Step Two - Figure out how much you can afford!

Having completed Step 1 of our five-step plan, you are ready to move on to step two.

Realtors can provide you with all kinds of information about the home buying process.  Look to a realtor for guidance on location, style,  and prices of home in the area.  By now, you likely have already spoken to a realtor.  Most are willing to help you through the process.  Many will even provide you with a list of lenders that they have worked with and recommend to potential buyers.  Make sure you let the realtor know you are a first time home buyer.  While realtors are professionals in the home buying and selling adventure, you need to rely upon a mortgage lender to help you with all the mortgage details. 

While you should rely upon the mortgage lender to help you with the mortgage process, I would like to introduce you to the types of mortgages available.  Please ask your lender about the details of each.

Fixed Rate Mortgage

Most mortgages today are fixed-rate loans.  With fixed-rate mortgages, the interest rate remains the same for the life of the loan.  Fixed-rate loans give the borrower the ability to know their principal and interest payments during the loan term.  There are several term limits available for this type of loan; a 30-year loan is the most come with 15-year loans coming in second.

Adjustable Rate Mortgage

An adjustable-rate mortgage has a variable interest rate.  The loan will start at a fixed rate for a stated period, and after that time passes, the interest will be adjusted to the prevailing rate and adjust periodically for the remainder of the loan.   An example of an adjustable-rate mortgage is a 5/1 ARM.  The rate remains fixed for five years in this loan and then adjusts annually for the remaining loan term. 

FHA mortgage

An FHA mortgage is a home loan insured by the Federal Housing Administration.  Allowing down payments as low as 3.5% with a 580 FICO, FHA loans help buyers with limited savings or lower credit scores.

VA mortgage

VA loans are mortgages backed by the Department of Veterans Affairs and are available to military service members and veterans.  Mississippi veterans have the extra benefit of the Veterans Home Purchase Board of Mississippi.   

USDA mortgage

A USDA home loan is a zero down payment mortgage for eligible rural and suburban homebuyers. United States Department of Agriculture issue this type of loan through the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program.  Not all Madison County homes qualify for a USDA loan.

Other mortgage terms

With this basic understanding of the main types of loans, you will likely hear the following terms in your conversation with a lender.

Conventional mortgages: Lenders use conventional mortgages to describe loans that aren't backed by the government.

Conforming mortgages: Conforming loans are mortgages that conform to financing limits set by the Federal Housing Finance Agency (FHFA) and meet underwriting guidelines set by Fannie Mae and Freddie Mac, whereas non-conforming loans do not. Conforming and non-conforming loans are both types of conventional loans.

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Government-backed mortgages: Government-backed mortgages are guaranteed by the Department of Veterans Affairs (VA loans), FHA-insured loans, and loans backed or issued by the Department of Agriculture (USDA loans).

Now that you have a general idea of the type of mortgages available reach out to your preferred lender to select the best type to meet your needs.  When you reach out to them, let them know that you want to get pre-approved to begin your home search.

Items that the lender will ask you to submit to obtain pre-approval will include some of the things below:

  1. Loan application

  2. Driver license & Social Security number

  3. Lastest pay stub

  4. Two months worth of bank Statement

  5. Last two years tax returns

  6. List of all creditors with the latest balance

Once you have your pre-approval letter, you are ready to start looking for homes.