buying your first home by Anh-Minh Le |
1 2 3
continued from page 1
Another important factor in determining your housing budget is the type of loan you will be getting. Ask your lender a lot of questions so that you can determine what works best for you -- for example, a 30-year fixed (what most of our parents probably have), an adjustable rate mortgage (better known as an ARM, where your interest rate is only fixed for a certain number of years), or an interest-only loan (which means you're not paying down principle for the initial period of the loan). There is no right answer here. It really depends on your individual financial situation, what the market is like in your area, and what you're comfortable paying every month.
Of course, thinking about your budget is a good way to figure out whether you can feasibly manage the jump from renting to home ownership, but don't just proceed directly into the house hunting. Get pre-approved by your lender. It's great that you now know how much you think you can spend, but it's important that the bank agrees with you. Plus, being pre-approved shows a seller that you mean business and are ready to get this deal done.
Fortunately, pre-approval is a relatively painless process. While my husband is extremely well-organized, I am not. I was certain that I would be missing all sorts of required information. But the only thing we had to submit initially was a Personal Financial Statement, which was fairly straightforward (your name, address, income, etc.). The only part of the PFS that required any real thought was calculating out our net worth. But even that is just a matter of adding together all of your money (including cash, stocks, retirement programs, real estate, vehicles) and then subtracting your total debt (student loans, other mortgages, bank notes, taxes owed, credit card balance).
The bank ran its credit checks on us (a FICO score of 650-700 is considered average), and we quickly got an answer based on the type of loan we were interested in. Armed with a pre-approval number, we were ready to house-hunt.
(Pssst… It's a good idea to get pre-approval letters in varying amounts. For example, let's say you're pre-approved for a $250,000 loan. If you're only offering $225,000 on a house, the sellers don't need to know that you can actually afford to go higher.)