SPECIAL PROMOTIONAL: Make your home ownership a dream come true
Madison lenders help to make it easier
“The idea that you need a 20-percent down payment to buy a home is a myth,” says Julio Rios, vice president of mortgage lending at UW Credit Union.
“It is important to talk to your lender about your options and understand that home ownership is within reach with as little as 3 percent down.”
How much home buyers use as a down payment is a personal decision that should be based on their individual circumstances and where they feel comfortable. Although putting less than 20 percent down may require home buyers to pay private mortgage insurance (PMI), it may also allow them to buy a home sooner.
Additional costs need to be paid when the loan on a home is closed, such as closing costs, appraisal costs and first year’s homeowner insurance.
“When someone decides what to save, they need to factor those additional costs in as well,” Rios says.
To get an idea of what fees will cost, Rios says it’s important to talk to a lender about all aspects of financing your loan, and to get pre-approval as to how much you can afford for a home purchase.
In most cases, there is no cost to get pre-approved for a mortgage. The lender will look at your income, your credit score and your existing debt to determine your debt-to-income ratio, which affects how much you are approved for to purchase a home.
Once pre-approved for a mortgage, home buyers are told not to take on any additional debt. New debt, such as buying a car or furniture, or changing jobs can affect a pre-approval.
When you have found a property and are ready to move forward, the lender will provide you with a loan estimate that would outline the fees associated with your loan. “Getting a pre-approval and loan estimate will help you plan,” Rios says. “Generally speaking, your debt-to-income ratio should be at about 45 percent or below. We may even go up to 50-percent depending on the situation and if you have a strong credit and asset profile.”
Your credit score is a critical piece of information that lenders consider when approving you for a loan. The score is an important measure of your financial well-being and can have an impact on the additional fees you will pay when buying a home, Rios says.
“The lower the credit score, the higher the fees you are going to pay. The higher your credit score, the lower the fees are,” says Rios.
Rios notes that UW Credit Union offers a full spectrum of mortgage loans–fixed rate, adjustable rate, construction loans, FHA and VA loans, and a suite of portfolio options that can help in most scenarios. They also offer jumbo loans for homes priced from $453,100 to $1 million.
When considering a mortgage loan, home buyers should also look at their options with respect to a fixed-term loan or an adjustable rate mortgage (ARM).
“How long are you going to live in the house? If you are going to be there five years, then you can get a five-year ARM at 3.25 percent interest compared to a 30-year fixed at 4.65 percent. That may help you buy a more expensive home because you have a lower interest rate,” Rios says.
The most important thing you can do when saving for a home is to understand your financial picture and set your expectations for success, says Mark Kennedy, chief lending officer at Summit Credit Union.
“With a smaller down payment there are likely to be other expenses such as PMI. Talk with your mortgage loan officer to understand the loan programs available, as there may be ways to better accomplish your goals and reduce your expenses, Kennedy notes.
Kennedy recommends that when saving for a home, the mortgage payment should be 28 percent or less of your monthly income before taxes and your total monthly expenses, including the new payment, should be 43 percent of your income before taxes. This is a general guideline and could vary depending on your situation. First home buyers should also consider the additional maintenance costs that come with owning a home.
“You can never be too prepared for that,” says Kennedy. “So just assume you are going to have an event of some kind at least once a year, and make sure you are in a position to have funds for that. This could be a roof repair or a furnace outage. Whether you are buying your first home or your 10th home, it is a great idea to set up a savings account for those unexpected expenses.”
Once you have decided to move forward and purchase a home, it is critical to have a pre-approval, Kennedy says.
“The way we at Summit approach the pre-approval is different than others,” he says. “We review your income and credit to make sure your plan is rock solid. When we give you that pre-approval, you’re good to go. The sellers and realtors love that certainty.”
During the pre-approval process, if it is determined that you aren’t quite ready to buy, whether due to a gap in savings, credit or level of existing debt, the Summit Credit Union team is committed to helping you reach your financial dreams and get yourself in a position to buy, Kennedy says.
As a result, Summit Credit Union offers a wide variety of mortgage loan options including low or no down payment loans and portfolio loan products that allow for lower down payments. One popular product is a 90 percent loan-to-value ARM loan that doesn’t require PMI.
“It’s been really popular with repeat home buyers,” Kennedy says. “They have gotten through the first one and are comfortable with how an ARM works and understand the benefits.”
With the current real estate market in Madison offering limited inventory, Kennedy advises new home buyers to be patient and not to get discouraged.
“You should not stretch outside your financial goals and settle for the wrong home,” he says. “In the end, partner up with a good realtor and lender and you will be sure to find the right home for you.”
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