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| Homebuying 101 |
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Establishing Credit Worthiness |
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Credit can be an important indicator of financial responsibility and will enable you to obtain credit more easily in the future. By paying your bills on time and in the amounts due, you will maintain a good credit history. If you abuse the privilege of having credit, you may find it difficult to obtain more credit in the future.
To obtain credit worthiness:
- Establish a steady work record.
- Pay all bills promptly.
- Open a checking account and do not bounce checks.
- Open a savings account and making regular deposits.
- Obtain a low balance secured card to establish new credit or re- establish less than perfect credit.
- Review your credit report annually for accuracy.
- Limit the number of credit cards you have.
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Understanding Credit Scoring |
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Creditors use credit-scoring systems to determine your credit worthiness. When you apply for a credit card, a home mortgage, a car loan; your creditors will use some form of scoring.
Information about you and your credit use—bill paying history, number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt based on credit performance of consumers with similar circumstances. A total number of points — a credit score — helps predict how credit worthy you are.
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Acquiring Your Credit Report |
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There are three major credit bureaus. Each may list different information so it is important that you look at all of them. To obtain a copy of your credit report you will need to provide your full name (including maiden name if applicable), current address, previous address (if needed for a five-year credit history), social security number, date of birth and signature in your written requests. Remember - it's extremely important to review your credit report prior to applying for a mortgage. You want to make sure there are no mistakes before you begin to application process.
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Choosing a Mortgage |
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There are many types of mortgages available to consumers today. You may want to ask yourself a few questions to help you determine which one might be best for you:
How long do you expect to live in the house?
Is it important to you to be free of mortgage debt before your children are ready for college? Before you’re ready for retirement?
Do you want the stability of a fixed mortgage or are you willing to take a risk on a payment plan that might change over the length of the mortgage?
Fixed Rate Mortgages
- 30-year—easiest fixed-rate loan to qualify for
- 20-year—can own your home debt-free sooner and the monthly payment may be only slightly higher than a 30-year
- 15-year—lowest interest rate; will save you a significant amount of interest over the life of the loan
Adjustable Rate Mortgages (ARMs)
- Usually lower initial interest rate
- Rates change as market conditions change
- Caps apply
- Each adjustment period (usually twice a year)
- For the life of the loan
Other Types of Mortgages
- Balloon
- Shorter term
- Lump-sum due at the end of the term
- Special Loan Programs
- Government-Insured Loans
- FHA (low down payment)
- VA (no down payment)
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Choosing a Lender |
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When it comes to choosing a lender you also have many choices. You can seek a loan through a mortgage company, commercial bank, savings and loan association, credit union, or other financial institutions. When looking for a loan it is important to compare all the options including mortgage type, interest rate and points, minimum down payment, mortgage insurance requirements, policy on prepayment of principal, and total amount of closing costs. |
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How Much Will I Pay? |
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The chart below will help you calculate how much you will pay toward your loan, including interest. The payments do not include real estate taxes, homeowner’s insurance or mortgage insurance (you will probably have to pay this if your down payment is less than 20%).
| Loan Amount |
Interest Rates |
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6.5% |
7.0% |
7.5% |
8.0% |
8.5% |
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| $50,000 |
316 |
333 |
350 |
367 |
385 |
| $60,000 |
380 |
399 |
420 |
440 |
461 |
| $70,000 |
442 |
466 |
489 |
514 |
538 |
| $80,000 |
506 |
532 |
559 |
587 |
615 |
| $90,000 |
569 |
599 |
629 |
660 |
692 |
| $100,000 |
632 |
665 |
699 |
734 |
769 |
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How Much Can I Qualify For? |
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The chart below is a simplified approach to determining how large a loan you could qualify for based on your annual income and the current interest rate charged for a 30-year fixed mortgage. Even though a lender may qualify you for up to 28% of your gross income including taxes and insurance, this chart uses a 25% ratio assuming that you would save approximately 3% for taxes and insurance. Also keep in mind that this qualification is based on your gross income.
| Interest Rate |
Annual Income |
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$30,000 |
$40,000 |
$50,000 |
$60,000 |
$70,000 |
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| 6.5% |
$98,800 |
$131,800 |
$164,800 |
$197,700 |
$230,700 |
| 7.0% |
$93,900 |
$125,300 |
$156,600 |
$187,900 |
$219,200 |
| 7.5% |
$89,400 |
$119,200 |
$149,000 |
$178,800 |
$208,600 |
| 8.0% |
$85,100 |
$113,500 |
$141,900 |
$170,300 |
$198,700 |
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Closing |
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The closing or settlement meeting is where your loan is finalized, your mortgage is issued and you get the keys to your new home. Within three days after you have submitted an application for a home loan, the lender is required by law to provide an itemized estimate of the costs to close (settle) the loan. It’s called the good-faith estimate and you should review it closely.
Fees typically paid by the buyer:
- Loan origination fee--covers administrative costs of processing the loan.
- Loan discount points—each point equal 1 percent of the mortgage amount.
- Appraisal fee—the lender uses the appraisal to determine the value of the property.
- Credit report fee—the lender uses to determine your credit worthiness.
- Advance payments or prepays—the lender may require you to prepay at the closing:
- Interest from the date of settlement to the date of the first monthly payment.
- Mortgage insurance first year’s premium as a lump sum at closing.
- Hazard insurance first year’s premiums a lump sum at closing.
- Escrow accounts to cover paying your property taxes.
- Title charges payable to companies other than the lender.
- Recording and transfer fees is a tax on property transfer.
- Additional charges such as surveyor’s fees, termite inspection, etc.
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