Often the biggest financial decision most people will make in their lifetime, the best time to buy a home for most people is when they can afford it. That’s why finding the right mortgage is such an important part of getting a great house at the best possible price.
“I’ve been a loan officer for 15 years now, and in our line of work it’s important to look out for the best interests of each individual borrower,” Melissa Lauridsen, a licensed Mortgage Loan Originator who started out in the industry as loan processor in 1989 and has been with Lake Mortgage for 20 years now, said. “We want to look at the whole picture and go over all their options before a mortgage decision is made.”
When it comes to determining “how much house you can afford,” most people are surprised to learn that there can be a big difference in what they can technically afford and what they are willing to pay for housing each month. Keeping in mind that a monthly mortgage payment is just one of the expenses of homeownership, buyers need to factor in other recurring expenses such as property taxes, insurance and utility bills and also be prepared to cover routine maintenance and repair costs down the road.
“It’s very important to determine what a buyer can afford versus what they qualify for so it’s always been one of my first questions - have you started looking yet and what’s your comfort-level payment-wise?’” Lauridsen added. “Right now lending is still taking a conservative view, so we’re very careful about how we look at income. Most people don’t want to eat macaroni and cheese for dinner every night.”
When it comes to getting the most for your money when buying a home, Lauridsen outlines a few important steps prior to getting a pre-approval and looking at homes.
First, strengthen your credit.
In today’s economy, most people understand it’s not wise to make any huge purchases or move money around before buying a new home.
“The two biggest things are checking your credit score and keeping balances down below fifty percent of the limit on revolving credit,” Lauridsen explained. “Right now, the higher the credit scores, the lower the fees associated with the loan. While we’re seeing similar interest rates across the board, a 740 score will have lower fees than a 680 score.”
Next, figure out your monthly budget.
These numbers will be unique for each buyer based on many factors including income, savings and personal spending habits. While some people choose to reward themselves by eating out and/or traveling, others prefer to save money by cooking and vacationing at home. Either way, it’s important to include lifestyle choices in your monthly budget.
Always remember that just because someone is willing to lend you a certain amount of money, it doesn’t necessarily mean you can afford it, according to Lauridsen.
Then, save for a down payment and closing costs.
This is an especially important consideration since the FHA revised its guidelines for Mortgage Insurance Premiums (MIPs) in June.
For example, when it comes to the purchase of a single family, owner occupied home, there is now a definitive difference in the long-term ramifications of putting down 5 percent and going with a Conventional loan when compared with putting 3 ½ percent down for an FHA loan. The down payment difference can be as little as $1,500 on a $100,000 loan with the potential savings significant, according to Lauridsen who outlines the following scenario:
A borrower with a middle credit score between 680–719 puts 5 percent down on a home selling for $100,000. Using Conventional financing this borrower will pay approximately $74.42 per month for Private Mortgage Insurance (which is .94 percent of the loan amount divided by 12) only until the home reaches a pre-determined equity position.
The LLPA’s (Loan Level Price Adjustments) will be added to closing costs. LLPA’s are based on the borrower’s credit score and Loan To Value.
In the same credit score range listed above, the LLPA’s or discount points would run between 1bp to 1.25bp paid at the time of closing. Under this scenario (5 percent down payment) the seller can contribute a maximum of 3 percent of the purchase price towards the borrower’s closing costs (CC), pre-paid items (PP) and LLPA’s. With a down payment of 10 percent the seller can pay a maximum of 6 percent of the purchase price towards borrower’s CC, PP and points.
A borrower with a similar middle credit score and sales price choses FHA financing with 3.5 percent down payment. This borrower will pay approximately $108.56 per month for Mortgage Insurance Premiums (1.35% of the base loan amount divided by 12) for the life of the loan.
The FHA loan will also cost the borrower 1.75 percent in UFMIP (Up Front Mortgage Insurance Premium) which is “rolled into the loan” at the time of closing. On FHA loans, the seller has a maximum contribution of 6 percent of the sales price towards the borrowers CC, PP and points.
“People can appreciate that mortgage insurance protects the investor against default, but they certainly don’t want to pay more than they need to,” Lauridsen said. “There’s a lot of information out there, and it can be confusing. Because we keep and service our conventional loans here, people appreciate having the option of coming in and sitting down with us face-to-face when they have any questions.”