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Buying a house requires serious consideration about your finances. To understand everything involved in a home purchase, you need to dig into the details. That’s what we do here.

Common Myths About Homebuying

Myth 1: It’s impossible to buy a house today with less than perfect credit.

If you have perfect credit, kudos to you!

For the rest of us borrowers with less than perfect credit, very often we are able to get an affordable mortgage. Sure there are caveats, but the only sure way to know is to discuss your specific situation with a lender (psst, like Primary Residential). We work to find the right solution for you. That may include a FHA or a VA loan, an ARM or even a fixed-rate mortgage. One typical requirement is that the loan is for your primary residence. Get more details today.

Myth 2: 30-year fixed mortgages are always best.

It depends. How long do you plan to stay in the house? If it’s less than five to seven years, an ARM may be better for you. Are you near retirement age? If so, a 15-year fixed mortgage with no prepayment penalties might be just the ticket. Schedule an appointment to discuss the options that are best for you.

Myth 3: The lender with the lowest interest rates is always the best choice

Your mortgage interest rate is very important. So are fees, the reputation of the lender and high-quality customer service. You deserve peace of mind knowing all your questions will be answered during the process and your lender is looking out for your best interests.

Myth 4: “Affordable” means anything that keeps your debt ratio under 36%.

Actually, this is a consideration for your lender. Your priorities must also include closing costs, a maintenance fund and an emergency fund. The house is only affordable if you can afford to stay in it. Work with us to get prequalified for a payment that’s financially comfortable. Then you and your realtor can shop for the best home for your money.

How Much Can Your Afford?

Lenders need limits. So do you. They just aren’t always the same. Lenders want to give you the most flexibility possible when shopping for a home. So a mortgage might be considered affordable if your monthly payment, plus payments on any other revolving debt such as auto loans, car insurance and credit cards, is 36% of your monthly gross income.

The monthly mortgage payment will include homeowners’ insurance and property taxes, so you should get an idea of what those figures are where you live. Coastal areas may require significantly higher insurance premiums and your property taxes can vary from one town to the next. A helpful lender (ahem, like Primary Residential) will ensure you have the right information or the right contacts to ask for the information you need. It’s easier to understand how much house you can afford, along with the associated price range you should be looking in, when you back these numbers out.

Don’t forget to budget for your down payment, home maintenance and an emergency fund. While these dreary considerations might mean you’re looking for a house with a smaller price tag, they will also help ensure that you can afford to pay your mortgage and live your life while you’re at it.

Buying Versus Renting

A seemingly ginormous set of factors can be considered when making this decision. These include comparing the initial and ongoing total costs of renting versus buying. When renting you lack control over things ranging from your lease getting renewed, the amount of the lease and the maintenance provided to the property by your landlord.

With buying you gain predictable mortgage payments for years to come. With that comes responsibility for the down payment, closing costs and maintenance.

In metro markets overall, Trulia* has calculated that interest rates would have to rise to 10.6% before renting would become cheaper than buying. And those interest rates went out with the 80s!

Understanding Appraisals

Appraisals create a lot of angst in buyers, but a low one can potentially save you the nasty hangover from overpaying for a property. Hopefully you’re reading this before you’ve put an offer on a house, and your offer includes an appraisal contingency for getting financing approval.

If the appraisal comes back lower than you wanted, this likely means the numbers on paper don’t line up with the dream home in your head. Lenders place a lot of importance on loan-to-value (LTV). Lenders are most often willing to lend up to 80% of the value of a property, leaving the remaining 20% as a typical down payment (note, there are plenty of exceptions to this, such as FHA and VA loan programs). If the appraisal comes back higher than you anticipated, you may be getting a deal from a motivated seller!

Appraisals are intended to provide an unbiased third-party analysis of the lovely home you want to buy, also known to lenders as collateral for the money you’d like to borrow. This information is used by lenders to make a business decision on that particular property, within the context of current market conditions and recent sales of comparable properties.

If your appraisal comes back lower than you expected, there are options available. You could increase the down payment you’re making, you could obtain a second mortgage to account for the difference, or you could work out a loan that is more flexible in terms of LTV. If you’re going into the loan with less than 20% down payment, many loans will require PMI.

Understanding Your Credit Score

Your credit score impacts the interest rate you can get for a mortgage. If it’s low, it can impact your ability to qualify for certain types of loans. If it’s really low, you may want to sit out the market to first work on improving your score.

So is a credit score a magic number? It is really three magic numbers, each generated by one of the top credit reporting agencies. And these numbers are not the same thing as your credit reports (though you will have three of those, too). Confused?

Don’t wait until you’re meeting with a lender to learn your credit score. When you get that twinkle in your eye for homeowner status, you should immediately search online for “3 in 1 credit report with FICO score” to buy a copy of your credit report and FICO score from each of the three agencies: Transunion, Experience and Equifax. You’ll find many vendors available, so just read carefully to ensure you’re getting both the report and the score (and pay attention to whether you’re actually signing up for an ongoing monitoring service). Review each one with great attention to every detail. Address any “oops, I thought I paid that a long time ago” situations, and look for anything negative that has already been addressed but isn’t accurately reflected as being paid. Review your previous addresses, names, etc. to ensure accuracy. Don’t start closing your accounts, either. It’s a process. Pay attention and stay with it.

If you’re just thinking about buying a house but not ready to pull the trigger, go to www.annualcreditreport.com and get a free copy of the three reports without the FICO scores. This will give you a view of what’s in your credit reports and help you flag any items that need to be corrected or disputed. And you can get a ballpark score – not FICO, not useful for actually obtaining a loan – for free at www.creditkarma.com. There are many resources to educate you on improving your credit.

Documents You’ll Need

Here’s what you need:

  1. Information about yourself and, if you’re applying with a spouse or partner, information about him or her:
    • Social Security number or an individual taxpayer identification number
    • Home addresses for at least the past two years
    • Divorce settlement papers, if applicable
  2. Details about your current financial affairs:
    • Account numbers, current names and balances for checking, savings, money market, retirement and credit card accounts
    • The address of your bank branch
    • The most recent three months of checking and savings account statements
    • Your most recent pay stubs, W-2s or other proof of employment and income
    • The most recent two years of federal income tax returns
    • Evidence of any other income you receive such as child support orders or Social Security award letters
    • Balance sheets and tax returns, if you’re self-employed
    • Gift letters, if you’re using gifts from your parents, other relatives or an organization helping you cover the down payment or closing costs (These letters must state that the money is a gift and will not have to be repaid.)
    • Canceled checks for rent or utility bill payments to demonstrate payment history
    • Information on all other consumer debts such as credit cards, car loans, student loans, department store credit cards, furniture loans, etc.
  3. A purchase contract, if you have one for the home you’re buying

Gather this information and visit us for a quote or get one online. Then you can move on to receiving a good faith estimate (GFE) or pre-qualification letter.

What is Preapproved Versus Prequalified?

What is the difference between pre-approved and pre-qualified?

When a homebuyer is pre-qualified, he or she has provided the lender with the basic information to determine which loan program the homebuyer may qualify for. Whereas, when a homebuyer is pre-approved, the lender has collected, verified and presented the information needed for underwriting and approval.

What is the difference between interest rate and APR?

Your interest rate is the monthly cost you pay on the unpaid balance of your home loan. An Annual Percentage Rate (APR) includes both your interest rate and any additional cost or prepaid finance charges such as the origination fee, points, private mortgage insurance, underwriting and processing fees (your actual fees may not include all of these items). While your interest rate is the rate at which you will make your monthly mortgage payments, the APR is a universal measurement that can assist you in comparing the cost of mortgage loans offered by different mortgage lenders.

What are the closing costs?

Closing costs include items like appraisal fees, title insurance fees, attorney fees, pre-paid interest and documentation fees. These items are usually different for each customer due to differences in the type of mortgage, the property location and other factors. You will receive a good faith estimate of your closing costs in advance of your closing date for your review.

Which amounts are included in my monthly payments?

If you have a fully amortizing mortgage, portions of your monthly mortgage payment go toward loan principal and interest. Interest-only mortgage payments include only the interest that is due on the outstanding principal balance. If your mortgage carries mortgage insurance, a portion of your monthly mortgage payment will pay this also, unless the lender has paid your mortgage insurance or you have paid your mortgage insurance upfront. If you have set up an escrow account for your mortgage, then portions also go toward your property taxes and homeowners insurance.

What is PMI?

Private Mortgage Insurance is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Private Mortgage Insurance is generally required for a loan with an initial loan to value (LTV) percentage in excess of 80%. In most cases, this will mean that you will have to pay Private Mortgage Insurance if your down payment is less than 20% of the value of the home you are purchasing or refinancing. The cost of the mortgage insurance is typically added to the monthly mortgage payment.

Can I lock my interest rate when purchasing a home?

Absolutely. PRMI provides a variety of options to lock in your interest rate. Locking your rate means that the lender is agreeing to provide you with your mortgage at that particular rate, and that it won’t go up (or down) between the time you lock it and the time that you close on your home. If your mortgage is fixed-rate, your interest rate will remain the same throughout the life of the loan. Mortgage interest rates fluctuate constantly, and you don’t want to start shopping for a house operating under a certain interest rate assumption, only to be unpleasantly surprised that interest rates have risen during your house hunt.

What will my rate be?

Rates are based on a variety of factors such as the loan purpose, your credit history and ability to repay, the value of the collateral and the loan amount.

How do I start the application process for a mortgage?

Visit one of our locations or access our or click here if you are ready to apply.

What is an FHA mortgage?

FHA loans are government-insured loans through the U.S. Department of Housing and Urban Development, also called HUD. FHA loans offer an excellent start to first-time home buyers, with options such as a low down payment or a low closing cost option.

Quick Facts:

  • Low down payment is required
  • Your own personal savings are not required to pay down payment or closing costs. Gift funds may be used instead
  • You can buy an existing home, or build a new one
  • Some geographic limitations apply

How does my escrow account work?

An escrow account is a separate account that holds funds for the purpose of paying bills such as homeowner’s insurance and property taxes. The lender collects the funds to be deposited into the account each month along with your monthly payment and then pays the bills for you when they come due. By taking the annual amounts charged for homeowner’s insurance, property taxes and other annually paid items and dividing them by 12, a payment amount is determined and is added to your monthly principal and interest payment. Spreading the cost of these expenses over 12 months makes it easier for you to budget those expenses and you won’t have to come up with additional cash when bills are due. For some loans, escrow accounts are a requirement.

When is my due date?

Your mortgage payment due date is listed on your monthly billing statement or coupon. A late charge is assessed if the payment has not been received and processed by the date noted. It is very important that you establish and maintain good credit by making sure your payment reaches us by the due date each month. Late payments can affect your credit record.

How do I know how much I can afford?

Our complimentary mortgage calculator can help you with this question.

What is Primary Mortgage Insurance?

In a nutshell, PMI is a requirement for many lenders when your down payment is less than 20% of the value of the home. PMI is for the lender’s protection because if someone were to stop making payments on his or her loan, PMI compensates the lender for the difference between the actual down payment and the 20% figure.

If you need PMI to get your loan, PMI is included in your monthly mortgage payment. The cost for PMI is based on the amount of your down payment, your credit score and how much you’re borrowing.

With most types of mortgages, once your equity reaches 20%, you can request to have PMI removed. FHA loans are an exception. While those mortgages can be easier to obtain than other types, the insurance requirement doesn’t go away when you reach that 20% equity milestone.

Some creative options are available to avoid PMI, including getting a second loan that essentially boosts the value of your down payment up to 20%. Interest rates can vary on this type of second mortgage, so it’s important for you to discuss these options with your lender. You need to know which is less expensive for you – the PMI or the second mortgage.

In addition to having 20% equity in your home, getting rid of PMI requires you to make on-time payments, typically for at least the most recent 24 months. And if you’re hoping to eliminate PMI based on raising property values, you will need to pay for a new appraisal to show this to your lender. Otherwise, once your loan balance reaches 78% of the original value of the home, check with your lender to ensure the PMI requirement is lifted. The onus is on the buyer for follow-through.

Closing on a Home

If you’re shopping around for a lender, take a close look at this list and ensure you understand which fees are associated with each lender’s offer, and, of course, the amount of each.

Closing costs may include the following items due, at least in part, at closing.

Insurance-related:

  1. PMI (Private Mortgage Insurance) – if you need it, your first month’s premium will be due at close
  2. Homeowners’ Insurance – most lenders require you pay 1/6 of the annual premium at close, to be placed in your escrow account
  3. Flood insurance – same as homeowners’ insurance, if it’s required where you live

Lender fees (Note, these fees may not apply to all borrowers for all mortgages):

  1. Discount points – sometimes packaged with getting a lower interest rate
  2. Origination points – a mortgage broker fee
  3. Application fees – fees associated with processing your loan request
  4. Processing fee – covering gathering and submitting your loan application
  5. Credit report fee – covering the cost of pulling your credit report
  6. Appraisal fee – for the cost of an independent appraisal of your home
  7. Survey fee – if a survey is required, there’s a fee for that
  8. Courier fee – sometimes included in the processing fee, it covers the cost of using couriers to deliver documents
  9. Flood certification fee – covering the cost of determining if your home is located in a flood zone
  10. Tax service fee – the cost of verifying proper crediting of your property tax payment
  11. Administration fee – fees for underwriting and/or documentation preparation
  12. Wire transfer fee – the cost of wiring funds to an escrow company
  13. PMI application fee – if PMI is needed, this covers the fee for processing the paperwork
  14. Commitment fee – to lock in a rate
  15. Inspection fee – the cost to cover any inspection required

Title fees or attorney fees:

  1. Recording/government filing fee – officially filing your property information at the local county courthouse; includes recording your ownership and transferring taxes and documents to your name.
  2. Notary fee – a mortgage broker fee

Whether you’re moving out of an apartment, a home you’re selling or your parents’ place, be sure to give yourself some overlap in case your closing date gets delayed.

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