Updated: Jun 8
If you are buying a residential home, then you probably have a few finance questions. Some common ones are how do I know what price home I can afford? How do I find a suitable lender? How much money do I need for a down payment? What is private mortgage insurance? And how much are closing costs?
1. How do I know what price home I can afford?
The first question home buyers ask is probably what price home can I afford? It is hard to start looking at potential homes before you have locked down an idea of your price range. Of course, if you are getting a mortgage you will need to find a lender and they will help you assess what priced home you can afford. A quick internet search will also pull up a lot of calculators that will tell you what price home you could afford. Just keep in mind that these might not be the most accurate. It is generally advised that you spend no more than 25-28% of your monthly income on housing costs.
2. How do I find a suitable lender?
Buying a home is an exciting time, but it can also be stressful. It is important to find knowledgeable people to work with. Chances are you will be needing a loan to buy your home. Over 60% of Americans have a mortgage. When it is time to look for a lender, you can check a few different places. Check at your bank, first. If you already have good relationships at your bank, you may be able to find a suitable lender there. You can also ask around. References from friends and family can help you find your lender. Other places you look for a lender are credit unions, mortgage brokers, and nonbank mortgage lenders.
3. How much money do I need for a down payment?
After you have figured out your price range and found a suitable lender, you may be wondering how much money you will need for the down payment. A common number that is thrown out is 20%. This can sound overwhelming to a lot of people. Don’t worry. There are plenty of loans that allow you to put down less than 20%. Most lenders typically expect between 5-20%. If you do choose to put less than 20% down, you will most likely be required to purchase private mortgage insurance. Saving for a down payment can seem like a daunting task, but if you make a plan and stick with it you’ll be on your way to purchasing your home in no time.
4. What is private mortgage insurance?
Private mortgage insurance is there to protect the lender and their investment, not you. If you are getting a mortgage on your new home, there is a chance that you will be required to purchase private mortgage insurance. Any buyer who puts less than 20% down on a conventional loan normally must purchase private mortgage insurance. The purpose of private mortgage insurance is to protect the lender. If the buyer is unable to pay off the loan, the lender can recover some of their investment through private mortgage insurance. Private mortgage insurance can increase the likelihood of you getting a loan, but it will also increase the cost of your loan.
5. How expensive are closing costs?
Closing costs are the fees that come with buying a home. They can include appraisal fees, pro-rated homeowners insurance, and property taxes, lender fees, government taxes, and title insurance. A lot of home buyers wonder about closing costs. How much are they going to have to pay? Buyers are usually the ones responsible for paying the closing costs. However, you are generally able to negotiate with the seller. And in some cases, the seller will pay the closing cost in exchange for a higher selling price.