If you’ve decided that you’re ready to buy your first home and are gearing up to apply for a mortgage, you’re probably wondering how much of a down payment you need to prepare for. You may find that there are special down payment assistance programs in your area or that you qualify for a loan program that offers 100% financing (like a VA loan for example).
If not, here are a few tips to help you prepare to apply for a mortgage
know your local market
Before you speak with a lender and start the mortgage loan process, get familiar with your local real estate market. Have an idea of what homes costs in the area where you want to purchase. Of course, property prices will vary a lot depending on home style, location, and demand; but you want to know the average home price so that you don’t experience sticker shock with your lender starts talking numbers.
It’s also important to get to know your local market so that you understand what local programs are available to you. For example, some counties offer down payment assistance, while others may have a much lower property tax rate. These are things you want to know not only to maximize your loan but also to be able to make an informed decision.
know how much you want to borrow
Before you start that mortgage loan application, consider how much you can afford to borrow. Base this number on what you’re comfortable with paying – not what the numbers say you can afford on paper. If you have certain expenses that you don’t want to reduce or eliminate, just to pay a mortgage, take the time to calculate the payment amount that fits your lifestyle and financial goals.
The general rule is that 28 percent of your monthly income is the maximum you should spend on housing. That’s less than a third of your income. When calculating this amount be sure to include the entire mortgage payment (fees, taxes and home insurance) and not just the principle and interest on the loan. If you’re not sure where to start, look up the current average mortgage loan interest rate and then use an online mortgage calculator for a general idea of what to expect.
know your loan options
Ok, I’ve said this already… but it’s really important. Don’t just settle for the only mortgage loan program option that your lender offers you. Ask questions about interest rates, qualifying for an FHA loan, down payment assistance, private mortgage insurance, and loan stipulations. You don’t want to pay more out of pocket than you need too and you want to take advantage of every resource available to you.
Tip: loan stipulations are often the fine print of your mortgage. For example, I once had a client that didn’t know that his mortgage stipulated that he had to occupy for the home for 5 years. He couldn’t rent it out and he couldn’t sell it until after the 5-year mark.
Keep in mind that FHA loans have several advantages. The interest rate is usually lower than the going rate for conventional financing. You’ll also be able to avoid the need for a 20% down payment. In fact, with solid credit, you could only need 3.5% down. Here’s a brief overview of buying a home with an FHA loan.
Refi Guide 2018 FHA Mortgage Guide