The Importance of Knowing Your Buying Power
Many new buyers will balk when a Realtor asks them if they have been pre-approved, but it could save you money and time in the long run! Similar to a buyer consultation with your agent, a consultation with a local lender is going to provide you a great deal of knowledge. As the saying goes, knowledge is power!
1. The Meeting
Most people want to work with someone they know, like, and trust. This initial meeting is to find out just that. As you are handing over your financial information for the lender to work your numbers, you can use this time to ask questions and have them explain the process to you. If they’re not willing, or you’re still confused, it might be a good idea to try another option. This is another reason why I suggest local lenders. For many, it’s better to get the information face to face rather than in an email or over the phone. Plus, you are supporting your local economy!
2. Pre-Approved, Now What?
Now that you’re pre-approved – Congrats! – you should be discussing your options. There is more to a pre-approval than just a maximum amount of affordability, such as what loan type, interest rate, down payment, points, cost of the loan, etc. You may be able to afford more with an FHA loan, but it will also cost you more because the private mortgage insurance (PMI) is in place for the life of the loan. On the flip side, you might be eligible for a USDA loan with 0% down payment! Once you know all the options available to you, you can decide what homes you’d like to look at, as each loan type has requirements for which homes are eligible.
3. Breaking Down The #’s
Let’s say you’re buying a house for $200,000 on a 30 year loan with a fixed rate. Insurance is $100 per month and taxes are $200 per month.
A conventional loan will cost you $6,000 for the down payment and $6000 for closing costs. The mortgage & interest will cost $926 per month. PMI will be $162. Total payment of $1,388. After 10 years you should be able to drop PMI changing your monthly payment to $1226. Over the course of the loan, you will pay $472,800.
An FHA loan will cost you $7,000 for the down payment and $6000 for closing costs. The mortgage and interest will be $1036 per month (currently FHA is 1% higher interest). PMI will be $161 (based on higher down payment). Total payment of $1497 per month. Over the course of the loan, you will pay $538,920.
What’s the benefit to an FHA loan? You will qualify for it long before a conventional loan becomes an option, thereby securing a home sooner.
Knowing an FHA loan is going to cost you more money over the life of the loan will help you save money if that is not the best loan type for your situation. Only looking at homes eligible for your preferred loan type will save you time and make sure you won’t fall in love with a home you might not be able to buy. Know your options, know your buying power!