Finding the Perfect Mortgage the First Time 

The following is a guest post. Enjoy! 

Every year, millions of first-time homebuyers set out on a search for the perfect piece of property. They scour advertisements; they search through real estate apps; they go on countless tours and stop by untold open houses. Then, when they finally find the home of their dreams, they are utterly unprepared to make an offer.

Buying a home is more than comparing cabinet styles and deciding whether a pool is worthwhile. You must understand your mortgage options before you even consider whether you need or want granite countertops. This guide will help you determine what features you need from your home loan, so you can find and afford your dream home in no time.

Fixed vs. Adjustable

Mortgages last a long time ― typically between 15 and 30 years. Since that is such a significant amount of time for a loan, most lenders offer two options to help you manage your interest rate: fixed or adjustable. Which option you choose depends on your current income, your credit score, and a few other factors.

Fixed Rate

Fixed-rate mortgages are the most common. With these, you can expect the same interest rate for the entire duration of the mortgage loan. The primary benefit of having a fixed rate is knowing exactly what your mortgage payment will be each and every month; your home payment will never be a financial surprise. However, fixed-rate mortgages tend to have a higher interest rate ― at least initially.

Adjustable Rate

Adjustable-rate mortgages are less common but more accessible if you have poor credit. The opposite of fixed rates, adjustable rates will change over time. Most often, adjustable-rate mortgages (ARMs) are actually a hybrid product, as lenders will promise a brief fixed period before adjusting your rate.

Some buyers find ARMs preferable because they seem to have lower interest rates. However, over time, those interest rates will rise, and you likely won’t be able to predict when or how much. Therefore, you can expect financial irregularity for the duration of your loan.

Jumbo vs. Conforming

The cost of your home will also determine the type of mortgage you can obtain. Though you might not realize it, most home loans have a size cap, and not all lenders offer conforming loans, which are the standard size, and jumbo loans, which are substantially larger.

Conforming loans earn their name because they conform to the guidelines of the appropriate government-sponsored enterprise (GSE), Fanny Mae and Freddy Mac.

In 2013, these enterprises determined that the size of home loans should be limited to $417,000 for a single-family home in the United States. The GSE can do this because it purchases and sells mortgage-backed securities, which form the foundation of the housing market. In 2007, the unreliability of these securities incited the Great Recession, so adhering to the size cap for home loans should keep the economy more stable.

Conversely, jumbo loans are available from some lenders for those looking to purchase a home worth more than $417,000. However, such sizeable loans represent a marked increase in a lender’s risk, which means you must have impeccable credit, high income, and a large down payment to qualify. As long as you are prepared for the financial responsibilities of a more expensive home, a jumbo loan is an excellent mortgage option.

Conventional vs. Government-Insured

Finally, not all potential homebuyers have the credit history or liquid assets to purchase a home. Fortunately, the government offers unconventional, government-insured loan programs to help less-advantaged citizens buy property.

The benefit of having a government-insured home loan is that the government promises to pay your mortgage if you default, so lenders see the loan as no-risk. There are three main types of government-insured mortgages:

VA Loans

Typically available only to veterans or their partners, VA loans require no down payment, offer competitively low interest rates, and do not require mortgage insurance. These loans do conform to GSE guidelines, but they are incredibly easy to qualify if you or your spouse served in the Armed Forces.

FHA Loans

The Federal Housing Administration (FHA) also offers a mortgage program to low-income, low-credit homebuyers. Unlike VA loans, FHA loans require a down payment ― though it can be as low as 3.5 percent ― and mortgage insurance. However, interest rates are low.

USDA Loans

If you are willing to move to a rural community, the United States Department of Agriculture will help you secure a mortgage. Your qualification for this program depends on your income; it can be no more than 115 percent of the regional average. However, by participating, you earn exceedingly low interest rates and the opportunity to bypass a down payment, as long as you pay mortgage insurance.

A First-Timer’s Guide to Closing a Real Estate Deal

The following is a guest post. Enjoy! 

Hopefully, you did everything right from the beginning: You were pre-approved by your financial institution for an affordable home loan; you researched your area extensively to find the perfect property for you; you hired a real estate agent you could trust to gain access to property details and help you navigate the complex seas of paperwork. Now, it’s time to close.

Whether you are buying your first family home or a commercial property for your business, closing is convoluted and seemingly interminable. Even with the help of an experienced real estate agent, you should learn about the closing process before you attempt to survive your first real estate deal. This guide will walk you through the most important steps of closing your deal, so you come through excited to finally own your own property.

 

Obtain Title Insurance

Though it might seem unnecessary, performing a quick title search and obtaining title insurance will safeguard your investment from conflicts down the road. It’s possible that a previous owner of your soon-to-be home left the house in a will to a long-lost relative or failed to pay debts taken against the house. If anyone shows up trying to claim ownership over your home, your title insurance should reimburse you, so you won’t take a significant loss due to the state’s poor record-keeping.

 

Open Escrow

“I’m in escrow!” is an exciting statement to shout, but before you do, you should know what “escrow” means. Escrow is an account held by a neutral third party to prevent you or the home’s seller from being scammed. Until both parties in the transaction finish the necessary paperwork, all the money involved will be stuck in escrow.

 

Negotiate Closing Costs

Escrow isn’t free, but odds are you aren’t sure how much it should actually cost. Most escrow companies will try to take advantage of your ignorance and inflate their fees unnecessarily. By displaying your knowledge of the system (and using a few smart negotiating tactics), you can lower your closing costs and save some money. So-called junk fees to watch out for include:

  • Administrative fees
  • Application review fees
  • Appraisal review fees
  • Ancillary fees
  • Email fees
  • Processing fees
  • Settlement fees

Complete a Home Inspection

Do you know the difference between a wall crack caused by foundation settling and one caused by water damage? Can you tell just by looking how old the pipes are in the master bathroom? Can you recognize black mold? Most likely, the answer to all these questions ― and any questions about home repair or construction ― is “no.” That’s why you need to hire a home inspector to survey your desired property before you close the sale: You should know exactly what you’re in for before laying down cash.

You should also consider hiring a pest inspector to look for signs of damage due to wood-eating insects. If an infestation is discovered, most mortgage companies require the seller to resolve the issue before closing.

Renegotiate

Based on what your home and pest inspectors find, you might be able to lower the price you previously agreed to. Because you will likely need to complete some amount of repairs, you should ask that the seller to lower the cost by at least as much as the cost of the repairs ― or else request they complete the repairs themselves.

Set Your Rates

If you didn’t seek pre-approval ― which you should have, by the way ― it is time to lock down your interest rate. The best lenders will watch the market for a dip in rates, but you should avoid becoming too obsessed with obtaining the lowest possible number. Interest rates fluctuate several times every day, so your goal should be to obtain a reasonable rate that you can afford.

Funding Escrow

Finally, you can enter escrow. When you signed your purchase agreement, you likely deposited some earnest money into your escrow account to convince the seller that you do intend to buy the house. By now, both parties are certain about each other’s intentions, and it is time for you to move a more significant amount of money into your escrow account. You should deposit the full amount of your down payment (less the earnest money) and closing costs.

Sign the Papers

The last step of closing on your deal is signing the paperwork. In total, there should be about 100 pages worth of material, detailing the agreements of the sale, and you should read absolutely all of it. Because a home purchase will impact your finances for decades, you must know for certain that the contract says what it is supposed to. You don’t want any surprises in the way of rising interest rates or unknown fees down the road.

Millennial Money Problem: Saving Up 20% For a Down Payment on a Home

down-payment-house-my-personal-finance-journeyThe following post is by MPFJ staff writer, Chonce. You can read more articles by Chonce over at her personal blog, My Debt Epiphany. Enjoy! 

Purchasing your first home is a huge milestone and the ultimate sign of adulthood. Many people like homeownership over renting because it allows them to have more freedom over what they can do with their home.

With that being said, home ownership is quite expensive, and according to Apartmentlist.com, of the millennials who want to be homeowners, a whopping 79% can’t afford it.

This is due to a variety of factors including the cost of living around the U.S. If you live in a busy metropolitan area, houses may be expensive near you.

Not to mention, you may need a sizable down payment to purchase  your home. It’s best to put at least 20% down if you want to avoid paying private mortgage insurance.

But if homes are priced around $250,000 in your area for example, that can mean you’ll need a down payment of around $50,000 which is a huge amount to someone who has student loans and an annual salary around $50,000.

Needless to say, purchasing a home is hard for millennials from a financial standpoint which causes them to rent longer than they wish. If you’re trying to come up with a way to afford your first home, here are some options to help you come up with a down payment.

Get an FHA Loan

I wanted to mention FHA loans early on because you don’t absolutely need to put 20% down on your new home even though it’s highly recommended. The Federal Housing Administration is a government agency that helps homebuyers (especially first time home buyers) get approved for a mortgage.

With an FHA loan, you are only required to put down at least 3.5% as long as you are a first-time homebuyer or military service member. While this type of loan helps make owning a home much more affordable for millennials, they’ll need to find a property that accepts an FHA lender first.

Also, putting less than 10% down on your home can be risky because you won’t start out with much equity. If the value of your home started to plummet and you barely put 4% down, you may be underwater for a while.

Also, when you put less than 20% down on your home, you’ll need to pay private mortgage insurance (PMI) which can add to the cost of your mortgage even though you can probably get rid of it later.

Given all the downsides of using an FHA loan, it’s still a solid option for millennials who don’t think they’ll be able to afford a home anytime soon. Plus, if you are planning on getting a starter home to occupy only for a few years, you might want to use the FHA loan since it won’t be available to you if you purchase a second home later down the road.

If you are not sold on the FHA loan yet or would prefer to consider other options to help you come up with a 20% down payment, here are some alternatives.

Extend Your Timeline

If you can’t afford a home right now but really want to be a homeowner, it can be hard to extend your timeline but it can allow you to save up enough money and make a wiser purchase. If you have kids, debt, or other expenses like planning a wedding, for example, it’s best to tackle one major goal at a time so you can dedicate all your attention to it.

It’s important to determine what your budget is for a home and how much you’ll need to put down. Then, set a timeline based on how much you can afford to save each month and not your emotional connection with a pretty home across town.

For example, if your budget for a home is $200,000 and you’d like to purchase a house in the next 5 years, that means you’ll need to save $40,000 for your down payment or $8,000 per year which adds up to $666.66 per month.

Let’s say you don’t want to wait 5 years and think you can do it in 4 years instead. That’s $10,000 that you need to save every year or $833.33 per month. It can be doable if you split that monthly amount with your partner and your income and living expenses can support that goal.

Cut Down on Living Expenses

Cutting down on living expenses is one of the best things you can do to boost your savings so you can reach that 20% down payment. You may want to cut or reduce smaller expenses like cable and other subscriptions, your shopping budget and other impulse purchases, and your daily coffee habit.

You can even cut larger expenses like your current living expenses. Living in a basic apartment that falls way below 30% of your income can help you save a ton or you can even become a one car family or see if you can move in with your parents or other relatives in order to save more.

Live on One Income

If you want to purchase a home with your significant other or spouse, you can leverage both of your incomes to help you reach that goal quicker.

Living on one income and using the other income to save is a strategic way to round up enough money for a 20% down payment.

My husband and I started living on one income when we got married and as a result, we paid down $4,000 in debt within our first 3 months of marriage.

You may need to cut some of your expenses and make some sacrifices to make it work, but you can start out by saving the lower income and living off the higher income.

Start Side Hustling

If you’ve cut expenses all you could and still need money to live off, you can always try to earn extra money through a side hustle. If the income from your full time job isn’t getting you to your goal quick enough, look into freelancing your skills whether it’s freelance writing, graphic design, photography, dog walking, or babysitting.

There are tons of things you can do in your spare time to earn extra money and you can throw all your earnings toward your down payment fund.

Again if you are planning to purchase a house with a spouse, both of you can establish a side hustle so you can earn twice the amount of extra money and avoid burnout.

When my husband and I were planning our wedding, I did freelance writing and blogging as a side hustle and he tested websites online and took surveys. Now, he is looking into becoming an Uber driver to earn extra money so we can pay off our debt quicker.

Use Extra Lump Sum Payments

If you receive any extra lump sum payments like a tax refund, bonus at work, or commission, you can put it directly in your house down payment fund.

If you have a birthday or special event coming up like a college graduation, you can request that family and friends make a contribution to your house down payment fund instead of buying you a gift.

The money can really add up.

How about you all? Can you think of any other great ways to save up for a down payment on a home? What has worked for you in the past?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/76657755@N04/6881505052/

From Renter to Buyer: Top Tips for Making a Smooth Adjustment to Homeownership

The following is a guest post by Amy Hart. Amy writes on a variety of topics; article writing definitely being her top hobby. Recently she is focusing on property topics, having just completed a move into her much-lusted after dream home!

It’s great to enjoy the element of flexibility that renting offers you but nothing really beats living in a place that you can truly call home.

Looking for a home to buy, and you can read here about Taylors, who could help with that search, is the first step on your path to making that transition from renter to buyer. Here are some  tips and suggestions on how to achieve a smooth adjustment to homeownership.

The financial difference is one of many advantages

Renting can often feel like you are wasting money that could be going towards a property that you get to own outright when you have paid off the mortgage, and according to a recent survey by high street bank Barclays, the savings could run into hundreds of thousands.

The bank estimated that if you compared the cost of owning your own home over a fifty-year period, against the cost of renting, with aspects like maintenance in the equation, you would be over £190,000 better off as an owner.

Renting might win the short-term financial argument in some respects but as you will always need a roof over your head and it is therefore better to take a longer term view, being a homeowner seems to be a bit of a financial no-brainer.

A greater sense of security

If you needed any further persuasion regarding the argument in favour of buying rather than renting, another positive factor is the greater sense of security that you may experience.

It is not just a case of putting down roots and being able to make plans knowing that the house is yours as long as you keep up the mortgage payments, it is also the progression in your credit standing from tenant to homeowner.

This is certainly one factor that sometimes get overlooked but definitely has relevance.

Owning your own home can improve your credit standing and when you have a property with equity available, this can give you an element of bargaining power for better deals and lines of credit, that are not always available if you are a renter.

Experiencing the difference

Becoming a homeowner can take a bit of getting used to, as some things change the minute your name goes on the title deeds and you officially become a property owner.

One aspect of this transition that can be a bit challenging to adjust to, is the fact that if anything goes wrong with an appliance in the property or any repairs or maintenance tasks are required, it is no longer a case of calling the landlord or the letting agent in order to get it done.

You will have to pick up the bill for any of these expenses, so be prepared to think like a homeowner and anticipate any potential problems by scheduling regular maintenance. Also think about setting up an emergency fund that gives you access to some money in a hurry, if you need to get the boiler repaired or an electrical fault needs fixing urgently.

There are a number of fundamental and sometimes subtle differences between being a tenant and owning your own home, so it is simply a case of being prepared for these changes and understanding how your role has changed.

Get your insurance sorted

Another noticeable aspect of becoming a homeowner is the difference it makes to your insurance requirements.

As a tenant, you will presumably have arranged insurance to cover the prospect of your personal belongings being damaged or stolen in the property that you are renting.

When you become the owner of a property, you immediately become responsible for insuring the building itself as well as your possessions. Buildings insurance is designed to insure against potential problems with the building, structural or otherwise, that will need to be paid for.

If you have a mortgage, your lender will insist that you have a valid building insurance policy which covers the rebuild cost of the property should disaster strike. For a personal perspective, buildings insurance will also mean that you take out cover so that if your home is flooded by a burst pipe for instance, the insurance cover will allow you to be able to claim for the majority of any expenses incurred in putting this right.

Buildings insurance can often be combined with a contents policy, so that you are covered for most eventualities.

Once you get to know all of the main aspects of homeownership and the differences you face compared to renting, it shouldn’t take you long to make a reasonably smooth transition.

To Rent or Buy: Knowing the Right Housing Choice for Your Wallet

The following is a guest post by Melissa Marshall. Enjoy!

For people in the UK who are trying to make sense of the property market and their options, it can feel rather like a game of pontoon, and you don’t whether to stick or twist, in terms of renting or trying to buy your own home.

There are some attractive properties to discover at Entwistle Green in Liverpool for example and in certain areas around the country, it could work out cheaper to buy than to rent.

The buying or renting conundrum

If you were looking at a map of the UK where rents and property prices are at their highest level, the very epicentre of the most expensive area would be central London, where property prices and some rents, look more like mobile numbers rather than an asking price.

Interestingly, as you work your way out of that price hotspot in the city of London and spread out to other cities across the country, the numbers become not just infinitely more manageable in terms of affordability, but overall, in just about 35% of the rest of the UK, the mathematics come down in favour of buying rather than renting.

As you would expect, buying in some cities such as Glasgow and Dundee in Scotland, can offer some clear blue water in terms of a definite monthly saving achieved through buying rather than renting a property in these areas.

However, there are also a number of cities like Manchester and parts of Liverpool for example, where your mortgage payments will still be cheaper than many rental payments for an equivalent property.

It is still probably cheaper to rent than to buy in locations like London and Cambridge as prime examples, but as general view, the further north you head in the UK, the greater the chance than buying will trump renting in terms of monthly cost savings.

Savings to be made despite rising house prices

The property website Zoopla came up with some figures recently which seem to convincingly support the argument that buying a home is cheaper than renting in many major cities throughout the UK.

The study concluded that nearly half of the major cities offer you the chance to make savings through buying rather than renting. Interestingly, buying instead of renting was cheaper in 36% less than a year ago, but that figure has since risen to 48%, suggesting that there a growing number of opportunities to save money each month if you can get yourself on the housing ladder.

Barriers to overcome

It is fair to say that actually buying your own home is not always that easy in comparison to renting, as there are barriers to overcome, such as raising a big enough deposit and being able to afford the additional expenses associated with moving such as stamp duty and legal fees.

The average house price in the south of the country is now well over £300,000, which means that raising a deposit and having enough income to pass the affordability check, could be an issue.

If you widen your property search to the midlands and the north, the UK housing market offers far more opportunities in terms of affordability, as the average house price is closer to £150,000, giving a clear example of what is meant when people talk about the perceived north-south divide.

How the numbers work

Working on the basis that you are able to raise a 10% deposit in order to buy your own home, which is the typical percentage required, you will put yourself in a position to make savings over the term of your mortgage, in comparison to what you would spend on rental payments.

A typical mortgage where you put down a 10% deposit and pay the mortgage back over a period of 25 years at a fixed interest rate of around 4.5%, should see you end up paying less to own your home than renting.

The other major factor to consider is that once you have paid off your mortgage, you will own your home outright and be able to profit from any subsequent rise in values over the time that you have owned it.

There are pros and cons to both options, as you might have more flexibility to move around more easily when you are renting for example, but if you do want to make the most of the money that you have available each month, it could turn out to be cheaper to buy than to rent, especially if you are casting your net well away from the London area.