Purchasing a New Home

Buying a home may be one of the largest financial investments an individual or family makes. As exciting as it can be to own a beautiful home, buyers need to make sure they are ready for the financial obligations that come with purchasing a house. A number of items must be in good shape before a home is purchased, and financing options need to be thoroughly considered.

Before any mortgages are approved, lenders audit the credit score of the home buyers. Credit scores, also known as the FICO scores, give the lenders a good estimate of the risk they are taking by loaning money. The lower the credit score, the lower the chance that the loan will be paid back entirely or in a timely matter. This is why low credit scores lead bankers to charge higher interest rates or even reject applications. Consumers can always check their credit score by obtaining a credit report. There are many agencies that can provide a credit report, and consumers are entitled to one free credit report each year. If your credit score is subpar, be ready to explain to lenders why this is so, and you might even want to consider waiting until a better credit score is built.

Another item banks check is the stability of your job history. If you have been unemployed recently or on a new job, your application may be less appealing. At least two years of employment, even if not on the same job, gives the lenders more confidence in helping you finance your home.

Along with a steady job history, steady income is also heavily weighed. The lenders need to ensure that the homebuyers are making enough money to pay off the monthly mortgage payments. Lenders usually want the monthly payments to be 29% (or less) of the borrower’s gross income. They also consider other long term loans that homebuyer may have, such as additional mortgages and car loans. Debt burden may hinder the borrower’s ability to repay and may lead to rejection of additional loans.

Lastly, there need to be enough savings for down payments, closing costs and processing fees. Down payments can change according to the consumer’s credit score. These days banks even offer as low as zero percent down payment for borrowers with great credit histories. But keep in mind that the less you put down, the more you’ll have to pay later. You’ll have to face accumulating interest and much larger monthly payments especially if nothing is paid up front.

Mortgages come in many different forms that homebuyers should be aware of. Fixed interest rates are the most preferred mortgages, where interest rates stay constant over the 15 to 30 year period. These allow for fixed house costs and provide more stability. On the other hand, adjustable rate mortgages have interest rates that vary over the life of the loan. Usually they offer lower starting rates that rise to a set limit. Unless home buyers plan on selling the home after a few years, or are very confident that their incomes will grow with the inflation, it might not be the best choice of mortgage. Another newer option is the interest-only mortgage which allow buyers to pay only the interest on the mortgage for a period of time before the original terms kick back. The monthly payments increase drastically after the initial interest only period is over, and sometimes even cause foreclosures. This option is recommended for those who plan on living in the house for a short period time.

When making a financing decision, it is also important to consider additional special mortgage programs such as FHA and VA. Borrowers must meet certain criteria to be eligible for these types of loans. Federal Housing Administration mortgage insurance backed mortgage loans have historically offered lower income borrowers the ability to purchase homes they otherwise be able to afford. VA mortgage loans are guaranteed by the U.S. Department of Veterans Affairs (VA) and are offered to veterans and their surviving spouses. If eligible, VA loans can offer low interest rates and down payment flexibility which may not be offered by other lenders.

Before buying a new home, it is important to see how the purchase would affect your overall financial plan and lifestyle. Consider objective advice from a financial planner when making the exciting and sometimes challenging decision to purchase a new home. A financial advisor can help you understand the many complex financing options and costs associated with the purchase of a new home.

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