Home Financing is one of the most important factors when buying a home, and the most confusing. Where do you start? How do you get it? What should you be looking for?
The first place to start when obtaining Home Financing is to find a lender to work with. If you do not already have a lender to work with feel free to look at Our Lender Recommendations. Feel free to shop around and find the one that is best for you.
Next step is to get pre-approved. NOTE: There is a big difference between getting pre-approved and pre-qualified. Pre-qualification is a lenders opinion on how much they will be able to lend you. Pre-approval is the complete verification on how much a lender is able to lend you.
During the pre-approval process the lender will ask for lots of documentation from you and any co-borrowers, such as:
- Social Security Number
- W-2 Forms from the previous two years
- Pay Stubs (most recent months)
- Employment History Summary
- Bank statements for checking and savings accounts (past 3 months)
- Creditor Information – this includes debts like student loans, auto loans, credit cards, child support payments
- Federal Tax Returns (for the past 2 years)
- Complete Record of Assets
- Stocks, bond, and investment accounts
- IRA / Retirement plan
- Life insurance policies
- Automobiles owned
- Construction loan
- Gift letters
- Documentation of other income
Your lender will pull your credit score, which will show the majority of your debts. Don’t get crazy pulling our documents unless your lender asks for it.
Once you are pre-approved your lender will be able to look at your financial situation and present you with the best options for your Home Financing. That all seems very vague doesn’t it. Here’s an overview of some Home Financing Programs:
Conventional loans are the standard private loans from your bank. Generally, the down payment for a conventional loan is 5%. If you have less than a 20% down payment there will be Private Mortgage Insurance, or PMI. This extra payment will go away when you have paid off enough of the loan, usually 20% of the total amount. Additionally, there will be “origination fees” on top of the loan amount.
FHA (Federal Housing Administration): This loan is one of the most common loans due to its affordable down payment of 3.5%. You will normally have a “funding fee” that will be added to the top of the loan (to pay for the program) and any home will have to meet safety and structural standards. There will also be a monthly Mortgage Insurance Premium (MIP) payment that usually lasts the life of the loan.
VA (Veterans Administration): This loan is for military members and their families. VA loans do not have a required down payment. However, they have extra funding fees, and require even stricter home safety and structural guidelines than and FHA loan.
South Dakota First Time Homebuyers (SDHDA): If you are a first time homebuyer, South Dakota has a program to help. With income qualifications and price limits, they provide a low fixed interest rate, a low 5 year step interest rate, and even a slightly higher rate with a gift of 3% to help with closing costs and down payments. Down payment is 3.5% as well.
Rural Development (RD): For homes outside of Rapid City limits, this is a great local 0% down program (income qualification and price limits apply). They also have a low income housing program that can help with your payment in some cases and can accept lower credit scores.
If one of these options appeals to you feel free to ask your lender about it!
Make sure to ask questions throughout the entire process. You don’t really want to be surprised by something later on.
- What kind of loan is your lender recommending for you? What are the advantages and disadvantages?
- What is the current interest rate? Is the rate fixed or adjustable?
- If the rate is adjustable, how will rate and loan payment vary?
- Is there anything that you need to do to qualify for this loan?
- Is there anything that will disqualify you?
- What is the estimated monthly mortgage payment?
- How much of a down payment do you need to pay?
- How much are the estimated closing costs? (Your lender should provide a breakdown of these so you can compare it to other loans.)
- Does the lender offer a loan rate lock? Is there a fee for that?
Final note: There are a few actions that you can take that will negatively affect your credit score and therefore your home purchasing power. With new rules at play in the lending world, a large purchase on a credit card could affect your debt-to-income ratio – possibly putting your loan approval at risk.
If at all possible, you should avoid making a major purchase or changing your job if you’re seriously considering buying a home in the next few months.