Buying a home is unquestionably one of the most important financial and emotional decisions that a Massachusetts resident can make. The decision to buy a home is shaped by many factors: a desire to build home equity, freedom to alter living space as desired, wanting to move into a different neighborhood, etc. Although the home buying process is complex, is should also be enjoyable.
This article has been written to help home buyers in Massachusetts by removing one stumbling block in the process of purchasing a home, namely, a clear understanding of how the home buying process works.
Step 1 – Determining Affordability
The first step, aside from deciding that you wish to buy a home in Massachusetts is to determine what type of home you can afford. When taking this step consider that in addition to the monthly mortgage that you’ll pay the mortgage lender, you will also be required to purchase home insurance, pay for maintenance of the home and property (mowing, snowplowing, repairs, etc.), pay property taxes, and if you will purchase a condominium you’ll want to budget for special assessments (new roof, paving, etc.), and condominium or homeowner’s association fees.
The best method to determine what you can afford is to create a budget on an excel spreadsheet or other online platform, or even put pen to paper. On one side of the budget write all of your income, on the other side note all expenses. If you are not sure what the cost of homeowner’s insurance or property taxes are, try searching online with terms such as “average cost of homeowner’s insurance in Massachusetts” or similar search terms to locate common costs for these items. Once you’ve listed all of your income and compared that dollar figure to your total expenses you will have arrived at rough idea of what you can afford.
Note: When budgeting for monthly mortgage expenses, consider that most mortgages will be set up to pay your property taxes and insurance premiums within the monthly mortgage payment amount. Use our weekly budget worksheet to determine what you may be able to afford.
The Right Mortgage
What type of mortgage is available to you?
While you will quickly realize that applying for a mortgage requires sifting through reams of paper (either physical paperwork or virtual paper if online), the bottom line is that the actual mortgage terms are usually fairly simple. The primary considerations with any mortgage are what interest rate you will pay, whether that rate is fixed or flexible, and how long you will have to pay the mortgage.
The Fixed Rate Mortgage
A fixed rate mortgage is a loan with interest rates that remain static, that is, the rate does not change with time. If you have a fixed rate mortgage for 4%, it will always be 4% no matter what the real estate market does.
The Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage is simply a mortgage with a rate that changes, a variable interest rate. The way the rate changes can be set by the lender and will be spelled out for you in the terms of the mortgage. There are many types of adjustable-rate mortgages, and some can be fairly complex and require some research to understand. Whenever considering an ARM, take time to fully understand how the rate will change over time.
Loan Term
Typically, a mortgage will need to be repaid to the lender over a period of 15, 20, or 30 years. As a generally principle in lending, the longer the term of the mortgage the greater interest you will pay the lender over the life of the mortgage.
Mortgage Type
- Conventional mortgages usually will have a fixed rate and term of 15, 20, or 30 years
- FHA Loans are loans which you may qualify for if you have a credit score of at least 500 or greater, you purchase mortgage insurance, have a debt-to-income ratio of less than 43%, if the home to be purchased will be your primary residence, and if you can demonstrate steady income through employment to the lender
- Other Loan Types include USDA, VA, and Jumbo Loans which are based on veteran or income status
Mortgage Minimums
Most banks will not finance less than $50,000 for a mortgage, some require a $100,000 minimum mortgage. This fact may affect mortgage borrowers who are buying a home with equity from the sale of another home and who only wish to borrow at the minimum limits. Shop around to find a lender that will service your mortgage at the lowest amount that you require.
Your Credit Score and other Credit Matters
Do you have a good idea of what your credit score is? If you do, and you know it is high, you’ll have little to be concerned about. If, on the other hand, you know that your credit score is low or that you have foreclosures, bankruptcy, a history of late payments to creditors, or other similar problems you may not qualify for a home mortgage from a lender. Don’t be discouraged however, if you do have some of these issues in your past. Home mortgage lenders are human after all, and the vetting process that a prospective mortgage borrower will undergo may allow for reasonable explanations for negative aspects of your financial life, and for evidence of a change in financial circumstances or behavior.
There are also other ways to improve a credit score or to set the record straight where there are inaccuracies in your credit report or to record an explanation for a bad moment in your credit history. You will want to obtain a credit report for free from one of the credit bureau’s (you are entitled to one free credit report annually).
Putting Together a Down Payment for a Mortgage
When purchasing a home in Massachusetts, most mortgage lenders will require a down payment. The size of the down payment varies widely, but generally a minimum of 20% is required to avoid having to obtain mortgage insurance for a lower down payment.
Generally, the greater the down payment, the lower the interest rate on the home mortgage. Think of the size of the down payment on a mortgage from the lender’s viewpoint as a measure of how much skin in the game the borrower has. The larger the down payment, the more risk the borrower is willing to take, the less likely the lender is to hedge its bet by including high interest rates and other unfavorable terms in the mortgage.
You Know How Much You Can Afford – Now What?
Once you have a good idea of the size mortgage and down payment your budget will accommodate, you will want to contact either a broker or mortgage lender. The choice between broker and mortgage lender is personal one and may not make a significant difference to you. Basically, a broker is the agent who originates the loan then passes off the information to the lender (typically a bank) which ultimately provides the funds used for the home purchase. If you wish to skip the broker step you may go straight to a bank or mortgage lender which will have you complete both the mortgage application and ultimately provide the funds for the home purchase.
The Prequalification or Preapproval Letter
Once you’ve decided on a lender or bank to work with you will want to get a prequalification or preapproval letter. Such a letter is a notice from a mortgage broker or bank which indicates the amount of money that the broker or lender is willing to lend to you. While it may not be required yet, once you begin Step 2 of the home buying process it is advantageous to have a prequalification letter in hand because there may be an offer that you wish to make immediately, particularly in times of high demand and limited supply in which multiple competitors are all vying for the same property.
Now that you have considered all of the various issues involving Step 1 of the home buying process in Massachusetts, you are ready to proceed to Step 2 – Locating a Home.
DISCLAIMER:
The information provided in the pages and posts of this website are for general informational purposes only. The information presented on this site is not legal advice, and no attorney-client relationship is formed by the use of this site.
