How a Home is Finance

When buying a home, it is best to understand how a home is finance. There are three parts to the process.

The Mortgage Application
The Down Payment
Settlement and Closing Cost

The Mortgage:

The most important aspect of your home purchase is the mortgage that you obtain. The amount of the mortgage loan will decide what kind of home and down payment you need. Most of the time the amount of the down payment and income-debt control the price of homes you can see and consider purchasing.

I or the lender will analyze your income and debt ratios to determine your ability to repay the loan. You can in most cases afford a loan that is 25-33% of your gross monthly income. The interest rate and amount of the loan will determine your monthly payments. The term of most loans is 15-30 years.

The Down Payment:

A down payment is the money that you pay up front when you buy the house. The more money that you put down on the house the less your monthly mortgage payments will be. Most of the time a conventional loan will require 20-25% of the cost of the house as a down payment.

In some cases if your credit is excellent and you have sufficient income I or the lender will agree to a 10% down payment. This will give you more cash in your pocket but will make your monthly mortgage payments higher.

Conventional lenders are willing to accept a lower down payment if Private Mortgage Insurance (PMI) is secured. PMI protects the lender incase of default on the loan and can reduce your your down payment by 10%.

Closing Costs:

Closing cost are simply the cost of borrowing money, making the loan, preparing the documents and finalizing the loan. The cost are significant that a first time buyer may overlook.

The cost of borrowing money. This includes any discount points, a one time charge to adjust the yield to what markets conditions demand. Each point is one percent of the mortgage amount.
The cost of making your loan. This includes any origination fees, appraisal fees and credit reports. Your hazard and mortgage insurance is paid at closing most of the time. Any prepaid interest will be paid for the period between closing and the end of the purchase month.
The cost of preparing your documents. Title cost and to pay for a search of public records to see if the property is free from any other ownership liens. Recording and transfer fees and the legal recording of the deed.
Closing cost can vary from state to state so check with me or your lender for an estimate of your closing cost.

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