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Clinton Savings Bank is not a financial advisor. Please consult with a licensed professional who can provide advice tailored to your individual circumstances.

While we hope you find this content useful, it is only intended to serve as a starting point. Your next step is to speak with a qualified, licensed professional who can provide advice tailored to your individual circumstances. Nothing in this article, nor in any associated resources, should be construed as financial or legal advice. Furthermore, while we have made good faith efforts to ensure that the information presented was correct as of the date the content was prepared, we are unable to guarantee that it remains accurate today.

Buying a Home

Start by defining your goals. Consider where you want to live, the features in a home you want (realizing you may not get everything on your wish list), what you can afford, and a realistic date for having the money you'll need. Then you can apply your knowledge to making this key decision.

The Cost of Buying

The actual amount you'll spend to buy a home depends on the part of the state you’re buying in and the type of home you want. While the dollar amount will vary, certain guidelines apply wherever you buy.

It's likely that you will need some cash for a down payment and will need a mortgage - a long-term loan you use to buy a home – for the rest. Typically, the down payment is between 3% and 20% of the sale price, however there are loan types that allow for zero money down for first-time homebuyers and there are some government sponsored programs that may even match a portion of your down payment.

What a mortgage costs depends on three factors: the principal, which is the amount you borrow, the finance charge which is the amount you pay for borrowing the money, determined by your interest rate, and the term which is the length of time the mortgage lasts. You should also consider what the real estate taxes and homeowners’ insurance costs will be on a monthly basis when determining what the total monthly expense will be.

Mortgage Requirements

When you apply for a mortgage, you will have to qualify to borrow. Typically, lenders require you to dedicate no more than 28% of your gross monthly income to cover your monthly mortgage payment, real estate taxes, and homeowners' insurance. For example, if your gross pay is $54,000 a year, or $4,500 a month, your housing expenses could be up to $1,260.

Most lenders also consider your other monthly financial responsibilities, including car payments, personal loans, credit cards, college loans, and other debts. They don't want these expenses plus your housing costs to be more than about 40% of your gross monthly income. In short, they want to be sure you'll be able to pay your mortgage before they let you borrow. Lenders may go higher than 40% with compensating factors.

Be aware that affordability and qualification are not the same thing. Just because you qualify for a certain mortgage doesn't mean it's wise to borrow that amount of money. Establish a set budget to help ensure that you can afford this new commitment along with household expenses.  It’s always good to prepare an emergency fund to help bridge the gap if something unexpected happens.

If you're unsure where your credit stands, check your credit report. Everyone is entitled to one free credit report each year from each of the three major credit reporting agencies – Experian - https://www.experian.com/, Transunion - www.transunion and Equifax - www.equifax.com.

What If You're Turned Down?

The lender will send you a letter stating the reason(s) that you did not get approved and if you are unclear about the reason(s); have a conversation and ask why.  If the reason is credit-related, check your credit report. If there are any obvious errors, follow the instructions on the report to have them corrected and follow up on your request. If the negative information is correct, and your credit history has flaws, at least you'll know the factors that may be affecting your ability to borrow and you can begin to strengthen your credit credentials.

Using a Real Estate Agent

A real estate agent can provide valuable assistance in buying a home. An agent knows what's available in a particular neighborhood, what the price trends are, and how current asking prices relate to actual sales prices.

You can look for an agent the same way you look for a lender or other professionals. Ask your friends and family for recommendations, check out your local resources and various real estate websites.  Interview several agents before you decide on the person to work with. It could turn out to be an extended relationship, and you want it to be a productive one.

Traditionally, real estate agents and the real estate firms that list homes for sale are paid by the seller and represent the seller's interest. That doesn't mean that, as a buyer, you can't establish a good relationship with sellers' agents or use them to find a home at a price you can afford. Some buyers, though, prefer to hire buyers' agents to represent their interests and negotiate the sale price and contract terms.

Which Mortgage is Right For You?

FIXED-RATE (CONVENTIONAL) MORTGAGE

If you’re the type of person who values stability, you’ll probably want a fixed-rate mortgage. It ensures that your mortgage payments will remain the same throughout the life of the loan, no matter how market conditions change. You’ll essentially “lock in” whatever interest rate your lender offers when you sign on your loan, and you’ll keep that interest rate until your loan is paid in full. If interest rates fall drastically, you may even be able to refinance your mortgage at a lower rate (as long as you’re willing to pay loan costs again).

A fixed-rate mortgage gives you the peace of mind that you’ll always know what you owe each month. Most fixed-rate loans last for 15, 20, or 30 years, and they are a low-risk way to build equity and credit over time.

PROS:

• Stable rate and consistent payment for the life of the loan
• Won’t increase if interest rates rise
• Can refinance if a lower rate becomes available (however you may need to pay closing costs for the new loan)

CONS:

• May be a higher rate than an adjustable-rate loan (which could mean paying more in interest over the life of the loan)

BEST FOR:

Borrowers who want a stable mortgage payment that remains the same, no matter what

ADJUSTABLE-RATE (CONVENTIONAL) MORTGAGE

Interest rates can pretty much change daily, but if you plan to only stay in a home a few years an adjustable-rate mortgage could result in lower interest costs. It’s a mortgage that is subject to market conditions and the interest rates set by the Federal Reserve. If interest rates fall, you’ll owe less each month. If interest rates rise, so does your monthly payment.

Most lenders “lock in” your low interest rate for one, three, five, seven or even ten years, after which you’ll be subject to market fluctuations. There is a cap on how high your interest rate can go but you’re left at the mercy of the Federal Reserve and your payment could increase substantially if rates rise.

PROS:

• Can give you a super-low interest rate to start
• May be able to lock in your low rate for a specified amount of time before it begins to adjust

CONS:

• Rates could increase, resulting in a higher payment

BEST FOR:

Borrowers who don’t plan on living in the home for more than a couple of years.

GOVERNMENT-INSURED MORTGAGE

If you need a mortgage but your credit score isn’t high enough to qualify for a conventional loan, you might be able to get a government-insured loan. It’s basically where the FHA promises to pay back your lender if you default, which reduces some of the risks to your bank. An FHA loans provides a channel for first-time homebuyers or borrowers with limited financial resources. In exchange, they loosen some of the credit requirements so individuals with lower credit scores can qualify. It’s also a good option if you have less cash on hand for a down payment, since you can qualify with less than 10 percent down.

Some government agencies offer specialty loans for veterans (VA loans), Home Equity Builder programs that match a buyer’s down payments up to a certain amount, or those living in rural areas (USDA loans), but you’ll have to meet special requirements to qualify.

PROS:

• Can qualify with a lower credit score
• Allows for a lower down payment

• Flexible credit qualifications
• No pre-payment penalties 

CONS:

• May have to pay mortgage insurance
• Can have higher closing costs

BEST FOR:

Borrowers with smaller down payments, lower-income borrowers, or individuals with lower credit scores.

JUMBO MORTGAGE

Thinking of spending a pretty penny on an expensive home? You might need a “jumbo” mortgage. “Jumbo” is what lenders call a mortgage above the government’s “conforming mortgage limits,” or the amount the FHA has determined that conventional loans cannot exceed. Because home values vary across the United States, the maximum limit depends heavily on where you live. While the 2022 conforming loan limit (CLL) is $647,200, it could be much higher in areas with a high cost of living.

PROS:

• Allows for the purchase of high-priced homes
• Takes high-cost-of-living areas into consideration
• Gives you more control in deciding how much home you can afford

CONS:

• May require a higher down payment (10–20 percent)
• May need more documentation of income and cash on hand in a savings account

BEST FOR:

Borrowers with good savings and a large down payment, who require more money for a high-priced home.

Renting Versus Buying

Because purchasing a home is a huge investment, you need to take the time to weigh the benefits of renting versus buying a residence.

Renting may be a smart financial move for these reasons:

• You probably won't pay property taxes and upkeep directly, though your rent may reflect these expenses.
• Depending on the housing market and interest rates, you may be able to find a rental for less a month than you may pay on a mortgage.
• You run no risk that the value of your property will decline.
• Renting gives you more mobility to take advantage of a job or other opportunity in a different area.

Buying a home has its advantages ­as well:

• You may be able to deduct the interest on your mortgage and your local property taxes on your tax return, which may reduce your taxes. Speak to a tax advisor for more information.
• You usually can build equity as you pay off your mortgage, increasing your share of the property's value, although depending on market fluctuations this may not always be the case.
• You may be able to get a home equity loan or line of credit where you borrow against the part of your home that you own. These options generally have lower interest rates than personal loans.
• If your house increases in value over time, you may make a profit when you decide to sell.

Ready to Take the Next Step?

Reach out to one of our Mortgage Originators to discuss your specific situation and what options may fit your needs the best. Or apply online now.