I would love to buy a new home, but how do I know how much I can afford?
Most people like to think of it in terms of their monthly payment. A very good rule-of-thumb is that your total monthly payment will be about 1% of the purchase price. If a new home costs $100,000, the total monthly payment will be about $1,000. For $130,000, the payment is $1,300, and so on. This estimate covers everything that is included in the monthly payment, including principal and interest, taxes and insurance.
What kind of down payment is needed? How much money is needed for other costs, such as closing costs?
With 100% financing, which is often available, you typically need about 3% out of your own pocket for various closing costs. For example, you have to pre-pay some taxes and insurance. So, for a $100,000 loan that is 100% financed, you would need about $3,000 total cash.
However, many home builders help their buyers with these out-of-pocket costs, and it is possible to get into a new home for as little as $500 cash out of pocket.
There are also home buyer assistance programs that can provide down payment grants to qualified applicants.
How much income do I need?
Lenders look at the overall debt-to-income ratio. They like to see that your monthly housing payment, plus everything on your credit report (including car payment, credit cards, etc.), is not more than 50% of your total gross monthly income (before taxes).
If you want to buy a $100,000 home, the monthly payment will be $1,000. Suppose you also pay another $500 each month in other bills that are on your credit report. That’s a monthly debt of $1,500. You would need to earn about twice that, or $3,000 a month, to qualify for the home loan, typically.
What if I am self-employed, or if I receive all or part of my income in cash? Can that income be considered?
Yes, definitely. It happens all the time. The applicant just needs to write down a statement of what their other income is, minus expenses.
Speaking of credit reports, what type of credit do I, as a buyer, need to have?
For an FHA loan, which is very popular, buyers generally need to have clean credit for the past 12 months, meaning that payments have been made on time. Many lenders don’t worry about credit problems that took place in the past, as long as the past year is good and clean.
How much credit do I need to have established? What if I don’t have other loans or credit cards?
The FHA and other lenders are very willing to consider what they call “alternate lines of credit.” That is, any type of payment history that shows that the buyer is able to make regular payments on time. These can include items such as rent, utilities, telephone, car insurance and child-care payments. If a buyer can show clean, 12-month payment histories for at least 3 of these types of alternate lines of credit, that is generally good enough.
What if I still don’t have enough of a credit history?
Today, builders and lenders work hard to find a program that can help everybody. If a buyer cannot qualify for an FHA or conventional loan, the lender may be able to provide what is called a “subprime” loan. The interest rate is generally about 1.5 points higher, which means a higher monthly payment. However, the buyer can refinance at a lower rate in 2-3 years, after they have improved their credit scores.
Another solution is that the home buyer can spend the next 12 months improving their credit history. With at least one year of good credit, the home buyer will have a much better chance of getting approved by a lender.
If I cannot qualify for a loan alone, by myself, can I put another person on the loan?
Absolutely, this is fairly common. Families helping each other. Of course, a husband and wife can apply for the loan together, but other family members can also sign the loan. Even friends. The only thing to keep in mind is that, by signing, they are agreeing to fulfill the obligations o the loan.
Do I need to find a home first, then apply for a loan?
It’s a very good idea to pre-qualify for a loan. That is, to find out how much of a loan you can qualify for, and kind of monthly payment you are comfortable with. The financing is the most emotional part of the home buying process, and with that taken care of, shopping for a new home can be very enjoyable.
How do I get started?
Your builder or Realtor can refer you to a loan officer, or you can contact a mortgage company yourself. Be ready to provide the basic documentation that will help them fill out your application, such as identification, Social Security number, paycheck stubs, etc. Most lenders can provide you with a checklist of items you will need, to help you get started.
Do I need to use a Realtor?
Using a Realtor is highly recommended by many home buying experts, but it is totally your choice. You can purchase a new home with or without a Realtor.
Who pays the Realtor?
The seller (builder) pays the Realtor a standard commission, typically 3% of the sales price. The price for the buyer is the same, whether or not a Realtor is involved in the sale. No reputable builder will offer the buyer a lower price for excluding a Realtor from a sale.
Can I negotiate the price of a new home?
As a general rule, sales prices for new homes are not negotiable. However, there are certain situations in which a buyer may be able to save on the cost of a new home.
In a new community, builders usually offer “pre opening” prices in order to create sales momentum before the model homes are completed. Prices typically increase after the grand opening.
Likewise, builders often offer “closeout” prices in a community that is almost finished.
Builders typically offer the best pricing on inventory homes, especially ones that are completed and have been on the market the longest. These are also called “spec” homes, because they are built in speculation that a buyer will come along.
Finally, just like stores, builders often run promotions where they will offer free upgrades, price discounts, or money for closing costs, etc.
Should I buy an inventory home, or should I build from a plan?
There are advantages to both, and the choice is yours. If you buy an inventory home, you can see what the home looks like, and you can move in very quickly. You may also be able to get a better price. If you like everything about the inventory home, such as the location, and the color of the brick and carpet, then it could be the best choice.
When you build from a plan, you have many more choices. You can choose the lot, the brick, the carpet, etc. However, you have to wait longer, typically from 90-120 days. The builder may be less willing to give you any discount when you build from the ground up.
The model home is so beautiful. Will my new home look like that?
It will look even better, because it will be yours!
Generally, most homebuilders decorate their models to show many of the upgrades that are offered at extra cost, above the base price of the home. Such upgrades can include wood floors, tile floors, Corian countertops, premium cabinets and covered patios. It is a good idea to ask your builder which items are optional.
What will I need to buy after moving in to my new home?
The features that are included in a new home vary with each builder. Typically, the most important items you will need to purchase to begin living comfortably include the refrigerator, washer and dryer, coverings for the windows, and grass sod for the back yard. That said, some homebuilders are now including items like these in the base price of the home. The best advice is to ask and compare various builders.
