can go shopping for a home you can afford. This may mean working with a real estate agent, but you shouldn’t relinquish control of the entire process. “Some agents will refer buyers to lenders who only make conventional loans,” says Siler. “However, government-backed loans from FHA or VA may be a better deal, because you might be able to m
ake a smaller down payment. Federal loans don’t require a credit score, which may help borrowers who have had problems in the past.”
Remember that buying your dream home is a long process, one that probably won’t be without bumps. But if you do your homework and arm yourself with the right tools, the end result will be a home you can live well in and a mortgage you can live with.
What to Know Before You Go
Before you begin house hunting, here are some tips and terms to keep in mind:
- Income counts. As a rough guideline, lenders want to see a monthly payment (including mortgage, taxes and insurance) that equals no more than 28% to 36% of your gross monthly income. As a rule of thumb, this means you generally can borrow about three times your income. With a family income of $50,000, for example, and no exceptional circumstances, you probably qualify for a $150,000 loan.
- Lock in, float down. Under these terms, some lenders will charge you the current interest rate but allow your rate to drop if mortgage rates move down by the time you close on the home. You’ll generally pay several hundred dollars for this type of can-win, can’t-lose guarantee.
- Log on. The following Websites are useful for finding information about mortgages, calculating payments and comparing current offerings: www.hud.gov, www.hsh.com, www.countrywide.com, www.wellsfargo.com, www.homeadvisor.msn.com, quickenloans.quicken.com, www.eloan.com, www.iown.com, www.lendingtree.com and www.priceline.com.
- Points. Points are upfront fees (typically included in the amount you’ll borrow) you pay in return for a lower interest rate. On a $100,000 loan, for example, one point equals $1,000, two points cost $2,000, etc. Each point you pay drops your mortgage interest rate by about 0.25%. Generally, it makes sense to pay points if you plan to stay in the house for five years or longer. According to HSH Associates, on average, borrowers pay almost one point on most mortgage loans.
(For information on getting free government guides to mortgage terms, see “Home Buying 101” in Shopsmart, this issue.)