Mortgage Basics


Selecting the right type of financing is one of the most important decisions you can make. In fact, determining how much you can afford before you begin your home search will save you valuable time in choosing the right home in the right neighborhood.

The three main factors to consider in figuring how much you can afford: your down payment, the mortgage you qualify for and closing costs.

Most loans require a down payment between 3.5% (FHA) and 20% (conventional) of the home price. If this is more than you are able to put down, there are still a few loan programs you may qualify for, but this means the interest rate and closing costs will likely be a little higher.

Most lenders require that the borrowers monthly mortgage payment (including principal, interest, taxes and insurance) cannot be more than 28% of the gross monthly income (gross=before deductions). They also look for your total debt (regular scheduled payments of 6-months or longer), including the monthly mortgage payment on your new loan, to not exceed 38% of your gross monthly income. In addition to that they will consider the composite credit scoring service, usually called your FICO score. Scores over 700 are preferred by lenders. These are only guidelines, however, and you should discuss your specific circumstances with a loan officer to determine what you quality for.

The reason for a credit report is to review your debt payment habits, outstanding debt balances and available credit. Assets are also reviewed, including checking and savings account balances, CDs, stocks and bonds, etc.

Avoiding any late payments on credit accounts and limiting your credit purchases (or at least not maxing them out) helps keep your credit report in good standing. If you have items on your credit report that could negatively affect your ability to secure a mortgage, be prepared to explain each situation to your lender in writing. You should also consider delaying major purchases until after you’ve moved into your new home. Don’t buy a new car or furniture for your new home until afterwards.

Closing costs typically range between 2% and 5% of the loan amount. These fees are due at the time of closing, but sometimes may be included in the loan. Your lender will provide a Good Faith Estimate (GFE – specific details of the terms of the loan and details of the loan costs) long before you contract to buy your home. Requesting the seller to pay for some or all of your closing costs is an option too – everything is negotiable!

I definitely recommend taking the time to pre-qualify for a mortgage before searching for a home. This will put you in a better negotiating position, because the seller is assured that the transaction will not be delayed while you secure financing. Most sellers will not consider an offer unless it is accompanied by a pre-approval letter. Call me for recommendations on mortgage brokers in the New Braunfels area.

Clair Devers
Key Real Estate Services
Licensed Realtor
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