 |
Buying a new home is not only one of the largest financial decisions a person might make in their life time, but it can also be one of the most exciting. This excitement makes it easy to get caught up in the home shopping process and can be the reason many potential home buyers forget about or skip the initial steps required to get you started on buying a home.
The urge to start looking at real estate listings does not have to be ignored or put aside, but before you call about an ad or contact a realtor, take a careful look at your savings to determine how much you have for a down payment. This is an important step and should not be skipped because determining how much you have for a down payment and other associated home buying costs will affect almost every aspect of your home buying experience. Simply knowing how much you can afford to spend will help you save time and money when looking for the right mortgage, interest rates, and even when writing your purchase offer.
The mortgage options available to a potential home buyer is dependent on their personal financial situation. This means that your personal savings and the amount of money you have available for a down payment will determine what kind of mortgage you can get from a lender. If you do not have sufficient funds for a down payment or to cover closing costs then you are going to be limited in your choice of mortgage options. If you have a large down payment and money to cover closing costs, you will have more options including conventional fixed rate loans, adjustable rate mortgages, buy-downs, graduated payment mortgages, and so much more.
It is important to know how much of a down payment you can afford when shopping for interest rates (by phone or online) because some mortgage options will charge a slightly higher interest rate if the buyer only makes the minimum down payment. Interest rates vary from one mortgage option to another, so knowing your financial situation will help you get the best mortgage option to suit your needs.
When you put an offer down in writing on a new home, you need to know how much you have for a down payment because it will affect how you write your offer to purchase the property. Your down payment amount will determine the type of mortgage you qualify for and the type of mortgage will also affect how your write your offer letter because different loan types require different things to be included in the purchase offer. For example, if you want the seller to pay for all or part of the closing costs, you must know ahead of time if your mortgage option allows the seller to do so. The amount of your down payment also affects whether or not you qualify for the loan. When making a minimum down payment, lenders are strict and will most likely have you conform to their underwriting guidelines. However, if you put down more money, lenders tend to make more allowances when you are writing the offer.
When buying a house, lenders will base their decision to give you a mortgage on your financial situation. This does not just mean having enough money for a down payment or being able to make the monthly loan payments. It means that lenders want your entire financial background so they have confidence in you as a borrower. If you can verify that you have assets in addition to those being used for the down payment, the lender will be confident that you have reserve funds to draw upon in emergency situations and still meet your financial commitment to them.
Having a complete financial history documented is an asset, but it is not always necessary because there are mortgage options available that do not require this information. However, this type of mortgage option usually requires that the borrower pay a higher interest rate.
It is also important to have a history that shows where your down payment funds originated. Consider the following as you verify and document your assets:
The easiest way to verify your funds is to provide current bank statements (from the last two to three months) to the lender. Some lenders may send a "Verification of Deposit" to your bank, but this is generally an old practice and bank statements are usually sufficient.
The money being used for your down payment and other associated costs with buying a house should be seasoned funds. This means that the funds should be in your bank account for the entire period covered by the bank statements. If your current bank statements (as supplied to the lender) show any unusual deposits, you will be required to explain to the lender where the money came from.
Brokerage firms will send monthly or quarterly statements for stocks, bonds, and mutual funds. Copies of your most recent statements (within 60 to 90 days) also need to be given to your lender to document these assets. In some situations, you might hold stock certificates instead of having an account with a broker, so copies of the certificates should be provided to your lender for verification of these assets. If necessary, you can also provide your tax records to show you have held these stocks over a long period of time. Savings bonds are similar because you generally hold an actual bond certificate. Copies of any bonds held should also be supplied to your lender.
Using income from the sale of stocks, savings bonds, or other investments is allowed as part of your down payment. However, you must provide all the documentation regarding the sale of the stock or investment to your lender for verification purposes. If cashing a savings bond, keep copies of the paper work because it will establish the current value of your bonds and show your lender that you received the cash from their sale.
Cash gifts are often given by family, friends, or acquaintances because many first time home buyers just do not have the money for a down payment. Your lender will ask the gift giver to sign a "gift letter" that stipulates the money is a gift and it does not have to be repaid. The letter might also include information about the gift giver (relationship to the borrower), the address of the property being purchased, the amount of the gift, and even where the funds originated. The lender might also require verification from the gift giver to prove they are able financially to give the gift. It is also a good idea to keep records of the deposit when you (the borrower) deposit the gift into your account.
There are some mortgage options that allow you to borrow money from your retirement accounts to be used as a down payment. If you choose to do so, it is important to provide the necessary documentation to your lender. Having a retirement account also shows the lender that you have a solid history for saving and that you have reserve funds to draw upon in case of an emergency. Having these extra funds makes the lender more confident in you as a borrower so it is in your interest to have these assets verified.
Additional assets and personal property can include vehicles, recreational vehicles, furniture, antiques and collectables, electronics, clothing and accessories, and so on. These assets encompass practically everything that you might own excluding real estate. Your lender will ask you to estimate the value of these assets when filling out your mortgage application. This might seem like a strange request, but your lender wants to verify that your income matches your spending habits. If you are spending beyond your means then the lender will be more cautious when deciding whether or not to approve your application.
Note: You are not required to document the value of these additional assets unless you intend to sell them as a way to make your down payment. Lenders are stricter about documentation of asset sales when a borrower resorts to this method for coming up with a down payment because these types of funds are harder to verify.
Most home owners will agree that saving money and paying off their mortgage faster is appealing, but most have no idea where to start. Well, it can be as simple as making bi-weekly mortgage payments instead of one monthly payment. By allowing half of your mortgage payment amount to be deducted from your bank account every two weeks, you end up making 13 payments a year instead of only making 12 payments on a monthly payment plan. The benefit to making bi-weekly payments is that the extra payment is made directly to the principal and your loan amortizes faster with fewer payments in the long run.
How quickly you pay off your mortgage depends on your interest rate and when you start making the bi-weekly payments. For example, a $100,000 mortgage amortized over 25 years at an interest rate of 4.74 (current rate) will be paid off 40 months sooner with a total of $10,982.02 in interest savings if you chose bi-weekly accelerated mortgage payments.