Selling or Buying a Home: What to Know About Your Financing

Whether you’re selling a home to purchase another or a first-time homebuyer, one of the most complicated aspects of home buying is financing. In order to lock in the best rates for your mortgage, it is essential that your credit score is good and that you have a handle on your overall financial picture for the future. 

But what do you really need to know about your financing options before buying your next home? Here are questions to shed some light on the process. 

What is PMI? 

PMI stands for Private Mortgage Insurance. If you are unable to make at least a 20% down payment on the house you’re purchasing, you will have to obtain PMI. This protects the lender in the chance that you are unable to make your house payments on time. 

The better your credit score and overall financial health, you may be able to make that 20% or more down payment and avoid having to purchase PMI. 

What will your down payment be? 

FHA loans, or loans insured by the Federal Housing Association, require at least a 3.5% down payment of the cost of the house. Most mortgage lenders will require at least 3% down. Your credit history will influence what your down payment should be. 

5%, 10% or 20% are typical. A down payment can come from your personal savings, the money you made from selling your existing home, or money obtained through gifts or grants from family or non-profit organizations. 

How does your credit score affect the home buying process

Your mortgage and your credit score affect each other in a circular way. If you have a good payment history on an existing mortgage, your credit score will remain healthy and robust, assuming you maintain good financial health across the board. 

However, the act of taking out a mortgage will cause your credit score to temporarily drop, so experts advise you not to make any other large financial purchases within six months of opening your home loan. 

What about DTI (debt to income)?

The most important information you can have besides your credit report is your debt-to-income ratio or DTI. It will also affect your ability to maintain a mortgage payment and acquire a loan. There are two types: front and back end. 

Front-end DTI refers to your household expenses including mortgage, property taxes, insurance, HOA fees, and anything else related to homeownership. This is divided by your monthly gross income. 

The back-end ratio is all other monthly debt such as car loans, student loans, credit card payments, and any regular payments you make.

What are your next steps toward buying or selling? If you are looking at starting the home buying process and want to know a bit more about how we do it here at Hallmark Homes, feel free to reach out to us online, we are happy to answer any questions.