A. To Rent or Buy
Before we get started detailing all of the processes that go into making up the home buying experience, it’s important to make sure that the decision to buy a home is the right one for you. Buying versus renting has very different advantages and disadvantages that are important to keep in mind when evaluating how a mortgage loan will fit in to your current financial situation.
Renting offers advantages ranging from flexibility to security. For starters, renting allows you the flexibility of being able to change residences once the terms of your rental contract have been fulfilled. Renters also avoid financial loss if the property loses any value. Property maintenance, including any necessary repairs or replacements, are the responsibility of the landlord. The property owner is also obligated to pay for any costs related to ownership of the home such as property taxes, homeowners insurance and any applicable community association dues.
The disadvantage of renting a property as opposed to buying is that after you have completed the terms of your lease agreement, it is up to the property owner whether or not they agree to renew your contract or decide to increase your rent. You’ll also be making payments over the course of the time that you live there, without ever obtaining any financial stake in the property.
Buying your own home provides a number of benefits when compared to renting. It’s the ultimate long-term investment in your financial future as property values generally increase over time and owning your own home creates the opportunity to build equity, which can be borrowed against for any number of reasons. Consistently making your mortgage payments on time can also help to build a strong credit history - and owning your own home allows you to take advantage of income and property tax deductions.
Once your home is completely paid off, you’ll own it and have complete control, including the ability to leave it to family members. Even before the mortgage has been paid in full, you’ll be able to customize your home in a way that meets your individual tastes, remodeling and renovating however you see fit.
Despite the overwhelming number of advantages associated with owning your own home, there are a few drawbacks to consider. When you own your own home you’re responsible for its upkeep and maintenance, as well as the additional costs of homeowners insurance, real estate taxes and HOA fees (if applicable). There’s also always the possibility that you could lose your investment if you fail to make your mortgage payments.
To find a mortgage option that allows you the freedom to buy, call one of our mortgage specialists today and take advantage of rates.
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B. What Can I Afford?
The amount of the mortgage loan, and thereby the price of the house you’ll be able to purchase, depends on a variety of factors including your current income and expenses, as well as your current and future lifestyle. Talking with a financial advisor can help to clarify what is realistic for your family. The key is to match your mortgage payments to your budget, rather than trying to stretch your budget to allow for a larger mortgage payment that’s unmanageable and may lead to a risk of foreclosure. The goal is to not have to put any other major financial plans on hold, while still being able to save enough money in preparation for whatever the future may hold. It’s important to remember that the price you’ll end up paying when you purchase a home includes a number of additional fees, including those associated with closing costs.
i. Getting Pre-qualified
Pre-qualifying for a home mortgage loan will give you a better idea of how much you’ll be able to borrow, and therefore the price range of homes you should be considering. It is important to remember that you might be pre-qualified for an amount that exceeds your expectations, and one that you might not be able to comfortably afford. You should always scale back the loan amount so that it fits within your budget.
Getting pre-qualified is intended only to provide potential homebuyers with an estimate, and is not a commitment on the part of the lender. Once you have a general idea of your borrowing power, it will be easier to narrow down your choices. Pre-qualification is based on information that you provide regarding your current financial and employment status, as well as that of any co-borrowers. You can get prequalified online, over the phone or in person, and usually at no cost to you. Getting pre-qualified is a great way to show potential sellers that you are serious about buying a home!
Pre-qualification is based on non-verified information and is not a commitment to make you a loan by Florida Community Bank. Loan approval will be subject to, but not necessarily limited to, verification of all income, asset and liability information provided by you, satisfactory property appraisal, compliance with Florida Community Bank's loan program guidelines and all required closing conditions such as survey and title examination.
C. Your Credit Score and You
Your credit score is a major indication of your overall financial history and current standing. It’s looked at by employers, leasing offices, insurance companies, lenders and more. A bad score can mean the difference of thousands of dollars due to increased interest rates and premiums. Your credit score is more commonly referred to as your FICO® score, and generally falls between a range of 300 and 850.
Lenders look at a loan applicant’s FICO® score to determine what level of risk (good or bad) it is to lend them money—and how much they will ultimately decide to lend—because it shows how well they have been able to manage their money over time. When a lender is confident in your ability to repay your loan, you will be able to qualify for a loan program applicable to your financial situation.
TIP: If your score is currently low, it might be in your best interest to hold off on purchasing a home until your credit improves and you can qualify for better mortgage terms.
i. Checking Your Credit
Your credit score is ultimately determined by three major credit reporting agencies— Equifax, Experian and TransUnion. You are entitled to receive a FREE copy of your credit report from each of these agencies once a year by visiting www.AnnualCreditReport.com. While the report is free, the same is not true of your FICO® score, which can be obtained by paying a separate fee.
Checking your credit reports annually is important as they provide you with sensitive credit information that reflects your current debts, as well as your payment history. Pulling your own credit reports can also alert you to problems and errors, including any credit lines that you did not authorize or mistakes made by creditors.
ii. Improving Your Credit
There are a number of ways you can start improving your credit score so that you can qualify for better interest rates. However, building your credit is a process that takes time and constant vigilance. Some aspects that go into creating a good credit score include:
Length of Credit History
- Lenders will take into account how long you’ve been building your credit, as well as how you’ve historically handled these responsibilities.
- The longer you’ve been maintaining your credit, the better! It means you’re experienced with borrowing and managing money, and that you’re more likely to repay your debts.
- Lenders want to know that you’re experienced with managing a number of different credit account types.
- A good mix of credit types might include mortgage, credit card, student loan, cell phone and car payments.
- Recently opened accounts are looked at by lenders as an indication of your current financial standing.
- Lenders want to know whose offered you credit and when.
- Opening too many accounts in a short period of time is viewed as a sign that you’re low on funds and are supplementing your income with credit.
- Creditors want to see what debt obligations you have and that you are paying them off.
- Missing payments, especially missing multiple payments damages your credit score.
- Don’t open too many accounts in a short period of time.
- Before you start looking for a home, pay off any major debts.
- Refrain from making any major purchases until AFTER you purchase a home.
- Keep your debt manageable, don’t ever exceed your credit limit!
- Try to keep your credit card balances below 70% of your maximum limit.
- Pay (at the very least) your minimum balance on time each month.
- Set up automatic bill pay so you’re never late on making a payment.
- Avoid filing for bankruptcy, and never let your accounts get turned over to collections.
- Keep accounts open that you’ve historically paid on time, even if you maintain a $0 balance. Closing accounts negatively impacts your credit score, especially closing your oldest accounts.
- Use your credit card for minor purchases like gas and groceries.
- Review your credit report at least once a year so that you can monitor your credit and check for any inconsistencies.
The number of factors and fees that go into the purchasing of a home can be overwhelming and are often overlooked. It’s easy to blow your budget if you only take into account the home’s selling price, which is why it’s important to consider these costs when you’re looking at your loan options.
One-time fees like the home appraisal, home and termite inspections, moving costs, and the obtaining of your credit report can cost upwards of $2,000, while closing costs add anywhere from three to seven percent of the total loan amount. In addition, you’ll also be faced with recurring payments related to utilities, maintenance, association fees (if applicable) and insurance.
As a rule of thumb, lenders typically require the interest, principal, insurance, and taxes of your monthly mortgage payment to equate to less than 28% of your monthly gross income, and your housing expenses when combined with your long-term debt to be less than 36% of your monthly gross income.
i. Personal Finance
Your budget will be an invaluable resource throughout your home buying experience, if not throughout your entire life. It should take into account your household income and expenses, your plans for the future and even the unexpected!
Step One: Income
The easiest part of building your personal financial budget is starting with your income.
Base this number on your net income rather than your salary which doesn’t take into account applicable taxes and insurance. It’s also important that you consider your FUTURE income, which will change based on aspects like retirement or health.
Step Two: Expenses
Your expenses will be broken down into fixed and variable. Fixed expenses are those that remain the same on a monthly or yearly basis. They include things like car, mortgage, credit card and student loan payments. These expenses won’t fluctuate over time, so they add a level of predictability to your debts.
Variable expenses will change monthly or annually based on your usage and include things like your groceries, mobile phone bills, utilities, clothes, gifts, entertainment and “like to have” spending. These expenses are where you’re going to look to when you need to make room in your budget or find places to cut back.
It’s important to consider ALL of the expenses you’ll incur throughout the year as well as into the future. Take into account everything from holiday and birthday presents to replacement vehicles and your future children’s college payments. Having an emergency fund will allow you a certain amount of protection in case of unexpected changes in income or unplanned expenses arise.
Step Three: Review and Track
It’s important that you review and track your credit accounts each month in order to get an idea of where your money is going, as well as for catching any fraudulent activities. Most banks and lenders have embraced the ease-of-use of online and mobile banking, and offer valuable resources to help you balance your budget and keep an eye on your spending habits. Having a visual representation of your historical spending can help you identify patterns that you can tweak to create a more balanced budget.
The difference between your monthly “need to have” expenses and your monthly income is where you’ll find your capacity to manage a mortgage. You’ll want to keep your monthly mortgage payments within your designated budget, rather than trying to make room for them. Creating and maintaining a personal financial budget takes planning, prioritization and discipline. Speak with a mortgage professional today to help you craft your budget and find a mortgage payment that works for your lifestyle.
Purchasing a new home will require a variety of different insurance policies in order to ensure that your investment, home and all of its contents will be compensated for in the case of loss or damage. The type of insurance you will need to purchase will vary depending on your geographical location, the value of your home, and the size of your down payment.
a. Private Mortgage Insurance
A lender will typically require you to obtain Private Mortgage Insurance (PMI) if you plan on making a down payment that is less than 20% of the home’s purchase price. PMI is provided by a private insurance company and protects the lender in the event that you default on your loan. Lenders require PMI because by making less of a down payment, they end up lending you even more money and thereby increasing the potential risk for loss.
It’s important that you inquire about any potential lender’s particular PMI specifications before you commit. Some lenders will allow you to drop your PMI after you’ve paid off a predetermined amount of your loan balance.
TIP: Many sources recommend that you hold off on purchasing a home until you have enough to make a sizeable down payment amount in order to avoid paying thousands more across the term of your loan.
b. Homeowners Insurance
Your home is one of the biggest financial investments you’ll ever make. Homeowners insurance protects it—along with its contents—from hazards such as fire, theft, wind and other natural disasters. Depending on your geographical location, your lender might also require you to obtain flood insurance. It’s recommended that you obtain enough homeowners insurance to cover the costs of replacing your home and personal property, alternative living expenses, and liability. It’s also important to note that while windstorm insurance may cover your roof getting blown away by a hurricane, any rain/water damage to your home would require flood insurance in order to be covered, even if it was a result of the roof damage.
Start by contacting different insurance agencies to receive a quote and find the best coverage for your situation. Proof of coverage is required before you will be able to close on your home.
iii. Property Taxes
Anyone looking to buy their first home needs to consider property taxes when they are putting together their budget to see what price range they can comfortably afford. Property taxes are levied by local governments and are calculated annually according to the current value of your home. The value of your home may be determined using a variety of methods, including an assessment performed by a county-appointed inspector and the estimated market value based on comparable homes that have recently been sold. Property taxes vary by area and go towards maintaining local schools, emergency services, public transportation and other municipal projects, as well as towards funding community improvement initiatives.
Contact your mortgage professional today for assistance in estimating the value of a potential home’s annual property taxes based on the tax rate levied in that particular area.
Utilities are commodities or services like gas, septic systems, sewers and even cable that are billed to homeowners on a monthly basis. By and large, the price you’ll pay each month for utilities like water and electricity will vary depending on your household’s actual usage. With larger homes or those located in warmer or colder climates come higher utility bills, so make sure you take that into account when you’re calculating your monthly expenses. Your real estate agent may be able to ask the sellers of a potential house what their average energy bill is per month so you can avoid any surprises.
v. Community Association Fees
Homeowner, Property Owner or Condo Association (HOA/POA/COA) fees should be included in your budget if your unit is part of a community association. If you decide to purchase a home in a neighborhood, complex or development with an HOA/POA/COA in place, you will need to pay fees (usually monthly) for management and maintenance. These fees will cover things like maintaining common areas, landscaping, garbage collection and association taxes and insurance. HOAs may put restrictions on what you can and can’t do with your home, and encompass areas such as fencing and parking. Find out about HOA restrictions BEFORE you decide to purchase a particular home to avoid any surprises. Also, it is important to remember that if the community association has any unbudgeted expenses, they may levy a mandatory special assessment to all homeowners. For example, if an association has a lack of reserve funds but needs to cover emergency repairs, they will likely budget for the repairs and have each owner pay their share of the total bill.
Click here to view current loan programs and rates!
Call and speak with one of our mortgage specialists to learn more at 877.313.9103.
Many factors go into how much you should budget for general property maintenance, including the size, age and type of home you purchase. If you live in a community association, exterior property maintenance items may be included in your dues.
a. Projected Maintenance
Both interior and exterior repair, replacement and maintenance is inevitable, so keep in mind everything from lawn upkeep to appliance breakdowns when you’re putting together your budget. It’s these planned and—more often than not—unplanned expenses that make having an emergency fund a necessity.
b. Home Warranties
One of the ways you can save yourself time, money and energy in the event that one of your home’s appliances or systems breaks down is to purchase a home warranty. Different from homeowners insurance—which covers damages caused by hazards like hurricanes—a home warranty limits the effects of unforeseen repairs and replacements due to natural wear and tear to appliances like your refrigerator and dishwasher, and systems that include your air conditioning and plumbing.
Transferrable home warranties are a great tool when it comes to selling your current home and negotiating the terms on purchasing a new one. Only a seller can be truly knowledgeable regarding what their appliances and systems have undergone throughout the years. Purchasing and agreeing to transfer a home warranty contract to a potential buyer can give them the peace of mind that any unexpected expenses relating to those covered items will be taken care of at a fraction of the cost. This is especially important for those buyers who don’t have an emergency fund to fall back on.
Like any other official contract, you’ll want to look over the specifics of your home warranty plan before you decide to purchase it. Pay close attention to the terms and conditions including what the plan covers, what fees you’ll be required to pay, and any limitations. It’s important to keep in mind that your ultimate coverage usually depends on the condition of the appliance or system BEFORE you purchased your home warranty contract. This means that if an item has any preexisting issues, or if there’s evidence that it has been maintained improperly, your coverage may be voided.
vii. Down Payment 101
A down payment is simply money that you put upfront, in cash, when you close on your new home. It represents an investment in your home and can help to determine which loan option is best for you. The rest of the money used to purchase your home represents the loaned amount provided by your lender. Once you close on your new home, your down payment becomes equity in your home (assuming the appraised value is constant).
Conventional mortgages like fixed and adjustable-rate loans require the borrower to make a down payment amounting to at least 20% of the original purchase price. Doing this entitles you to a lower interest rate and therefore a lower monthly mortgage payment. It also helps you avoid the need to acquire Private Mortgage Insurance (discussed earlier).
If you’re unable to put down the full 20%, alternative mortgage programs are available that offer first-time homebuyers with low to moderate income levels more flexible down payment options and assistance. These programs may be offered by the federal government, or local housing agencies and lenders.
FCB offers a number of different mortgage loan options designed to fit a variety of financial situations. Visit our Residential Lending Products page to find out more about these mortgage programs, or call one of our mortgage professionals!