How Much Money Do I Need For A Down Payment
The larger the down payment you are able to make, the less youll have to finance when you purchase a home. On a conventional mortgage, making a down payment of at least 20% will prevent you from having to pay for private mortgage insurance. The minimum down payment required varies based on the type of mortgage you obtain. In 2019, the median down payment for first-time buyers was 6%.
Gather The Documents Needed For Your Mortgage Application
Your finances are in good shape and you know how much you can borrow. Now here comes the real work.
Lenders require quite a bit of documentation as part of the mortgage approval process, so itâs a good idea to gather everything up before youâre ready to apply. Hereâs what youâll need:
Income verification. First, youâll need to prove you have the income to support your mortgage payment. Lenders will likely want to see tax returns for the last two years, as well as recent W-2 forms or pay stubs. If youâre self-employed, youâll need to verify your income with 1099s or profit and loss statements from the past couple of years instead.
If you receive income from alimony or child support, youâll also be expected to provide court orders, bank statements and legal documentation that shows youâll continue receiving that income.
Proof of assets. In addition to income, additional assets can help you secure a mortgage. Expect to provide bank statements for checking and savings accounts, retirement accounts and other brokerage accounts from the past 60 days.
List of liabilities. Lenders may also ask you to provide documentation related to outstanding debts, such as credit card balances, student loans or any existing home loans.
Calculate How Much House You Can Afford
Before you get your sights set on your dream home, make sure you can afford it. You can estimate how much house you can afford to buy with the 28/36 rule. This refers to your DTI ratioâfor example, a 50% DTI ratio means you spend half of your monthly pre-tax income on debt repayment.
Ideally, your âfront-endâ DTI, which includes only your mortgage-related expenses, should be below 28%. Your âback-endâ ratio, which includes the mortgage and all other debt obligations, should be no more than 43%âthough under 36% is ideal.
If your DTI is too high, youâll need to work on reducing or eliminating some existing debt before you apply for a home loan. And remember, your monthly loan payment is just one piece of the puzzleâthereâs also interest, homeowners insurance, property taxes and homeowners association fees. Youâll also need to consider how much of a down payment you can contribute and whether youâll be required to pay the PMI.
You can use our home affordability calculator to help you run the numbers and decide how much house you can afford.
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Choose Among The Types Of Mortgages
Youâll need to evaluate your options to decide which type of mortgage loan would best suit your needs. A few things to keep in mind include:
Conventional vs. government-backed. There are two main types of mortgage loans. The first is a conventional mortgage, which means itâs provided by a private bank, credit union or online lender. These loans tend to have fairly strict eligibility requirements and higher down payments.
If your credit isnât in great shape and/or you havenât saved up much for a down payment, you may still be able to buy a home through a government-backed mortgage such as an FHA, USDA or VA loan. These loans are still borrowed through individual lenders, but the funds are insured by the federal government. This makes these loans much less risky to the banks providing them, allowing you to secure more flexible terms.
Fixed vs. variable interest rate. Another big consideration is choosing between an interest rate thatâs fixed for the entire term of your loan or one that can vary. Fixed-rate loans are generally a safe bet, as you know exactly how much your mortgage payment will be each month.
Variable rates tend to be less expensive in the first few years of the loans. However, the rate will reset one or multiple times throughout the loan term according to the current market. That means your interest rate could increase in the future, causing your mortgage payments to become unaffordable.
Get A Mortgage In Principle
Now youve got a clear idea of what you can afford, its time to get a mortgage in principle. This is a simple document from a mortgage advisor or lender which confirms the amount you can borrow based on the information youve provided to them. You can typically get one of these very quickly, and they will be valid for around 12 weeks.
The benefit of getting a mortgage in principle is that it shows sellers and estate agents that youre a serious buyer, and that you have your ducks in a row! Some estate agents wont let you view popular properties unless you can evidence that its within your means, so a MIP is the perfect document to hand over to land a viewing. Get a Tembo MIP in minutes here.
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Shop For Your Dream Home
Work with your real estate agent to find a property that meets all of your needs. Consider whats most important to you in a property, like proximity to good schools, room for a growing family, the size of the bathrooms or kitchen, off-street parking, a flat lot, a specific neighborhood, access to amenitiesthe list goes on. You may not be able to find everything on your list in one house, so figure out what your non-negotiables are and share them with your agent. He or she can help you find a house that has the features you want.
Find Your Real Estate Agent
Having a real estate agent will make navigating the process of purchasing a home in Nebraska a whole lot easier. Your agent will help you make offers, review contracts, and negotiate the closing process. They will also connect you to inspectors and other necessary services for purchasing a home.
Its helpful to know what to look for when on the hunt for a good realtor. Things to consider include years of experience, what sort of reviews they have, the number of transactions in the past year, and if they have experience working in your price range.
Be sure to ask your agent questions about your desired neighborhoods and what their strategy is for helping you find and close on a home. Most importantly, make sure you feel comfortable with them this process is going to most likely take a while, and you want a good working relationship.
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Work On Your Credit Score
If your score is below 760, its worth the effort to improve your credit score by taking steps to pay down your balances and make all your payments on time. Having excellent credit will make you eligible for the lowest mortgage interest rates. The Loan Savings Calculator from myFICO is a great tool for estimating how much you could save on your mortgage by improving your credit score.
If youre putting down less than 20% on a conventional loan, excellent credit will also make you eligible for the lowest mortgage insurance rates. But even if you have bad credit, you might be surprised by your loan options.
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How Much House Can I Afford With A Va Loan
Veterans and active military may qualify for a VA loan, if certain criteria is met. While VA loans require a single upfront funding fee as part of the closing costs, the loan program offers attractive and flexibleloan benefits, such as noprivate mortgage insurance premiums and no down payment requirements. VA loan benefits are what make house affordability possible for those who might otherwise not be able to afford a mortgage.
With VA loans, your monthly mortgage payment and recurring monthly debt combined should not exceed 41%. So if you make $3,000 a month , you can afford a house with monthly payments around $1,230 .
Use ourVA home loan calculatorto estimate how expensive of a house you can afford.
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Find A Mortgage Lender
Once youve decided on the type of mortgage, its time to find a mortgage lender. Its important to shop around for multiple offers to make sure youre getting the best possible deal, not just the lowest interest rate. Be mindful of the lender fees when evaluating your options.
To find the right lender, speak with friends, family members and your agent and ask for referrals, advises Guy Silas, branch manager for the Rockville, Maryland office of Embrace Home Loans. Also, look on rating sites, perform internet research and invest the time to truly read consumer reviews on lenders.
decision should be based on more than simply price and interest rate, says Silas. You will rely heavily on your lender for accurate preapproval information, assistance with your agent in contract negotiations and trusted advice.
Remember that interest rates, fees and terms can vary substantially from lender to lender.
Thats why its important to shop around carefully and ask questions, Woroch says.
For many borrowers, applying for a mortgage is overwhelming. If youre not sure exactly what to look for, you might want help. A mortgage broker can help you navigate all the different loan options available to you and possibly help you get more favorable terms than youd be able to secure by applying on your own.
Va Home Loans With No Down Payment
VA loans provide home-buying options for U.S. military members, veterans, and their spouses. Like USDA loans, VA loans have no down payment or credit score requirements, though most lenders prefer a credit score of 580 or higher.
You must have a certificate of eligibility to apply for a VA loan. This certifies your service history and current duty status to prove youre eligible.
VA eligibility requires:
- You served 90 days of active wartime service
- You served 180 days of active peacetime service
- You served six years in the National Guard or Reserves
- Youre the spouse of a service member who died in the line of duty or following a service-related disability
The VA guarantees loans against losses with an entitlement, which is similar to private mortgage insurance. This allows lenders to offer a zero-down payment purchase with less risk and lower rates.
Get pre-approved for a mortgage today.
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Proof Of Assets And Liabilities
Your lender might ask you for some or all of the following when they verify your assets:
- Up to 60 days worth of account statements that confirm the assets in your checking and savings accounts
- The most recent statement from your retirement or investment account
- Documents for the sale of any assets you got rid of before you applied, such as a copy of the title transfer if you sold a car
- Proof and verification of any gift funds deposited into your account within the last 2 months
Your lender may also ask you for supplemental information on any debts you owe, like a student loan or an auto loan. Cooperation with your lender only makes the mortgage loan process easier, so be sure to provide any requested information as soon as possible.
When And Where To Apply For Your Mortgage
You can meet with a mortgage lender and get pre-qualified at any time. A pre-qual simply means the lender thinks that, based on your credit score, income, and other factors, you should be able to get approved for a mortgage. Its informal and totally non-binding.
As you get closer to buying a home youll want to seek pre-approval. You can meet with a local bank, credit union, or mortgage broker. Or you can even get pre-approved online from any number of national online mortgage lenders.
Wherever you go, this pre-approval isnt binding, but its a formal indicator of your ability to get approved for a mortgage. Most sellers will want to see a pre-approval within a couple days of receiving your offer.
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Which Specific Home Features Do You Want
While its good to retain some flexibility in this list, youre making perhaps the biggest purchase of your life, and you deserve to have that purchase fit both your needs and wants as closely as possible. Your list should include basic desires, like size and neighborhood, all the way down to smaller details like bathroom layout and a kitchen fitted with durable appliances. Scanning real estate websites can help you get a sense of the pricing and availability of properties offering the features that are most important to you.
Automate And Maximize Savings
Set up automatic transfers from your checking to savings accounts, so the money is out of reach for immediate spending.
The stock market is too volatile for short-term savings less than 10 years so when saving for a house, keep your money in a high-yield savings account, a money market account or certificates of deposit instead.
The CDs should be timed to mature just before you want to buy a house. Maximize your savings by getting the highest interest rates possible.
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What Is A First Mortgage Loan
In lending terms, a first mortgage is the primary loan on a mortgage. If a borrower defaults on the loan, the lender with the first mortgage has priority over any other legal claim on the property.
Its different from a first-time homebuyer mortgage, which is the loan a borrower takes on to finance their first home. When you start shopping for a mortgage, you can typically choose among these programs for different types of loans:
Will I Be Accepted For A Mortgage As A First Time Buyer
Assuming you have saved at least a 10% deposit and want to borrow no more than 4.5 times your income, there are a few more tests you need to pass in order to secure your mortgage offer.
The first is a youll need a good track record of borrowing and repaying money on time.
The second is the affordability test. Your lender wants to make sure you can afford your mortgage repayments not just on paper, but in practice. So they will look at all your spending patterns to see if you have enough money left over to pay your monthly repayments.
For this reason, in the weeks and months before your application, its a good idea to get your spending under rigorous control so you can demonstrate a comfortable surplus of income each month. Remember that any rent youre currently paying wont count, because of course, if all goes to plan you wont have to pay rent anymore!
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Complete Inspections And Appraisals
This part of the homebuying process allows you to better evaluate the condition of the house before officially purchasing it. After this step, you may be able to renegotiate the terms of your contract with the seller.
Inspections
An inspection is when a licensed professional comes and evaluates the home for any potential issues. In Nebraska, your inspector should check the roof, foundation, electrical system, HVAC system, and plumbing of your future home. However, a septic inspection may have to be done separately.
While its not a requirement in Nebraska, it is recommended that buyers complete radon testing and termite inspection before purchasing a home. Investing in some of these more niche inspections can possibly save you quite a bit of money and avoid a huge headache in the future.
Appraisals
Your lender will hire an appraiser to examine the home and determine how much its valued at. This is to ensure the house is worth the money being loaned to you.
Should the appraisal come back lower than expected, you might have to renegotiate the price with the seller or possibly fork over a larger down payment.
Once You Have Your Mortgage Make A Budget
Your expenses donât stop after youâve taken out your mortgage. Youâll also need to take care of ongoing costs. Your mortgage repayment will be your largest monthly outgoing. And, of course, youâll need to cover council tax, utility bills and other ongoing expenses, too.
With this in mind, making a budget and sticking to it is crucial. If you fall into debt, you may be unable to keep up with your mortgage repayments and your lender will take away your home. Defaulting on your mortgage will also negatively affect your credit score, which will damage your chances of borrowing money again.
Most importantly remember that, as a homeowner, youâre now the one responsible for maintenance and repairs. Try setting aside about 1% of your homeâs purchase price each year. This will give you a reserve of cash to tap into should your home need attention.
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Get A Preapproval Letter
A mortgage preapproval is a lender’s offer to loan you a certain amount under specific terms. Having a preapproval letter shows home sellers and real estate agents that you’re a serious buyer and can give you an edge over home shoppers who havent taken this step yet.
Apply for preapproval when you’re ready to start home shopping. A lender will pull your credit and review documents to verify your income, assets and debt. Applying for preapproval from more than one lender to shop rates shouldn’t hurt your credit score as long as you apply for them within a limited time frame, such as 30 days.
