There are a slew of decisions that go into buying a home. But don’t worry! That’s what we are here for — we’ll help guide you through the entire process.
From type of house to pages of paperwork, the following topics can serve as a resource as you plan not only for your future home, but all of the details and fees that come with it.
Think of your down payment as an initial payment, on a large purchase, such as a home. A down payment is not the full cost of the home, but rather a fraction of the total cost. It is up to you to decide how much money you feel comfortable putting into a down payment; there are pros and cons for each choice. Most down payments range from 5% to 25%. For down payments less than 20%, it is common practice for private mortgage insurance to be added to cover the lender, which will increase your monthly mortgage payments.
Very few people can afford to pay for a home in cash, so it’s understandable that you may need to make financial arrangements to cover the rest of the cost of your home in the form of a mortgage loan. Financial arrangements are made by signing a contract with a mortgage lender. You agree to pay back the loan over a period of time, with interest. Interest is the payment the lender takes in exchange for lending you its money, and is calculated as a percentage rate of the total loan amount. If you put more money into the down payment, you will borrow less, thereby lowering the amount you will need to pay back in interest. Here’s a longer explanation on how down payments can affect monthly payments.
Different Kinds of Mortgages
There are different types of mortgages available to first-time homebuyers, but there are two main categories to consider: government-insured loans or conventional loans. Government-insured loans are special loans available to qualifying first-time homebuyers and may offer more flexible terms but also include certain restrictions, such as income caps or credit score floors.
Common government-insured loans include:
- FHA loans: helpful for first-time homebuyers who may also be paying off student loan debt;
- Fannie Mae Home Ready loans: available to low-income families, but does have income caps and credit score floors;
- Freddie Mac Home Possible: offers flexible credit terms to families as long as the borrower’s income needs to match the median income of the home’s neighborhood;
- VA loans for veterans or individuals currently serving in the military: made available through the Department of Veteran Affairs.
Conventional loans are mortgages available from mortgage servicers, and may come in one of two forms: a fixed rate or an adjustable rate mortgage. A fixed rate mortgage will have one interest rate throughout the duration of your mortgage-payment period, while an adjustable rate mortgage interest rate may fluctuate throughout your repayment period. It is advisable to try for a fixed-rate mortgage, because an adjustable rate mortgage can add undue uncertainty to your future rates. If you decide to go with an adjustable rate mortgage, make sure you ask some important questions about the interest rate for the loan before you sign, such as caps or floors on your interest rate, and if you can afford to make payments if the rate increases. Community reinvestment loans may also be available for purchasing homes in certain neighborhoods, and often require less money down and a lower credit score threshold. Talk to a housing counselor to learn more.
Other Costs To Consider
Along with the mortgage, there are other costs to consider when you calculate a home’s affordability. These payments might be monthly, yearly, or one-time costs that are associated with either the home-buying process or keeping and maintaining your home.
One such cost is property tax, which is calculated by the local or state government, and is used to fund local infrastructure, such as schools or parks. Taxes are calculated differently depending on the region or area, but it generally based on the value of the property and multiplied by the local tax rate. The effective tax rate in New York City is around 0.8%.
There’s also the closing costs: fees that are involved in “closing” the deal to purchase your home. Each person involved in the purchase process (and it can be a long list), is paid for their work to help you purchase your home. These costs generally fit in four different categories: lender fees, third-party fees, prepaid items, escrow account funds, and adjustments related to your interest rate. For a full list of everything that may be included, see here. The average total closing cost is 3% to 5%, except for co-ops, which can be much lower.
Your realtor will also help guide you through these fees, and should help you negotiate with the seller to split these fees as part of your offer. It is, however, important for you to make sure you know what to expect, once you are ready to begin the home search process. These fees cannot be drawn out of your mortgage loan or paid with a credit card.
As you prepare to buy a home and apply for a mortgage, make sure you have the following paperwork on hand: proof of income, documentation of existing debts, and proof of savings. Proof of income means that you have an ability to pay back the loan and may include documentation covering:
- tax returns for at least the past two years and W-2s for the past few years, as well as additional resources if you are self-employed
- alimony or child support
- rental income from another property
- stock options
Your mortgage lender will also want to see debts, which can include: credit card debt, student loans, car loans, or alimony/child-support payments. Finally, they will want to see proof of your assets: bank statements, investment records, retirement accounts, other real-estate, and auto titles. Also include bankruptcy discharge papers in your mortgage application.
At the end of the day, the mortgage holder’s main concern is that you are financially able to afford the home, and will pay them back for the loan over time. Loan originators will look at your application package to assess your income, savings and other assets, as well as debt, to ensure you’re able to afford the home.