Knowing How Much Home You Can Afford: Preapproval to Home Repairs
November and December are nationally slower months for home buying, so it may be the perfect time to be house-hunting. But how do you know how much home you can afford before shopping? From understanding the mortgage payment structure to knowing what you’ll need for a home loan pre-approval, here are some tips to getting started on your journey to homeownership!
Become Pre-Approved for a Mortgage
Pre-approval for a home loan means you’ve applied with a mortgage loan officer and had your credit score reviewed, necessary documentation verified, and have been approved for a specific loan amount. The pre-approval typically lasts up to 90 days.
Checklist for the Preapproval Process
Proof of Income. Borrowers should have two years of W2 statements, thirty days of current pay stubs, and proof of any additional income (alimony, child support, disability payments, etc.).
Employment Verification. Lenders typically prefer borrowers who have steady employment status and can verify their income. Just changed employment? That’s okay. Your lender will probably contact your previous employer to verify employment history. Self-employed? You may need to provide additional verification to prove employment and income status.
Proof of Assets. You’ll need to provide copies of credit union or bank statements as well as any investment account statements. These show the lender if you have secured funds for closing costs, cash reserves, and/or a down payment of anywhere between 3-20%.
Credit Score. Usually, the higher the credit score, the lower the interest rate. You’ll need to provide authorization for pulling your credit score during the preapproval process.
Personal Documentation. Make sure to bring a copy of your driver’s license and social security number.
Understand the Mortgage Payment Structure
First-time home buyers may overlook the additional costs that come with homeownership. While the listed house price needs to be affordable, there are additional annual costs to consider.
Think of the PITI Acronym (Principal, Interest Rate, Taxes, Insurance)
Principal. This is the portion of your mortgage payment that goes towards the actual cost of the home. Home loans are structured so the first years of payment are applied more to the interest than principal, and then eventually reverses to principal over interest.
Interest Rate. The interest rate has a direct impact on your mortgage payments. When you are speaking with your mortgage loan officer, be sure to discuss the difference between a fixed rate and adjustable rate to ensure you’re making the best decision when it comes to repaying your loan. The better your credit score and loan repayment history is, the more likely you’ll be to have a lower interest rate.
Taxes. Real estate taxes can fluctuate, depending on the location of your new home. Taxes are calculated by the government annually, but you have the option to pay these taxes as part of your monthly payments.
Insurance. Similar to your taxes, insurance can be combined with your mortgage payment. Your homeowners insurance (property and liability coverage) can be added to your monthly payment. Additionally if you purchased your home with less than 20% down, you will most likely also be charged for PMI (private mortgage insurance) by your lender.
First-time homebuyer? Check out our First-Time Home Buyer Mortgage.
The Unknown: Home Inspection and Repairs
When making a decision on purchasing a home, be sure to have a home inspection completed. A home inspection is a visual evaluation of a home’s condition by a professional home inspector and assists with identifying any repairs or corrections which may need to be made.
Tips for Your Home Inspection
1. Research your inspector.
2. Attend the home inspection.
3. Read the inspection report.
After your home inspection, you’ll probably have a general list of items that will need addressing, some minor and possibly some major. This list could include: major appliances, electric, plumbing, heating/cooling systems and more.
If you’re planning on moving into an older home, read 4 Repairs for an Aging Home.
Saving for Home Repairs.
Homeownership means being ready to afford last-minute repairs. Saving for home repairs can better prepare you for home repairs costs. For example, if your home cost $150,000 it is recommended to save $1,500 for home repairs each year. What are some of the most expensive repairs?
Foundation repairs—commonly caused by water damage.
Fixing water/sewer lines
*Depending on the cause of damage, your homeowner’s insurance might cover the cost of repair.
Purchasing a Home is a Big Step
Whether it’s first-time home buying, upgrading or downsizing, your credit union’s friendly and knowledgeable mortgage loan officers are ready to help navigate your path to homeownership. Contact a mortgage loan officer at firstname.lastname@example.org or call 1-877-269-4179.