Local Buying Tips

Your First Step Toward Buying a Home

When preparing to buy a home, the first thing many homebuyers do is look at the real estate ads in newspapers, magazines and listings on the Internet. Some potential buyers read how-to articles like this one. The next thing you should do - before you call on an ad, before you talk to a REALTOR®, before you shop for interest rates - is look at your savings.

Why?

Because determining how much money you have available for down payment and closing costs affects almost every aspect of buying a home - including how you write your purchase offer, the loan programs you qualify for, and shopping for interest rates.

Mortgage Programs

If you only have enough available for a minimum down payment, your choices of loan program will be limited to only a few types of mortgages. If someone is giving you a gift for all or part of the down payment, your options are also limited. If you have enough for the down payment, but need the lender or seller to cover all or part of your closing costs, this further limits your options. If you borrow all or a portion of the down payment from your 401K or retirement plan, different loan programs have different rules on how you qualify.

Of course, if you have enough for a large down payment, then you have lots of choices.

Your loan choices include various programs for conventional fixed rate loans, adjustable rate mortgages, VA, FHA, and USDA mortgages.  

Shopping for Rates

A very important reason you need to have at least some idea of your down payment is for shopping for interest rates. Some loan programs charge a slightly higher interest rate for minimal down payments. Plus, the interest rates for different loan programs are not the same. For example, conventional, VA, USDA and FHA all offer fixed rate loans. However, the rates vary from one program to another.   

You will want to note that a smaller down payment (less than 20 percent of the purchase price), requires the borrower to pay Private Mortgage Insurance or PMI which protects the lender against loss if a borrower defaults. There are two kinds of payments: an upfront PMI premium and a monthly PMI premium. The upfront premium can be paid at closing, or be rolled into the loan. Just remember that rolling this payment into the loan--and the monthly PMI premiums--will affect the size of your mortgage payment. To remove PMI, you must have at least 20% equity in the home. You may ask the lender to cancel PMI when you have paid down the mortgage balance to 80% of the home's original appraised value. 

Comparing Mortgage Fees

If you shop lenders by phone, the loan officer will be able to tell you which programs fit your situation and quote your rates accordingly. However, if you are shopping on the Internet, you have to develop some idea of your loan program on your own.  Internet shopping does not provide you with the total picture.

Comparison shopping for a mortgage will get you comfortable with the process and give you a better feel for the costs. Ask at least 3 lenders to provide loan estimates and compare the results. This will help you learn the terminology and get a sense of the range of closing fees. You will find that some lenders waive certain fees for a little higher monthly interest rate. This may be a better option as interest rates are at historic lows and it will save you some upfront costs at closing.  Once you choose a lender and have a loan estimate in hand, save it. You will want to use it to confirm that the rates you were quoted are the same as those on your settlement statement at closing.

Writing Your Offer

Another reason you need to know what funds you have available for your down payment is because it affects how we write your offer to purchase a home. Not only are we required to put your down payment information in the offer, different loan programs have different rules that affect how we can write your offer. This is especially important when dealing with FHA and VA loans.  

If you are asking the seller to pay all or part of your closing costs, you have to be certain your loan program allows what you are asking. For smaller down payments, lenders allow the seller to pay less closing costs than for larger down payments. Some loan programs will allow a seller to pay certain types of costs, but not others.

Finally, your down payment also affects your ability to qualify for a loan. When you make a small down payment, lenders are fairly strict about having you conform to their underwriting guidelines. For larger down payments, they will tend to make allowances or exceptions to the rules.