Curbed University delivers insider tips and non-boring advice on how to buy, sell, or rent a home or apartment. Additional questions welcomed to Curbed Chicago's tipline.
So you think you're ready to take the homeownership plunge. Okay, hot shot. But you might first want to double-check whether renting is not your stronger suit at your present life stage. As a rule of thumb, people who don't have a steady source of income and don't have enough in the bank to cover a down payment and closing costs, even when reduced under FHA loans (or if your credit history is so bad that you can't get a loan), should rent. Beyond that, it gets more complicated, and every case is different. If you do have the money and are sitting on the fence, it might be a good idea to spend some time plugging your numbers into a rent-or-buy calculator. The New York Times has a good calculator that takes variables like homeowner's insurance, utilities, renovations, and property taxes—the intangibles that many buyers don't consider when scouting a new home—into account.
Now committed to finding a loan, you have a couple of options: You can go directly to a major bank like JPMorgan Chase or Wells Fargo, or visit a broker who will shop around for the best price. Before you apply, you need to figure out what you can actually afford. You can use an online mortgage calculator, like this one, to see your payments based on credit rating, income, loan type and property values. Also, familiarize yourself with these terms so it seems like you know what you're talking about:
Amortized Loans: An amortized loan has equal payments throughout the loan's duration, generally paid once a month.
Adjustable vs. Fixed Rate: The more common fixed-rate mortgage allows you to lock in your rate over a 30-year or 15-year payment period. A 30-year mortgage allows more time to pay off the loan, but the higher interest rates that come with it means that it'll cost more in the long run. On the flip side, buyers who lock in with a 15-year fixed-rate mortgage tend to get lower interest rates and they end up paying less overall. For obvious reasons, adjustable-rate mortgages (ARM) are riskier than a typical fixed-rate mortgage. Payments will begin relatively low, but once the rate is adjusted they may become harder to meet.
Pre-Qualified vs. Pre-Approved: Before shopping for a home with a buyer's agent, you'll need to get pre-approved for a loan. The bank will review your financial history and then agree to a loan in writing. Before the housing crash, buyers could get pre-qualified loans informally based off-their DTI.
Debt-to-income Ratio: Debt-to-income Ratio (DTI) refers to the percentage of your total monthly income that goes towards paying debts. This will give the lender an idea of how much debt you can realistically take on. House Payment plus minimum monthly revolving and installment debt should not exceed 35-41% of gross monthly income (the variance will depend on the source of financing with FHA loans capping DTI at 43%).
Speaking of FHA loans, if you're a first time buyer or have shaky credit this could be your route to a stable home purchase. It's not the government lending you money, but rather a federally-insured conventional loan that offers lower interest rates and down paymentshttp://portal.hud.gov/hudportal/HUD?src=/buying/loans to you the buyer and more assurance to private lenders that you're safe to bet on. Closing costs can also be absorbed by the loan, which can save you a bundle up front.
Finally, don't forget to shop around. Studies have shown that it takes a few mortgage quotes to be able to finger the best deal. You stand to save significant loot by performing this diligence, and its fairly easy to do online. Or be old-fashioned and suit up for a bank visit. Maybe you're that potent a presence. Look to find a licensed lender, see if they're FHA-approved, and ask for a Good Faith Estimate— a formal written quote that carries obligations that worksheets don't.