The Home Shopping Network

Have we got a deal for you...

One of our members is in the process of looking for a new home and another is wondering what is entailed in case he chooses to buy in the future. We went over some of the basics this week. We tried to cover everything to do before making an offer on a home. You’ll want to figure out your budget and get everything in order before making any offers. As with any major financial things, it would be a good idea to check your credit report first.

When you find the right home, you’ll need to make an offer. Your realtor will handle most of this, but you need a pre-approval letter from a lender. This is a letter that says they would give you a loan of a certain amount for a certain term (usually 15, 20, or 30 years) at a certain interest rate on a home for a certain value, given what you have disclosed. This is not a guarantee. You’ll still need to submit all of the official financial documents to get the final loan, but at least this gives sellers some confidence that you are capable of securing a loan when you make an offer/bid on a property. Remember that anytime someone pulls your credit report, they are required to provide you with a copy upon your request. You’ve combed over your report before embarking on this adventure (hopefully), but it’s always good to see what a lender sees, and they’ll have some credit scores for you as well.

Budget: One of the things you’ll want to figure out before getting the pre-approval is how much you can afford and how much you’re willing to spend. The old rule of thumb was that a bank would not give you a loan where your monthly payments exceeded 1/3 of your monthly income. Those payments should include taxes and insurance. A few things go into figuring out this payment.

Down payment: This will also come into play for mortgage insurance. You need to know how much money you’ll be plopping down to make this purchase. If you can muster up 20% of the sale price, then you’re doing pretty well. Certain types of loans (FHA) will let you get by with as little as 3.5%. There will also be closing costs that you need to consider unless you’re a great negotiator and the seller agrees to pay those for you.

Interest rate: There’s not much to say here. Find the best rate you can. APR is the starting point for a loan, but APY is what you’ll really pay after fees and such. APY is going to mean a lot more to most people. You can get a good idea of the going rates at a site like bankrate.com.

Property taxes: These can be estimated based on the millage rate for the area, or you can just look up the property at the local county property appraiser website and it should tell you exactly what the property taxes are. If you see a homestead exemption, then the taxes may not be accurate, since the property might not have a recent assessment. Homestead exemption is the tax break for a property being your primary residence and it also puts a cap on the maximum yearly increase on property taxes. If this is a problem, find a comparable home that sold recently and check the taxes there.

Homeowner’s insurance: We’re estimating insurance at less than 1% of the home value per year. I.e., a $100k home would have a yearly insurance payment of $1k. There are a few other factors to consider here as well depending on where you are. In Florida, you’ll probably need windstorm and hurricane insurance. You might also want sinkhole coverage if it still existed. You might be able to get catastrophic ground collapse coverage. If you’re in an area prone to flooding (depending on the flood zone), you may also be required to get flood insurance. Other areas probably have other insurance requirements, such as earthquake insurance in California, tornado insurance in Oklahoma, lobbyist insurance in DC, or kaiju insurance in Japan. Everyone will want robot insurance.

Mortgage insurance: If you’re paying less than 20% of the home value as a down payment, you’re probably going to have to factor mortgage insurance into your monthly payments. This is insurance that is required if you don’t have enough cash upfront. We’re not sure how to describe it other than as a fine for being poor and wanting to buy property, although it does allow you to make the purchase without forking over your life savings upfront, so it’s not all bad. We’ll assume that this will cost about $50/month for every $100k of the loan. The good news is that once you own less than 80% of what the home is worth (80% LTV, loan to value), then you can be rid of this extra payment. Some lenders will require an appraisal or even a refinance to remove mortgage insurance.

Now we have some numbers to work with: property value, loan amount, interest rate, taxes, homeowner’s insurance, and mortgage insurance (if applicable). Find your favorite mortgage calculator. We don’t have a favorite, so we picked this one out of a Google search. Plug in your numbers and see where you end up!

There are a few other things to take into consideration with the upfront costs such as any points you are paying to get a better rate and the closing costs. Your lender can give you these details in the Truth in Lending statement that you’ll get before the closing, but they should be able to provide you with an estimate long before that.

Now go forth and make them an offer that they can’t refuse.

Profit!