Tips for Buyers

Article by Stacy L. Bradford for The Wall Street Jurnal, Smart Money section.

Tips for First-Time Home Buyers


YOUR FIRST HOME. Purchasing one is a rite of passage that most non-homeowners dream of. Besides the intangible benefits, homeownership lets you build equity, and is the single biggest tax break available to most consumers. Here's our look at some smart strategies for getting in the door.



First: Pay Off Your Debt

It's a common mistake for home-buyers-to-be: They focus on saving as much money as possible for a down payment instead of paying off other debts. A better approach is to use extra cash to eliminate credit-card and other high-interest consumer debt — even if that means you can put down less on your future home.

Why? First, credit-card debt is expensive and limits your ability to save. The average interest rate on credit cards is typically more than double the national average for a 30-year fixed-rate mortgage. Second, credit-card debt will limit how much you can borrow. That's because lenders often won't allow your total monthly debt service — which includes payments for credit cards, student loans and car loans, as well as homeowner's insurance, property taxes and a mortgage — to exceed roughly 40% of your gross income.


How Much Can You Afford?

The answer to that is a function of two things: How much you can borrow and how much of a down payment you can muster. As a rule of thumb, your annual mortgage payment, taxes and homeowner's insurance shouldn't exceed 28% of your gross income. Then determine how much cash you have for a down payment, leaving yourself enough left over to pay those pesky closing costs, which can add up to 3% to 5% of your total home's value (plus a little something extra for emergency repairs once you move into your new home).


Types of Loans

Now you're ready to start shopping around for the right loan. A first-time home buyer with a steady job and good credit can buy a home with less than a 20% down payment. But the more money you can muster for a down payment, the more options you will have. And, if you put down less than 20%, you will have to pay for private mortgage insurance. Your premiums will depend on a variety of factors, including how much you put down and the type of loan product you secure.


Questionable Credit

Worried you don't have perfect credit? You may yet qualify for a loan insured by the Federal Housing Administration, or FHA. These government-insured loans are issued with even more lenient credit criteria. You can also put down as little as 3.5% for an FHA loan. A portion of closing costs may be used to meet the 3.5% cash requirement. The seller may pay the closing costs for the borrower and the lender may also charge a premium interest rate, also known as rebate pricing, to fund the closing costs. Depending on the lender, interest rates are typically a quarter to half a point higher than those in the conventional market. To get a government-insured loan, make sure you find a HUD-approved lender or a mortgage broker who works with one.

Since these loans are geared toward helping first-time home buyers and low- to moderate-income families, there's a limit to how much you can borrow.


Down-Payment Assistance Programs

Still having trouble coming up with that down payment? Each year HUD gives states and municipalities money to distribute to low- and moderate-income families for housing. Much of it is put toward down-payment assistance programs. Many young prospective home buyers may qualify for a grant (or in some cases a loan that's forgiven if a home buyer stays in the home for at least three years) worth 3% to 5% or even more of the sale price to put toward their down payment or closing costs.

To qualify for a down-payment assistance program, a consumer can earn no more than 80% of a region's median income. Call your state housing finance authority, county housing and community development office or mayor's office for an application.

One final note of caution: While they are a rarity these days, don't fall for a no-equity loan offer or another loan whose terms sound too good to be true. These high-cost, high-risk home-equity loans are a bad idea. 

Read more: Tips for First-Time Home Buyers - Spending - Deals -


Frequently Asked Questions About Financing

What type of loan is the right one for me?
This is a good question, considering the number of loans available to people today. Much depends not on what type of loan you can get, but the type of loan you want. For example, loans such as the FHA/VA program and others allow you to buy a home for little or no money down. But how much money you put down on the loan is not the ultimate test of a loan.  Many factors come into play.

Are you comfortable taking out a loan that varies in percentage, such as an adjustable rate mortgage (ARM)? Perhaps you're comfortable with a mortgage that can take down your monthly payment, with a large final payment such as a balloon mortgage. Or you might find a fixed rate mortgage more your style, or perhaps you're looking at commercial property and need a commercial loan.

That covers the loan types. You're probably also wondering what factors within your control affect your ability to get a mortgage. Essentially, four factors affect your loan application status:

· Credit: Do you have a good credit history?
· Income: Is your Income appropriate for the property you'd buy?
· Monthly Debt: With your level of bill payments every month, can you afford the mortgage too?
· Type of Income: Are you self-employed? Do you work on commission only? How much do you rely upon bonuses for your income? How much of your income right now is due to overtime?

These are the more common factors assessed when companies decide to write a mortgage for a home or other property

How much of a down payment do I need?
The old rule about 20 percent down on a house no longer applies, although it is a good barometer of a person's financial situation. Housing costs have increased faster than wages over the past 30 years, so we'll all pay more for our houses in real dollars than our parents did. Lenders are aware that housing is more expensive than ever, and have come up with unique programs to help serve buyers.  Some of these we've discussed already, like FHA/VA programs. Your down payment requirement could be affected by your income and credit situation.



How do I know if I have good credit?
There are several ways to find out. If you've never been late--ever--with a payment, you have good credit. Many people who have been late with an occasional payment still have good credit.
You can find out your credit rating by letting Chicago Funding run a credit check for you, automatically and securely. Or, you can contact a credit bureau such as Equifax at (708) 449-0600, Trans Union at (312) 408-1400, or TRW at (800) 682-7654.



I just moved in the past six months. Will that affect my ability to get a loan?
No, not if it was a local move, or really anywhere within the U.S. Sometimes things can get complicated if you moved from another country to our area. In the latter case, you may experience delays due to the difficulty in moving important paperwork over national lines.


I just changed jobs. How will that affect me?
As long as you're in a similar industry, making similar money, it won't affect you. The only differences might be if you were salaried and now you are commission-based in your pay, if you're now self-employed, or went to an entirely different industry making less money.



I'm self-employed. Will the loan process be difficult?
The loan process for self-employed people varies on a number of factors. How much money you have available, the type of business you're in, and how you pay yourself might affect your loan status. Many complex issues are involved; your best bet is to make an appointment to visit Chicago Funding in person to determine your ability to get a mortgage that you want.



What do I need to consider if I or my spouse was divorced?
As long as your debts are separate and you do not jointly own property, divorce will not be a large hurdle in the application process. Your Chicago Funding loan officer will inform you of any documentation you might need.


How does bankruptcy affect my ability to get a loan?
In many cases, after the discharge of debtors in the bankruptcy process, two years of spotless credit is needed to have a clean slate. No late payments, nor judgments, nor collections can exist within a five-year period after bankruptcy is declared.



Are there ways to buy a house for little or no down payment?
Depending on your credit, income, and debt situations, you could qualify for a down payment of only 3 percent. You should also check your eligibility for FHA/VA loans--in some cases, these programs offer loans for no money down.



Do I really need an attorney for the closing process?
We always recommend that you find an attorney for the closing process. Why? You probably know your job well, and know the type of house you'd like, but very few people are expert in the areas of plat surveys, liens, title transfers, etc. That's why we think it's a good idea to hire an attorney. For the small amount of money during the closing, they could save you many dollars and lots of headaches.



Will I pay an application fee? What is this fee designed to cover?
You will not pay an application fee. What you will be charged for, however, are fees to cover the property appraisal and credit report. There is no "application" fee.



Will I need mortgage insurance?
As long as you have at least 20 percent equity in the property--or can make a 20 percent down payment on the house you want--you will not pay for mortgage insurance. However, if you are buying property as an investment and you don't intend to live at that residence, you generally need to have more than 20 percent equity or down payment in a property to avoid paying mortgage insurance.



I'm interested in buying a property as an investment, not to live in.  What should I know?
As we discussed, you might need mortgage insurance unless you have a significant down payment. But as long as you qualify on income, credit, and debt for your own house, that's a good indicator that you'll be successful in getting a mortgage for your investment property.



What documentation do I need to start the loan process?
· Last two years' W-2 forms and tax returns
· Last two years' W-2 forms and tax returns
· Last 30 days' pay stubs
· Last 3 months' bank statements
· Name, address, and account numbers for all accounts (checking, savings, CD, money market, IRA, 401K)
· Name, address, and account numbers, and current balance for all credit cards
· Loan payment information (car, student loan, etc.)
· Complete mortgage or landlord information
· Divorce decree (if applicable)
· Realtor and attorney's telephone numbers and addresses
· If self-employed, business tax returns and certified P&L statement
· Appraisal/credit fee


This information was provided courtesy of:
Chicago Funding, Inc.  
2349 West Lake Street, Suite 120 

Addison, IL.    60101  
Phone: 630-376-2600    
Fax: 630-376-2588