Basics of Buying a Home
Buying or selling a home can seem complicated, even scary, considering the amount of money involved. But if you view it one step at a time, it becomes simpler. While real estate laws differ from state to state, there are several common steps related to buying a home anywhere, and all of them involve the law.
How much money will a lender provide for my home purchase?
The total loan amount a lender will agree to provide is directly tied to your income and expenses. As a homeowner, you will be paying a monthly loan payment, along with the cost of insurance, property taxes, utilities, and maintenance. A lender looks for a solid history of income, employment, and credit. The lender also will review your expenses, including automobile payments, credit-card debt, education loans, child support, alimony, etc. If you are borrowing money for your down payment, the lender will treat the interest payments on that loan as expenses.
What do I need for a down payment?
Some people may qualify for special government-insured loans offered through the Federal Housing Administration (FHA) or Veterans' Administration (VA). The down payment needed for these loans is minimal. But, unless you can qualify, you will often need a down payment equal to 20 percent of the purchase price to avoid paying the extra cost of Private Mortgage Insurance (PMI). This insures the lender against nonpayment of the difference between the customary down payment and the down payment actually paid.
What will I need for closing costs?
Along with the down payment, you will need between four and six percent of your loan amount to pay for closing costs, unless you are obtaining an FHA or VA loan. If you are obtaining a loan, the law requires the lender to provide an estimate of these costs at the time you apply.
Should I pre-qualify for a loan?
If you are unsure about your price range and, especially, if you are a first-time buyer, pre-qualifying for a loan can help smooth the purchase process. You will know exactly what you can afford and avoid the disappointment of being unable to buy the home you thought you could afford.
To pre-qualify for a loan, you will need to go through most of the steps entailed in applying for the actual loan. If you decide to pre-qualify, be sure to do so through a loan originator, that is, an actual lender. A mortgage broker, who brings together borrowers and lenders, cannot pre-qualify you for a loan.
I want to buy a home but my credit history is poor. Is there anything I can do?
Yes, there are several options. First, before you attempt to buy, you will want to improve your credit record by paying your bills on time and by curtailing your borrowing.
Second, credit-reporting agencies can and do make mistakes. Major credit-reporting companies such as Equifax, Trans Union, and TRW maintain computer files on your financial history. The law gives you the right to examine your own file. A summary of the report must be made available to you free of charge. However, there is a fee if you request a full credit report.
If you believe your credit report is in error, you may challenge the report by explaining the error in writing. The information must be verified by the agency if it is kept in the report. If you discover inaccuracies and you can prove them, you can demand that the agency correct them within a reasonable period of time. If there are no errors, you have the right to include a letter of explanation of up to 100 words in your report. The agency must include your statement, or a clear and accurate summary of it, in all future reports.