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This is one fundamental mistake many people make. When they think they are ready to buy a property, they seek a real estate broker. A good real estate broker is very important in a transaction, however, your first point of contact before you start looking for a house should be a mortgage professional, because it is the mortgage professional who ensures the success of your transaction. He/she is the one who delivers funds to closing. Unless this is an all-cash transaction, your first conversation should be about financing. Here are some topics that should be addressed with your mortgage professional:
At Opportune, Inc., when you plan to buy or refinance your home, we recommend consulting with a team that has decades of experience. If you live Chicago, greater Chicagoland, or anywhere in Illinois, you should work with a trusted local lender that can help you with your home buying and refinancing process.
One of the most important components of your transaction is your credit score. Lenders order your credit report from three repositories (Equifax, TransUnion, and Experian) and take your middle score (not average) as the basis. Your credit score is tabulated based on many variables. While calculating methods are guarded by the credit bureaus, we do know that your score is inextricably tied to your payment history, how many new hard credit inquiries you have, the length of your credit history, how much you owe, a ratio of your outstanding revolving debts to your revolving debts credit limit, and many other factors.
Your credit score will also be a determining factor in your interest rate.
Of course, it stands to reason that you will need money to buy a property. Most lenders assess your liquid assets, investments, and retirement accounts when determining your loan eligibility. When you purchase a property, you will not only need to show funds for the down payment but also reserves to cover your closing costs, tax and insurance escrow, etc. These assets may come from various sources, including liquid accounts (checking, savings, money market), investment accounts (401K, CD, stocks, mutual funds), gifts from relatives, closing costs credits from the seller, and other sources. There are also instances when assets can be used as income. This is when you are “asset-rich and income-poor.”
Assets are a big factor in determining your down payment. There is a misconception that you can’t buy a house unless your down payment is 20% or greater, but the truth is there are special programs that allow certain buyer’s the option to put down as little as 3% or 3.5% down. Often, with some of these programs, your down payment can also come in the form of a 100% gift from a relative. This is why you need to talk to a qualified mortgage professional before searching for a property. Knowing your qualification status, and options for purchase will open doors you may have once thought closed.
As mentioned above, the rule of thumb many years ago was that you needed a 20% down payment to buy a home. Thankfully, there are many programs where a 20% down payment is not required.
Even with a conventional loan, you can now put down as little as 3-5%. FHA financing requires a minimum down payment of 3.5% and VA loans for current and former military members or their surviving spouses allow zero down payment.
Here is an important factor to be aware of: any time your down payment is less than 20%, the lender will require you to purchase Private Mortgage Insurance or FHA insurance. It will add a few dollars to your monthly payment (as illustrated in the purchase scenario we ran above) but will allow for a much smaller down payment. Also, with conventional loans, your PMI will drop off once your equity exceeds 20%.
There are programs for lower-income borrowers that make purchasing a primary residence a reality. Fannie Mae and Freddie Mac offer programs such as HomeReady and Home Possible, respectively, that have different income-requirements, allow for a smaller down payment and offer a range of sizable discounts for PMI and condo adjustments. These are terrific tools for first-time or income-restricted home buyers.
Contact us for additional tips for refinancing your home.
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Equal Housing Lender Illinois Residential Mortgage Licensee. NMLS #276689
An Opportune, Inc. NMLS-ID. 276689
Illinois Residential Mortgage Licensee, MB 6759387
Illinois Department of Financial and Professional Regulation, Division of Banking
100 W. Randolph Street, 9th Floor, Chicago, IL 60601
All Inquiries: 1-888-473-4858 TYY: 1-866-325-4949
Florida Residential Mortgage Licensee, MBR4281
Office of Financial Regulation
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Phone: (850) 487-9687 Fax: (850) 410-9663
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