For those considering the purchase of a new property for the first time (or those who have not purchased in a long time!) the process of beginning your home search can be daunting. With ever-more resources available via online listing websites and local social media, even the simplest questions can have a variety of answers. So here are answers to a few basic questions to propel you down the runway to home ownership.
Should I get a pre-approval letter prior to starting my search?
The short answer is absolutely positively resounding YES! To get a pre-approval letter, a lending company looks your credit, income and other factors to determine to determine an allowable budget for your purchase. This lets you the home buyer (and your agent) better target the home options available to you. Please note the following:
- Getting a reapproval is not the same as applying for a loan. It simply gives you a ballpark figure of what you can afford.
- You are not obligated to use the lender that provided the pre-approval letter.
- The pre-approval gives you the parameters to make an offer on a property, but does not provide enough info to decide if the lender is giving your the best deal. There is no need to choose a lender at this stage.
Possessing a pre-approval letter also strengthens your credibility with sellers, as most will not entertain an offer from a buyer who has not yet been pre-approved. Some sellers will even balk at letting a prospective buyer do a walk through of the home due to security reasons. (If a buyer is not approved yet, are they serious about buying? Or do they just want to scope out the inside of my home).
Technically, you can get a pre-approval letter at any time in the home buying process; better to get it at the start so that you know how much home you can afford.
20% is a big chunk of change. What other options are available for down payment?
While putting a full 20% (or more) down has its benefits, home buyers do have the option of putting as low as 3% down on a new home. The caveat of course is that the putting a smaller amount down means the overall loan is going to be more expensive in the form in interest and PMI fees. Please note the following:
- Conventional loans do not require 20% down, however any down payment less than 20% will require Primary Mortgage Insurance (PMI), a fee added to your monthly payment. Conventional loan down payments can range from 5% to 15% with some lenders going as low as 3%.
- Federal Housing Administration (FHA) loans can be granted with a down payment as low as 3.5%. However if you are using FHA with higher down payment (5% to 15% for example) a conventional loan may be a better option.
- Zero down payment plans are available for veterans, and rural borrowers.
- The state of California offers several state specific programs. Click here for more info.
What goes into closing costs?
Fees included at closing can be paid out of pocket at the time of closing, or can be included within the loan either as a seller credit (which could mean an increase in price), or, from the lender, an increase in intrest rate or total price on the house. Common closing cost and fees may include:
- Appraisal fees
- Tax service provider fees
- Title insurance
- Government taxes
- Prepaid expenses such as property taxes, Homeowners insurance, and interest until your first payment is due
For more information, reach out to a licensed real estate agent in your area.
Ed Justen -DRE: 02221512 - Affiliated with Keller Williams. All advice and information given on this blog is sourced from publicly available websites and common knowledge. Got questions? Click here to book 30-minute meeting with me.