How to Finance Your First Home?

Estimate your Monthly Budget

Pen in all your expenses in any given month, and keep a record of your budget for the last six months, which will help you create a realistic estimation of your expenses for a month. This should include car loans, taxes, credit card repayments, lifestyle expenses, savings, insurance, monthly essentials such as food and drink. Your mortgage should fall within the 30 percent range of your monthly income, it would be extreme to exceed this limit since it would leave you with only a fraction for savings and emergencies. To get this process skewered could mean foreclosure for a homeowner, so be realistic when working this out.

Saving into a personal Housing Fund

Now that, you have a true estimation of your monthly budget, its time to set aside a small amount for your personal housing fund. The thing to remember when embarking on this goal is that the more down payment you can afford on a house, the lower it drives your mortgage. It is wise to buy a house after accumulating a considerable sum as seed amount, this will drastically slash down your monthly mortgage payments.

Informal shopping for Plans and finding good Lenders

During the process of saving up for the housing fund, you should visit different lenders and enquire into their plans, don't settle prematurely for a plan. One can also consult with friends and relatives on the kinds of plans they have taken up, to get a first hand version of the pros and cons of a general array of plans in the market. As a rule of thumb, don't let the lender inform you on policy plans, read up on it and the lender should only confirm knowledge you already possess. This might seem a cumbersome journey, but it will help you find good deals.

Analysing your Credit History, Report and FICO Scores

Request a free copy of your credit score online, you can find websites that provide them by googling the query. Understanding the odds of a lender willing to give you a mortgage loan can be determined from your credit score, most lenders would never lend to a person with a bad credit score because making enough money does not mean you have healthy financial behaviour. An example of this are celebrities and millionaires who apply for bankruptcy after losing it all, in contrast with conservative homeowners who display better repaying capacities. The FICO credit score is determined based on the data in your credit report, lenders require a score of 640 to give you a mortgage loan. Paperwork on your expenses is key to scrutinizing your credit history to cross check if the entries match evidence you hold in the form of paper and digital bills.

The Perfect Mortgage Loan

Mortgage Loan options in the market could bewilder most people, work on picking a Loan by looking at the overall principal cost of the loan over the entire term period and not at low monthly payments. There are conventional loans and federal backed mortgage loans. The three conventional mortgage plans are Fixed rate mortgages, Adjustable Rate mortgages and Interest-only mortgages. This is in exclusion of other tailored plans offered by the federal government, such as the VA, HARP etc.

Fixed-rate Mortgage or Adjustable-rate Mortgage

To help you find a Loan, we break down the criteria's you should look for in order to fix onto a Loan best suited to your financial position:

Fixed-rate Mortgages have a fixed interest rate for the entire term of the Loan, while Adjustable-rate Mortgages fluctuate during the term of the Loan. A borrower can also opt for a Loan that has elements from the Fixed-rate and Adjustable-rate categories.

Long term homeowners apply for Fixed-rate Mortgage, while short-term homeowners go for Adjustable-rate Mortgage.

Borrowers chose a Loan with the best rates of interest.

Conventional Loans or Federal- backed Loans

Federal backed loans such as Veteran Mortgage Loans, USDA, HARP, FHA have different plans to cater to the section of people unable to access affordable housing. When you meet financially difficult times with a Federal backed loan, the government can intercede on your behalf, but in the case of conventional loans, hard times might mean foreclosure. Even though, several Federal-backed plans require no down payment, this actually increases the rate of interest than if you opted to pay 10 to 20 percent of the overall value of the house as down payment.

Documents Required for Mortgage pre-approval

The list of documents varies according to the lender, but here is a general comprehensive list:

Income Verification: Lenders require paperwork establishing pay checks received during the last two months.

Employment Verification: This includes the names of all your employers for the last two years, along with their addresses and phone numbers.

Place of Residence: This includes a list of addresses you have lived in during the last two years.

Bank Accounts: Most lenders require details to all your accounts to establish your financial behaviour and estimate your repayment capacity.

Tax Details: Submit tax returns and W-2 statements for the last two years.

Other Credit: Lenders require details on other loans and credits you might have taken on your name, including student and car loans.

Real Estate Agreement: This includes a signed copy of the agreement by both parties, and a bill that shows the advance payment done on the deal.

Itemized monthly expenses: Certain lenders request an itemized monthly expenses chart.

Self-Employed: Lenders require Tax documents and balance sheets for the last two years.

Steps by Step Guide to buying your First Home

Pen down your monthly budget for six months to estimate if you have enough money left to take on a mortgage.

Start saving up into a housing fund to afford a bigger chunk of the down payment required to buy a house.

Talk to Lenders after educating yourself thoroughly on the mortgage market. Consult Family/Relatives to find out their choice of mortgage plans, in addition to pros-cons of their plans from personal experience.

Go online and download your FICO scores, if your score is 640 and above, lenders will give you a mortgage.

Understand the pros-cons of fixed-rate, adjustable-rate and interest-only mortgages, in addition opt for conventional or federal-backed loans.

Ascertain the loan you want after weighing your budget and credit score. Pick a mortgage plan according to the rate of interest, term period, and insurance charged on the mortgage payment.

Can you allot up to 30 percent of your income towards mortgage payments without it drastically effecting your life?

If your answer is yes, begin collecting the documents required by lenders for pre-approval of a loan.

Meet a lender and discuss the plan you opted for, requesting him to suggest cost cutting solutions such as discount points.

Once you are pre-approved for a loan, meet up with a realtor and look at houses.

On signing the paperwork and giving a token amount towards the new house, approach your lender and finish off the mortgage process by submitting the paperwork.

Automate your mortgage payments to go from your checking account towards your mortgage repayment. It is better to pay twice a month, since it helps towards elevating credit score.

Pay your mortgages on time, never miss out on payments.

Enjoy your new home.