property.
- The sales price and the amount of the loan, down payment, and deposit.
- The names of both parties and their respective agents, brokers, or attorneys.
- Any applicable time limits. These may apply to the buyer's acquisition of financing, the seller's response to the offer, the closing, or the transition of occupancy.
- Any conditions or contingencies that must be met in order to complete the transaction. For example, the contract may be contingent on the buyer's ability to obtain financing, the home being appraised at a certain value, the results of a home inspection, or the sale of the buyer's current home.
Remember that no two real estate transactions are exactly alike. Buyers and sellers bring different backgrounds, interests, and agendas to the negotiating table, and the purchase contract will reflect those differences.
The closing is the final phase of your homebuying and mortgage process, so now your new home is just a few steps away. If you haven't already, make sure you do the following:
- Review your loan commitment with your lender to make sure you understand all the requirements.
- Set the closing time and date based on your sales contract and the loan commitment expiration.
- Confirm that a survey of your property has been ordered. Check with your closing agent or attorney.
- Make preparations to move (notify your landlord, complete change of address forms, arrange for utilities to be disconnected at your current address and made available at your new home, and plan your actual move).
- Conduct a final walk-through inspection of your home-to-be.
- Make sure you've satisfied all the requirements of your agreement with the seller.
- Get a certified or cashiers check from the bank for your closing costs. Cash or personal checks are generally not accepted.
On closing day, ownership of the property will be transferred from the seller to you, and you will sign the closing documents. A closing agent (an attorney of your choice or a title agency representative, depending on local custom) will coordinate and distribute all the paperwork and funds, according to the terms agreed upon by you and the seller.
As soon as you've taken care of the paperwork, you're a homeowner! Grab the house keys and get ready to start life in your new home.
Good Reasons to Buy a Home Now
It's an exciting time to be considering buying a home. The combination of market conditions and helpful programs provide opportunities for first-time buyers, as well as for current homeowners hoping to downsize or to buy a larger home.
Favorable Market Conditions
The blend of historically low interest rates and the pace of home sales mean that it might be easier to purchase a home.
- Historically low interest rates. If you were buying or refinancing in 2001, you'd face mortgage interest rates slightly above 8 percent. Today's lower rates translate into comparatively lower purchase costs.
- Decreasing housing prices. In August 2006, half the houses for sale in the U.S. were priced above $225,000, while the other half were below (this highly watched reference point is called the market's median price.) Three years later, the median price dropped significantly to $177,000. This 21 percent decline in home prices suggests good deals for buyers.
- Slow home sales. Generally, homes are sitting on the market longer, which means more choices for homebuyers and a better chance of finding the home that you want.
In addition to favorable market conditions, eligible buyers could also benefit from government programs designed to stimulate the housing market and the economy.
- High conforming-loan limits. If you're house hunting in a federally designated metropolitan area, you may be able to borrow up to $729,750 without paying the typical higher interest rates on jumbo loan amounts.
- Flexible FHA Loans. In addition to low down-payment options, these government-backed loans enable you do use gift funds for down payment or closing costs, and have flexible income, debt, and credit requirements.