First Mortgage Loans: Buying a Home
Purchasing a new home, for most people, is the largest financial transaction in one’s life; and it is often the most stressful. There are scores of financial and legal documents required to complete the transaction; and inexperience or a lack of real estate knowledge can heighten your stress and the confusion, and result in mistakes and sometimes even regret over the purchase of a property or acceptance of a new loan. To make buying a new home the joyous occasion it should be, it helps to understand the process so you can be prepared for each step.
After you have made the decision to buy a home, you need to assess your finances and evaluate your credit reports for any errors. Credit corrections take time, so start early. The very first step before you even look for a house is to request a copy of all three credit reports, examine your scores, and dispute any inaccurate information. By doing this, the credit-repair process is already in motion while you are exploring the market place.
When you are ready to apply for a mortgage, you may have a better chance of approval and you may qualify for a lower interest rate if your credit is good and if your credit report is accurate. Gaining a better handle on things like loan application requirements, mortgage terms and conditions, and how interest rates and length of mortgage affect the overall price of the home, will make you a more informed buyer and a better loan applicant. In the long run, it will likely lead to a more enjoyable experience and a lower overall cost of home ownership.
What is a Mortgage Loan?
The term "mortgage loan" refers to a loan secured by real estate. When you take out a mortgage loan, you borrow money from a lender and agree that real estate will be collateral for the loan. You sign a mortgage document that grants the lender a lien on the real estate. If you fail to repay the loan as agreed, the mortgage document gives the lender the right to foreclose (take) and sell your real estate to pay off the balance on the mortgage loan.
Why You Should Get Pre-Approved?
Most home sellers want to enter into contract with a person they believe will not only bring the highest price, but be the likeliest to actually close the transaction. A person who applies for a mortgage early, and gets pre-approved for a loan, shows the seller they are serious about buying a home and have taken the necessary steps to make that happen.
Pre-approvals are common in the real estate industry, and easy to obtain if you have the right qualifications. Generally, to obtain a loan with competitive rates you'll need the following:
- Good credit history and credit (FICO) score
- A cash down payment (ranging from 5% to 20% of the purchase price of the home)
- A steady stream of income from which to make loan payments
To apply for a mortgage, walk into (or call) your local bank and ask to speak with a loan specialist. They will take your application, ask you for some financial information, and likely ask to see documents confirming the three items above. Those documents are used to determine how much of a loan you can afford, which, combined with your down payment, will determine how much of a home you can afford, and at what purchase price you should be looking to make offers. At this point in time, credit requirements are much more stringent than they were in the past. Therefore, lenders do require you to have good credit in order to qualify for a first mortgage, especially if you are a first-time home buyer. If you are planning ahead toward buying your first home, it is important to establish credit early, if you haven't already done so.
Finding A Home
Armed with your loan pre-approval, you can begin making offers on new homes. To do so, you'll want to work with a real estate agent or broker who specializes in your local area. The agent will use his access to the multiple listing service and your search parameters to narrow down the field of potential home choices to a manageable number. Together, you and the agent will visit homes for a walk through; and hopefully find one that closely matches your needs. If you do, the agent will draw up an offer and present it to the seller’s agent to present to the seller for approval.
If the seller accepts your offer you will be “in contract” which means you have agreed on the material deal terms and must begin the process of bringing that transaction to a close. The biggest part of closing is arranging the financing, but since you are already pre-approved that process should work itself out quickly.
Your property documents, contracts, and final financial information will be turned over to your lender for final underwriting, after which time you will receive a loan commitment and a closing will be scheduled on your new purchase.
At the closing table, the sales agreement will be finalized, title to the home will be turned over from the seller to you, the new buyer, and money will change hands through the title or escrow officer.
The Benefits of Home Ownership
The benefits of home ownership extend far beyond having a nice place to live and raise a family. Your home is also an investment, one that will hopefully gain in value over the years; and as it does you build equity; that is the difference between the market value of the property minus the outstanding loan balance. Home equity is an important consideration because if you decide to sell the home in the future, your equity is the amount of cash that comes back to you after the loan is paid off. As the months pass your loan balance will drop, increasing your equity at a faster pace, and increasing your potential profit if you decide to sell the property.
For example, if you purchased a $200,000 a home with a $25,000 down payment you would have obtained a loan for approximately $175,000. Your equity is $25,000, essentially equal to your down payment; the portion of cash in the transaction. After five years, that loan may have been paid down to approximately $160,000, while the value of the property may have increased to $250,000. Should you sell your home for that amount, you would receive a check for $90,000 at close ($250,000 - $160,000 = $90,000). That means a $65,000 profit for you ($90,000 - $25,000 down payment = $65,000). That’s nearly $13,000 per year over five years.
Home owners can also claims certain exemptions, deductions, and credits related to owning and paying for a home. These are tax incentives in which renters can not participate; and as a homeowner, will lower your overall cost of ownership.
Owning a home is an important decision, and one that should be made only after understanding the process of buying a home and obtaining a loan. You should thoroughly analyze your market and seek out advice from professionals like real estate agents, mortgage brokers and bank lenders, and when in doubt consult with a local attorney regarding legal paperwork, and a CPA regarding possible tax incentives of owning a home.