built, $175,000, four-bedroom house in 2000 with $15,000 of our own money, $30,000 from this program, and a $130,000 mortgage,” says Ronald. Saving on the down payment has left the couple with more money to spend on their three children.
First-time homebuyers such as Greer and the Jacobses are often eligible for special mortgage programs. “They might offer lower interest rates, a lower down payment, or reduced costs,” says Wilds.
Federal Housing Administration (FHA) loans are among the most popular now because they can be obtained with relatively low down payments. While conventional loans require 20% down, an FHA loan might require only 5% (for more on FHA loans go to www.fha.com).
Private mortgage insurance (PMI) is typically required on mortgages where the down payment is less than 20% of the loan. PMI protects the lender, not the consumer, from default on the loan, and the cost is built into the mortgage payment. The cost of PMI varies and is based on the amount of coverage, the type of loan, and the amount of the down payment.
Once the buyer has paid off more than 20% of the original loan amount, he or she can have the PMI payments removed from the loan.
There are other innovative mortgages available as well. “There are renovation mortgages that are based on the future value of the home after you’ve made improvements with some of the money you’re borrowing,” says Simon. “There are also home asset management accounts, where you go through the process once to get a mortgage for buying the house, as well as a home equity line of credit you can tap as needed.” To find out more information on the types of mortgage loans available, check out the Mortgage Information Service (http://mortgage-x.com).
9. Get A Pre-approval Letter
“A pre-approval is more meaningful than a pre-qualification,” says Gumbinger. “Sellers may be more interested in dealing with you because you look like a serious buyer.”
To get pre-approved for a loan, you have to present some financial information to a lender. That lender will look at your income, your debts, your credit rating, etc., and pre-approve you for a certain loan. For example, you might be pre-approved for a 30-year, fixed-rate mortgage at 5% until a given expiration date, typically 30 to 90 days.
Pre-approval largely goes by the numbers. “Individual circumstance will vary,” says Lewis, “but a rule of thumb is that lenders will want to see total housing payments of no more than 28% of your pre-tax income.” With $60,000 in annual income, or $5,000 per month, for example, a lender might like to see total payments of no more than $1,400 a month.
“The catch,” says Lewis, “is that your total payments include principal, interest, taxes, and insurance, and you won’t know up front how much you’ll owe in taxes and insurance. Another rule of thumb is that your tax and insurance payments will be about the same as your principal and interest payments on a mortgage.”
10. The Paperwork–Perserver
“Pre-approvals are helpful,” says Gumbinger, “but they’re not as