Financial Considerations

Mortgage & Financing

Once you have a good idea of how much you can afford, and you have your credit and savings in place, it’s time to start the search for a mortgage lender. Be sure to shop around for multiple offers and make sure you’re getting the best possible deal, not just the lowest interest rate. It’s important to pay attention to all the fees and conditions of each offer. If you are unable to qualify for a loan with favorable terms, you might want wait until you can make the necessary changes to improve your credit history before trying again. Patience and planning can save a lot of money in the long run.

Get a pre-approval letter
Pre-qualified is not the same thing as pre-approved. A pre-approval letter lets the seller know you are serious about buying their home. In fact, most sellers will not accept an offer from a buyer without one. Pre-qualified means a lender has pulled credit but has not verified any income, assets, or employment. Getting pre-approved is free and can usually be done fairly quickly through a mortgage lender. They simply require a few documents to verify your financial information (proof of income, taxes, credit, etc.) and get the process started.

Mortgage lenders, rates and fees
Mortgage rates, fees and closing can vary significantly from lender to lender, so you want to shop various lenders for the best deal and rates. Even a small shift in the rates and terms can make a big difference over time. You can then use these estimates to negotiate better terms with the lender you feel most comfortable with.

Assistance programs
Ask your Realtor to help you explore the various first-time home buyer assistance programs that are available. Many state and local housing authorities combine closing costs and down payment assistance programs with favorable interest rate mortgages. These programs increase buyers’ chances of owning homes in particular geographic areas, or help borrowers in certain professions, such as educators, first responders, or active-duty military/veterans.

Up-Front & Out-of-Pocket Expenses

Knowing how much you need in addition to your down payment will help you plan how long you must save. Make sure that you also include enough to have a cash reserve for emergency repairs and any unexpected crisis that might occur. Below are several out-of-pocket expenses that sometimes catch first-time home buyers by surprise.

Home inspection
Be sure to hire a certified home inspector to examine the property from top to bottom before closing. This is an upfront, out-of-pocket cost that’s nonrefundable if a deal falls through, but considering the cost of a few hundred dollars now can save you tens of thousands down the road, it’s money well spent.

Appraisal fee
Your mortgage lender wants to make sure the home they are about to loan on is worth the money before finalizing a mortgage loan agreement. The lender will hire an independent certified appraiser to assess the property value of the home, and this is an upfront fee charged directly to the borrower. 

Escrow account
Many lenders require that an escrow account be set up in conjunction with a mortgage loan agreement on the homeowner’s behalf. This account is managed by the lender, and after an initial deposit into the escrow account at the closing table, your house payment will then include ongoing property-related expenses such as property taxes, homeowner’s insurance premiums, and private mortgage insurance (PMI) premiums. This ensures that these critical homeownership expenses are paid on time and in full. 

Closing costs
Saving for a down payment is great, but it’s not the only cash you’ll need to seal the deal. You also need an additional 2% to 5% of the home purchase price to cover closing costs, which include loan origination fees, attorney fees, prepaid HOA fees, taxes, etc.

Home maintenance and repair
Once you have your new home’s keys in hand, certain costs can creep up on you and there is no landlord footing the bill for maintenance. As a homeowner you're on the hook for any upkeep and repair costs such as changing the locks, new carpet/paint, lawn equipment, replacing appliances, and so forth.

Other Considerations

You’ve gone through the steps and calculated the cost of saving for a down payment, closing, insurance, the “usual” up-front, out-of-pocket expenses, etc., but there are a few things remaining worth strong consideration.

Don’t rock the boat regarding your income or credit
One of the worst things you can do when buying a home is to rack up more debt or make changes to your income before closing day. During the underwriting process, lenders are rechecking your finances, credit history and employment status, and certain changes could delay or derail your final loan approval. These red flags include applying for a new credit card, loan or line of credit, making large purchases on credit cards, moving around large amounts of money or unsourced bank deposits, canceling or closing any accounts (even if they are paid off), changing jobs / quitting your current job, and/or failing to respond immediately to your lender’s documentation requests.

Have an emergency fund
Your emergency fund is your backup plan—your safety net. Things happen – unforeseen medical or car expenses, unemployment, home repairs, etc., and your emergency fund not only protects you from these expenses, bus also prevents you from relying on credit cards or high interest rate loans to get out of a financial jam. Some lenders care about whether you have cash reserves available after you close on your home, but that amount varies based on your circumstances and comfort level. A general rule of thumb is 3-6 months of expenses or 1-3% of your home’s value. You can use some of the same techniques to build your emergency fund that you used while saving for a down payment. Do what works best for you.

Additional costs
You'll need some cash after the home purchase, so be sure to set some money aside for things like hiring movers, fixtures and furnishings, appliances, immediate home repairs, maintenance, incidentals, upgrades, utility transfers, etc.


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