Frequently Asked Questions about First-Time Home Buying
Here at Monroe County Community Credit Union, we know buying a home can be a very intimidating process! Here are some commonly asked questions (and the answers to those questions!) about the home buying process:
- What are the benefits of home ownership for first-time buyers?
- Should I buy or rent a home?
- Am I ready to buy a home?
- What are some of the basic details of home mortgage loans?
- How is my mortgage application evaluated?
- How can I get started as a first-time home buyer?
- How can I determine what I may be able to borrow?
- What documents do I need for a mortgage application?
- How do I apply for a mortgage?
Home ownership has many benefits--chief among them being the security of becoming part of a community and owning the roof over your head. Other benefits include:
- Control over living expenses: Rent increases and lease payments are not a factor when you own your home. You have the ability to control your monthly mortgage payment based on what loan you choose--whether you opt for the predictability of a fixed-rate loan or the potential increased savings of an adjustable-rate loan.
- Build home equity: Home ownership is an excellent investment tool, as you build equity in your home with each monthly payment of your mortgage. Making home improvements can help to increase the value of your property, increasing the value of your investment in turn.
- Tax benefits: Mortgage interest and real estate property taxes can often be counted as deductions on your income tax returns. Consult a tax advisor about the deductibility of interest on your return.
- Building credit history: By making on-time mortgage payments, you can build a strong credit history.
Buying a home can be a rewarding experience and it allows you to build your personal net worth over time. However, for some people, renting your living space may be a more attractive option than buying a home. Take these factors into consideration when deciding whether to buy or rent:
- Mobility: Renters can pick up and move on short notice, whereas home owners generally require more time to find a buyer for their property before they can move to another house. If you plan on moving in a year or two, you may not recover the closing costs made on a mortgage loan when you purchase a house--renting may be a better option if you are living somewhere on a short-term basis.
- Financial responsibilities: Home owners need to pay for all utilities, maintenance and repairs for their property, in addition to mortgage payments, property taxes, and homeowners' insurance. If you unsure about which expenses should be included in your budget, consider the following: many rental properties take care of maintenance, repairs, and some utilities as part of monthly rent. Renting may be cheaper on a monthly basis than buying a home, and you can save towards perhaps buying a home with the difference. Keep in mind, though, that home ownership does allow you to build equity on a continual basis, and that home ownership allows offers significant tax breaks on interest and property taxes (Consult a tax advisor for the most current information on mortgages and tax deductions).
- Potential risk: Real estate normally increases in value over time, but this is not always the case. As evidenced by the recent housing market bubble, property values can decrease, leaving you with an investment that is losing value.
Renting may be a better option for people who need to be remain mobile (if you are looking to relocate to another city in a short period of time), people with uncertain financial circumstances, or people who are newly out of school or newly divorced. However, buying a home is one of the best ways to make an investment towards your personal wealth while taking care of your living arrangements as well.
If you are considering purchasing a home, you may be intimidated by the process of financially preparing and qualifying for a mortgage. Mortgage Center has many wonderful resources available to those who are considering becoming a home owner or those looking to refinance their current mortgage. Please click here to view Mortgage Center's up-to-date resources on budgeting for a home and the process of preparing for and starting the application process.
Mortgage loans can be complicated, but no matter which product you choose, each has some basic things in common:
- Interest rate: The interest rate is the percentage of the loan amount that is charged to you to borrow money to buy your home. Interest rates are based on current market conditions, your credit score, your down payment, and the type of mortgage you choose. Look at the current rates to see what may be best for you.
- Discount points: Discount points allow a borrower to lower the interest rate of their loan by paying a portion of the mortgage loan up-front. One discount point equals 1% of your mortgage amount - so if you qualify, you may be able to pay one or more points to lower your interest rate. Lower interest rates mean lower monthly mortgage payments - and discount points are normally tax-deductible. Consult a tax advisor on the deductibility of interest on your return.
- Origination charge: The amount that includes all charges (other than discount points) that all loan originators (lenders and brokers) involved will receive for originating the loan. This charge covers items including fees, document preparation, underwriting costs, and other expenses.
- Loan term: Your loan term is the amount of time you have to pay off your mortgage balance. Shorter loan terms typically mean higher monthly mortgage payments, but they often have lower interest rates--so if you pay off your mortgage balance within that shorter term, you may pay less in total interest than with a longer-term loan.
The total cost of a mortgage is reflected by the interest rate, discount points, and origination charges, and is shown by the annual percentage rate, or APR, of the loan. The APR is typically higher than the interest rate of the loan. The APR allows you to compare mortgages of the same dollar amount by considering their total annual cost.
A number of factors will be reviewed during the mortgage application process:
- Income: Do you have a reliable, continuing source of income which will allow you to make monthly payments? Income typically comes from primary, secondary, and part-time jobs, however other sources of income can be used--including retirement benefits, veteran benefits, alimony, child support payments, disability payments, or rental and investment income--provided they can be verified as stable, reliable and likely to continue for at least three years.
- Current debts and credit history: Do you pay your bills, loans, credit cards and other loans on time? Your payment history will be examined during the application process. Your credit history and credit score will also be examined as part of the application process. Because of this, it is a good idea to check your credit history before applying and take measures to correct any problems.
- Assets and available funds: Do you have enough money to make a down payment and to pay for closing costs on the mortgage loan? In some cases, you may be able to use gift funds towards closing costs and for part (or all) of the down payment. In many cases, you will also have to demonstrate that you have additional funds in your accounts to cover several months of mortgage, tax and insurance payments.
- Property value: What is the market value of the property you wish to buy?
Prepare to buy your first home by creating a plan.
Create a financial plan: Understand your credit needs and your borrowing ability--know your credit history and assess your ability to make payments. If your credit is not in proper shape to allow for the financial burden of a mortgage loan, make a plan to get your credit in shape and establish a budget to make sure it continues to be in shape. Compare your income and your expenses to make sure you can afford a mortgage. Total the amount of your savings and other down payment sources.
Estimate what you can spend: Calculate your monthly payment to determine which mortgage loan is best for your current financial situation. Remember that you'll need to have money available for a down payment and closing costs for the mortgage--if you have less than 20% for a down payment, you will need private mortgage insurance (PMI) which protects the lender if a borrower stops paying the mortgage. A mortgage calculator can help you crunch the numbers!
Set a time frame: Determine when you'd like to buy your home. Take into consideration your credit, cash flow and savings.
Before you start looking for a home, getting pre-qualified is a good idea. It will provide guidance on how much you can afford to spend on your new home and conveys to the seller that you are a serious, and qualified, buyer. A pre-qualification can also give you an edge over competing buys who are not pre-qualified. However, keep in mind a pre-qualification does not mean you have an approved loan. You will still need to go through the complete application and underwriting process.
Visit Mortgage Center's website to access calculators that will help you organize your finances. Their 'How Much Can I Qualify For' tool will give you an idea on how much you can borrow!
Please use the list below as a guide about what information and documentation you'll need to bring to your loan application interview.
Standard Documents (all loans):
- Original pay stubs covering the last thirty (30) days.
- Original W-2 forms for the last two (2) years for each applicant.
- Original bank statements for the past three (3) months (checking and savings accounts)
- Original 401k and IRA investment statements
- Original investment account statements for the past three (3) months
- Final purchase contract with all addendums signed by all buyers, sellers and Realtors
- Warranty deed
- Property survey
- Owner's title policy
- Property tax bill
- Homeowners' insurance
- Current monthly mortgage bill
- Copy of all bills you intend to pay off
- Complete copy of all divorce decrees, including all stipulations or modifications
- Proof of receipt of child support payments for the last twelve (12) months (only if you intend to use this income to qualify for your mortgage loan)
- Copy of bankruptcy papers and copy of discharge
- Copy of your last two years' tax returns if you are self-employed (signed)
- Copy of your last two years' business tax returns if your business is a corporation
- Year-to-date Profit and Loss Statement and Balance Sheet (self-employed)
- Written letter explaining any derogatory credit
Additional documents or updates may be required at a later date.
Getting started is easy!
- Start your application online
- Begin your referral in person at your local MCCCU branch
- Contact a Mortgage Center Loan Officer by calling 888.562.6865