How to Finance a Home

Today, there are vastly more financing options available to first-time homebuyers than there were in years past and sorting through the options and understanding which financing option is best for you is critical.  When shopping for a mortgage lender it is vital that you begin by getting a copy of your credit report from the 3 main credit rating agencies because it is estimated that 50% of credit reports contain errors large enough to result in a loan denial. 

Familiarize yourself with mortgage rates so that you can be an informed shopper. Likewise, familiarize yourself with mortgage types and the mortgage arena in general.  There are many government programs meant to aid homebuyers and first time homebuyers.  For example, first time homebuyers receive an $8000 tax deduction and all mortgage payments for all homeowners are tax deductible.  These are absolutely need-to-know facts of house buying.

Purchase By Cash or Get a Mortgage

Purchasing a home is often the largest investment an individual will make in his or her lifetime.  For this reason, it is rare that a person has enough cash on hand to pay for the home outright.  Although the main advantage to paying for a home with cash would be security, because no one can take your home from you for not making a mortgage payment if you have no mortgage payments to make, the negative is that it simply does not make sense from an investment point of view.  This is because it is assumed that the investor has alternative investments that yield more than the appreciation rate for homes (such as government debt).  Therefore, getting a mortgage makes more sense in almost all cases.

What Are Mortgage Lenders Looking For

But, getting a mortgage loan will not happen unless you prequalify in the first place, and in order to do that you must know the 4 main aspects of your financial like for which lenders look.

1. Assets – The lending institution will want to verify what assets you already have so they know that you have the means to continue paying your mortgage even if something temporarily happens to your income

2. Credit Score – Your credit score shows how reliably you have repaid previous loans and how much debt you currently have. 
   • It is extremely important to maintain a healthy credit score, which can be done by paying off your debt in a timely manner and paying down current debt

3. Debt to Income Ratio – Tax records for the previous several years will be required for anyone who will be included on the mortgage because the mortgage lender is looking for proof that you have been gainfully employed.  In addition, the lender will look at each month’s debt and will compare it to each month’s income to verify the ability to afford an additional debt burden.

4. Property to be purchased – The property you want to buy must be appraised because the appraisal must show that the home is equal to or greater than the amount of the loan.
   • If the property goes into foreclosure and is worth less than the money lent, the lender will not be able to recoup its losses

Fixed vs. Adjustable Loan

• Fixed Rate Mortgage – The main benefit of a fixed-rate mortgage is that your payment remains the same through the life of the loan which lends predictability and makes planning easier.  However, if want to take advantage of dropping interest rates, you would have to refinance, which requires additional paperwork and costs

• Adjustable Rate Mortgage (ARM) – If you know your income will be rising or know you will be selling the house in less than five years, ARMs may be a good option for you because they can often help you afford a larger loan and are cheaper in the early life of the loan.  Likewise, if rates begin to fall you do not need to refinance because your payments will automatically be recalculated at the new, lower rates. 
  • However, with an ARM, the initial rates are usually lower than market rates, so when you receive your first adjustment, it can be quite an unpleasant change

Getting Financial Help

Home ownership is the American Dream so, as always, it is integral that an investor contacts a qualified professional with any questions that he may have.  Make sure you invest wisely and work within your budget. A financial planner, real estate agent and an accountant are all excellent sources of key information to review at the time of purchase.  A qualified professional should be contacted whenever an investor needs financial help.