Learn The Basics Before Buying First Home

Q: I’m trying to purchase a new manufactured home in Florida on two acres.
 

I am a single, divorced and seeking an FHA loan with little-to-no down payment.

My question is about the loan amount. Because I don’t know yet where I’m going to buy, I’ve had to guess how much the land will cost. I expect to pay $40,000 for the land and $70,000 for the home.

The bank approved me for a loan for $149,000. I’m concerned about the extra $25,000 to $30,000 I’ve been approved for over the $110,000 I thought I’d have to pay. I’m concerned the extra $25,000 is going into the bank’s pocket disguised as fees and various hidden costs.

The private mortgage insurance payment is listed as $60.23 monthly. The bank told me the suggested monthly mortgage amount is $1,144.90. Does that include the PMI? I was hoping to keep the monthly payment to $1,000. My annual income is around $45,000.

Since I’m just guessing how much the house and land will cost, will the loan be reduced when I actually know what I’m going to spend?
Any advice would be welcome.

A: You're attempting to purchase your first home and the single largest investment of your life and it sounds to me as though you don't understand the basics of mortgage financing.

That makes me worried for you because when someone has no idea what they're doing, it's much easier to get scammed by someone who does.

So my first advice to you, is to read up on the subject of buying a home so you understand the process. There are shelves full of real estate home buying books (including my own) at your local library and bookstore. Pick up a book or two, but you should also read the stories in your local newspaper's real estate section, in magazines, and go online to check out more information about buying and selling homes. Since you’re looking for an FHA loan, check out the Department of Housing and Urban Development’s website (HUD.gov) for excellent background information on these loans.

Once you give yourself a basic education about buying a house, a lot of what the lender is telling you will make sense. But, let’s go through it anyway.

When a mortgage lender tells you that you are approved for a loan of $149,000, the lender means you can borrow as much $149,000. You don't actually have to borrow that much, but if you want to, the bank is telling you that it will lend it to you.

Next, look at the bank's rate and terms for the loan you’ve been offered. If they're going to lend you $149,000 at 6 percent (which is about the going rate), great. If they're going to lend you $149,000 at 8 percent, it probably means your credit has problems or that you are being taken advantage of by this lender. Are you being charged points? (A point is one percent of the loan amount.) What is the deal?

When the lender tells you that you can afford to spend up to $1,144 each month on your mortgage (and presumably real estate taxes and insurance are included in this payment), it's the lender's estimate only. Again, it's the upper limit, not what you have to take. If you’re more comfortable spending $1,000 or less each month, then that’s all you should spend. You know your budget better than the lender does and you should take on only the debt that feels right to you.

I don't know if you realize how much choice you have in the matter. Many first-time buyers want to spend as much as they can. Others, particularly those that are more fiscally conservative, don't. You can spend $1,000, or $1,144 or $500 each month. You control how much you borrow.

Here are a few other things to keep in mind. First, make sure you shop around. You'll want to be certain that you're getting as good a deal as possible on your mortgage. So visit local mortgage brokers, big banks in the area, national mortgage companies and a credit union, if you belong to one. (Credit unions typically offer good deals on mortgages and car loans.)

Next, make sure you search online for information about the lender. Make sure they're licensed to do business in your state. Make sure they don't have any complaints against them with the Better Business Bureau (BBBonline.org) or with the state Attorney General's office.

Again, the biggest obstacle I see for you is lack of knowledge. Do your homework, and the process will go much more smoothly.

NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.