Know What You Can Afford Before Home Shopping
Buying a new home is one of the largest financial decisions a person may make in their lifetime. Home shopping can also be one of the most exciting. That makes it easy to get caught up in the home shopping process. And that could be the reason many potential homebuyers skip the initial steps required to finding the right home.
The urge to start looking at real estate listings is fine and doesn’t have to be ignored. But before you call about an ad or contact a realtor, take a careful look at your savings. Accurately determine how much you really have for a down payment.
Taking into consideration the other costs necessitated by home shopping will save you time and money. When looking for the right mortgage, it is important to get the lowest rates available. And knowing what you can spend will help you in writing your purchase offer.
Home Shopping for Mortgage Options
The mortgage options available to a potential homebuyer are dependent on a few things. The homebuyer’s personal savings and the amount of money they have available for a down payment are essential.
If you do not have sufficient funds for a down payment or closing costs, then you are going to be limited in your choice of mortgage options. If you do have these funds, you will have many more options. That includes conventional fixed-rate loans, adjustable-rate mortgages, buy-downs, graduated payment mortgages, and more.
Before you start shopping for interest rates, there is one thing to know. Some mortgage options will charge a slightly higher interest rate when making the minimum down payment. Interest rates vary from one mortgage option to another. Knowing your financial standing makes it easier to get the best mortgage option suited to your needs.
Putting an Offer in Writing
Knowing how much you have for a down payment will determine the type of mortgage you qualify for. On top of that, this will affect how you write your offer letter. Different loan types require different items to be included in the purchase offer.
If you want the seller to pay for any or all of the closing costs, you need to know if your mortgage option allows the seller to do so. When making a minimum down payment, lenders are stringent. That means they will most likely have you conform to their underwriting guidelines.
The greater the percentage value you are able to put down on the property, the more lenders will tend to make beneficial allowances when you are writing your offer.
Verifying Your Financial Situation Before Home Shopping
Lenders will base their decision to grant you a mortgage on your financial situation. This does not just mean having enough money for a down payment or making the monthly payments.
As a borrower, lenders want to have your entire financial background to feel confident in lending to you. That means verifying the assets used for down payment. This gives the lender confidence that you have reserve funds for emergency situations. Ultimately, they want you to be able to meet your financial commitment to them.
Having your complete financial history documented is an asset, but it is not always necessary. There are mortgage options available that do not require this information, but these options generally lead to a higher interest rate.
Being able to illustrate how your down payment funds originated will be very beneficial. Consider the following when verifying and documenting your assets:
- Bank accounts
- Investments (stocks, savings bonds, mutual funds, etc.)
- Monetary gifts
- Retirement accounts (RRSPs)
- Personal assets
- Additional property
The easiest way to verify your funds is to provide current bank statements. These statements should be from the last two to three months. Some lenders may send a Verification of Deposit to your bank, but generally, bank statements are sufficient.
The money being used for your down payment, and other associated home-buying costs should be seasoned. The funds should be in your bank account for the entire period covered by the bank statements. If your current bank statements show any unusual deposits, explaining where those came from will be necessary.
Copies of the most recent monthly or quarterly statements you have received from within 60 to 90 days need to be provided to the lender. This means any stocks, bonds, and/or mutual funds you possess.
If you hold stock or bond certificates, as oppose to a brokerage account, copies of the certificates should be provided to verify these assets to the lender. You might also provide copies of your tax records to show you have held these stocks, or bonds, over a long period of time.
Using income from the sale of stocks, savings bonds, or other investments as part of your down payment is permissible. However, you must provide copies of all the documentation regarding the sale of these to your lender for verification purposes.
Cash gifts are often received from family, friends or acquaintances to help towards a down payment. Your lender will ask the monetary provider to sign a gift letter stipulating that the money is a gift and does not have to be repaid.
The letter may also include information about the gift giver. Things like their relationship to the borrower, the address of the property being purchased, the amount of the gift, and where the funds originated.
The lender might also require verification from the gift giver to prove they are financially able to give the gift. It is a good idea to keep records of the deposit when you, the borrower, deposit the monetary gift into your account.
There are some mortgage options that allow you to borrow from your RRSPs to use as a down payment. If you choose to use the Homebuyer Plan option, it is important to provide the necessary documentation to your lender.
Having a retirement account also shows the lender that you have a solid history of saving. It also shows that you have reserve funds to draw upon in case of an emergency. It is in your interest to have these assets verified.
Additional Assets and Personal Property Can Impact Home Shopping
Additional assets and personal property can include vehicles, boats, furniture, antiques and collectables, electronics, clothing and accessories, etc. These assets can encompass nearly everything you own, excluding real estate. Your lender will ask you to estimate the value of these assets when filling out your mortgage application.
They do this to verify that your income matches your spending habits. If you are spending beyond your means, the lender will be more cautious when deciding whether or not to approve your application.
Note: You don’t have to document the value of these additional assets unless you intend to sell them as a way to make your down payment. Lenders are stricter about the documentation of asset sales when a borrower resorts to this method for getting a down payment, as these types of funds are more difficult to verify.
Want to Save Money and Cut Years off your Mortgage?
Most homeowners agree that saving money and paying off their mortgage faster is appealing. But most have no idea where to start. It can be as simple as making bi-weekly mortgage payments instead of one monthly payment. With half of your mortgage payment amount being deducted from your bank account every two weeks, you will make 13 payments in a year opposed to 12. The extra payment goes directly to the principal, and your loan amortizes faster with fewer payments in the long run.
How quickly you pay off your mortgage depends on your interest rate and when you start making the bi-weekly payments. For example, a $100,000 mortgage, amortized over 25 years at an interest rate of 4.74 percent, will be paid off 40 months sooner, with a total of $10,982.02 in interest savings, if you choose a bi-weekly accelerated mortgage payment plan.