Finding a New Home: Three Important Questions Homebuyers Should Ask Themselves

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If you’ve decided to embark on the journey toward homeownership, first we say: congratulations! The road you are about to take is an adventurous one, and you’re likely to learn much along the way about what matters most to yourself and to the other members of your household.

Three Important Questions Homebuyers Should Ask Themselves Before Buying A New Home

Through years of working with thousands of homebuyers, we have come to realize that there are three core questions that, if contemplated adequately and answered sincerely, can shape a buyer’s search for a new home in a positive and productive way by making their priorities, desires and needs crystal clear.

How much can I afford? This first question is one of the most essential, as it determines much about the style and location of the home you will eventually buy. While we may daydream about having unlimited money to spend on a lavish home, the reality is that most of us simply want a comfortable, safe and beautiful place to come home to at the end of each day. Established neighborhoods can be mixed in these regards, and the most well-situated and safe neighborhoods can sometimes be financially out of reach. Luckily, affordability in many new homes communities is very high, giving buyers the environment and amenities that they want, at a price easily accommodated by most budgets.

Where do I really want to live? The answer to this question, in conjunction with the answer to the first question, will set the boundaries of the area in which your new home will lie. If you’re lucky enough to be staying put in your current town, your search will be made infinitely easier by the familiarity you already have with different streets, neighborhoods and communities. For those whose journey will take them into new territory, consider what you like and dislike about your current location, and use those preferences to create a check-list of wants and needs that you can use to narrow down your choices. In both situations, keep in mind the places in which you work and play, so that you spend less time in your car, and more time in your life!

How much space will I need? Once the dictates of location and finance have been revealed, the details of the actual home can finally be considered. The central concern is, of course, how large of a home you will need to keep your household comfortable, and this may affect where you can and cannot buy. You may love the look and character of a street full of bungalows, but if you need four bedrooms and those homes only have two—you’ll simply have to move on. Buyers visiting new home communities such as those built by LGI Homes will have a bit more flexibility, since builders typically offer a number of different floorplans with varying square footage and numbers of bedrooms, meaning that the perfect home is almost always available in the community of your choice.

As you can see, these three simple but powerful questions reveal much about the factors that will shape your search for a new home. The sooner you can find the answers to these questions, the more smoothly your search is likely to be, and the happier you will find yourself once the new home has finally become your own!

All About: DTI

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Buying a new home can be extremely exciting, but the process of financing that purchase can feel overwhelming for many first-time homebuyers. In this edition of our continuing “All About” series, we’ll cover DTI ratios—a somewhat mysterious (but very important) part of your mortgage qualification and approval process.

Borrowers can get a good idea of their DTI by using one of many online DTI calculators

Borrowers can get a good idea of their debt-to-income ratio by using one of many online DTI calculators.

What does DTI stand for, and what is a DTI ratio?
DTI stands for “debt-to-income”, so the DTI ratio is the amount of debt a buyer has, relative to the amount of money that they bring in each month as income. Lenders have DTI limit ratios that they use as a guideline, telling them how much a borrower can safely borrow to buy a home, while still successfully meeting their other financial obligations.

How do I figure out what my DTI is?
Borrowers can get a good idea of their DTI by using one of many online DTI calculators. (Credit.com has a good one here.) These calculators use your annual gross (pre-tax) income, divided by twelve, to estimate your monthly income. They then calculate what you spend each month on certain debts and expenses (typically housing costs, credit card payments, auto loan payments, student loan payments, etc.), and figure out what percentage of your monthly income is being spent on those obligations.

The resulting DTI ratio is expressed as two numbers divided by a forward slash, such as: 21/23.

Why are there two numbers?
There are two numbers because, in reality, the DTI ratio is calculating two different aspects of your monthly finances. The first number (known as the “front-end ratio”) expresses the percentage of your monthly income that goes solely towards housing costs. The second number (the “back-end ratio”) is the percentage of your monthly income that goes toward all of your debt obligations, including housing. The lower these numbers are, the more borrowing power you have.

I’ve calculated my DTI. Now how do I find out if it’s “good” or not?
Lenders vary in the DTI ratios they use, but there are some general rules of thumb. Conventional (30-year fixed rate) mortgages usually have DTI ratio limits of 28/36. FHA DTI limits are a bit more generous, setting a limit at 31/43. VA loans are limited at 41/41, and USDA loans (a popular product with many of our buyers), set a DTI limit of 29/41 for their borrowers.

While helpful, these limits are just a general gauge. Even if your DTI falls outside of these ranges, it is still worthwhile to talk with a lender about other financing products they offer that may fit your financial situation. Every buyer’s situation is unique, and there are many mortgage products that can get you into a new home in a fiscally sensitive and financially sane way.

Attention Veterans and Active Duty: Fund Your Home Purchase with a VA Loan

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For those who have served our country, gratitude is always in order. Since the days of the GI Bill, some of that gratitude has been paid through generous education and financing benefits that allow our military’s veterans and active duty members to build strength and success in their civilian life. One of those benefits, the Veterans Affairs (VA) loan, can make the process and cost of buying a new home easier for our nation’s finest heroes. Here are some of the most commonly asked questions regarding VA loans, with some quick answers and links that will lead you to more information.

Buy Your Home With a VA Loan

For veterans and active duty members, a VA Loan can be your best option.

What is a VA Loan?
While called “VA loans,” the Department of Veterans Affairs doesn’t actually loan out money. Instead, they provide a loan guaranty, which means that if something happens and the veteran borrower is unable to repay his or her loan, the VA Department will cover the losses for the lender.

What does this mean for me as a borrower?

With the insurance of the federal government behind you, private lenders are able to give qualifying active and retired military personnel loans with highly-preferential terms, such as no downpayment requirement, no private mortgage insurance, limited closing costs and no prepayment penalties. The loans can be used by first-time or repeat homebuyers, and the benefit can be used more than once, as long as prior loan balances have been cleared.

I served in the military. Do I automatically qualify for a VA loan?

Most honorably discharged veterans qualify for the VA loan benefit, as long as they meet minimum service time requirements , which are outlined in detail on the VA site. Even those military members on active duty can rely upon VA loans to help establish the most important base of all: home.

Are there limits on how much I can borrow?

While the VA doesn’t actually impose limits on how much can be borrowed, they do set limits upon how much of a loan they will guarantee. These limits, which are set each year, are available on the VA website, and depending upon your financial situation, may impact how much a lender will lend you.

Is applying for a VA loan really complicated?

While applying for a VA loan does require a bit more paperwork, most private lenders are familiar with the VA loan requirements, and many can help you file the necessary paperwork. Oftentimes, lenders can obtain the crucial “Certificate of Eligibility” online and in minutes, meaning that using a VA loan doesn’t have to be a drawn out and overwhelming affair.

As one of the top builders of affordable homes throughout Texas, LGI Homes has extensive experience helping veterans and those on active duty establish their lives in beautiful new homes. If you’re interested in learning more about our family-friendly neighborhoods—or just have some questions.

All About: Closing Costs

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One of the aspects of buying a home that confuses many first-time homebuyers is the closing, and that associated dreaded unknown: closing costs. How much they are, what they’re for, and whether they can be avoided are common questions. Some potential homebuyers are even scared away from considering a home purchase because they’re afraid that they’ll be unable to afford the closing costs! In truth, closing costs are fairly easy to understand, anticipate, and—in some cases—even finance.

Closing costs and related fees can sometimes be confusing to the first-time homebuyer.

Closing costs and related fees can sometimes be confusing to the first-time homebuyer.

What they are. Although they vary from state to state, closing costs are generally comprised of fees, tax payments and pay for services, all associated with the transfer of a home from one party to another. These may include fees for filing paperwork with the county government, lawyer fees for the preparation and filing of other legal documents, and the pro-rated payment of property taxes from the time at which you take over ownership of the home. Fees for home appraisals and inspections, fees for the processing of your mortgage, and any real estate brokerage commissions are also typically paid at the closing.

How much they cost. While some costs are fixed, many of the other costs depend upon the sales price of your home, as well as the nature of any state, county or city fees or taxes. Generally, closing costs typically range from two to four percent of a home’s sales price, depending upon variables associated with taxes and the mortgage loan. According to Bankrate.com, the purchase of a home in Texas costing $200,000 will currently generate an estimated $3,855 in closing costs.

Who pays what. While the expense of closing costs may seem large, the buyer is not always responsible for all of these costs. For instance, the real estate agent commission—typically one of the largest of the closing costs—is generally paid for by the seller. Some fees, such as those generated by filing legal paperwork with the government, can be paid for by either the buyer or the seller. And for some borrowers, such as those using a VA loan, an even larger number of the closing costs can be paid for by the seller.

How to keep your cash. For those who want to keep their cash in the bank while still enjoying the benefits of homeownership, there are some ways to cut the closing cost expense. Some specialized loans, like FHA and VA loans, put caps on the dollar amount of closing costs, and also make it easier for borrowers to finance part of their closing cost responsibility. Many lenders also offer no-cost loans, which roll the closing costs into your mortgage, meaning that you don’t have to lay out a large amount of cash up front.You can then spread the closing cost expense out across a number of monthly mortgage payments.

As you can see, closing costs are highly variable, but there are a number of different ways to handle them, and they needn’t deter anyone interested in homeownership from pursuing that dream.

High Rental Costs Got You Down? Think Homeownership!

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You don’t have to look far these days to find a news report or article talking about the skyrocketing costs of renting. Over the past few years, the numbers of renters have swelled thanks to the influx of prior homeowners and a huge generation of young adults (the “Echo Boomers”) moving out on their own. This, at a time when construction of new apartment and condominium buildings has been at an all-time low—meaning the supply of rentals is well below the growing demand of renters. As we all learned in school, this imbalance between supply and demand means just one thing: that monthly check to the landlord is starting to get bigger, and there’s no sign of rental prices coming down any time soon.

buy your own home to avoid skyrocketing costs of renting

High cost to rent has people turning to buying.

The good news is that as people flood into the rental market and drive up rents, some lucky renters are making one of the smartest financial decisions they can make: taking control of their housing costs, and avoiding skyrocketing rent prices, by buying their own home. They’re taking advantage of three factors that have converged to make this one of the most opportune times to buy a home:

Mortgage rates remain at historic lows, meaning that people who buy a home now have the ability to lock-in an extremely low interest rate on a 30-year mortgage. That’s thirty years of assurance that your housing payment will never go up. In the meantime, your hard-earned money will be going toward your own equity in your own home…rather than into your landlord’s bank account.

Home prices are some of the most affordable they have been in years, with buying a home more affordable than renting in nearly 80 percent of cities (according to online real estate site Trulia.com). The declines in home prices have finally stabilized, and in some areas, home prices are actually beginning to rise—meaning that the great deals aren’t likely to stick around.

Financing troubles have been in the news, and almost everyone knows someone or has heard about someone who had trouble securing a mortgage loan. The bad news is that legislation pending in Washington aimed at reforming the mortgage industry may well make securing a mortgage in the future even more difficult. For those with imperfect credit, or no downpayment, getting into the housing market before that legislation goes into effect may mean the difference between finally achieving the dream of homeownership and being stuck as a renter for another decade. Even for those with good credit, the rising cost of obtaining a mortgage may make homeownership an impossibility.

Of course, everyone’s financial situation is different, but one thing is clear: for renters, this is truly a gift-wrapped moment in which to buy a home. If you’d like to learn more about how low mortgage rates, low prices and easy financing can help you become a homeowner, just contact us or stop by one of our new home communities. We’ll be happy to show you around.

All About: Mortgage Insurance

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Buying a home is a huge investment, so it’s no wonder that the process of applying for, obtaining and signing for a mortgage can be a pretty complicated one. In an attempt to clarify the terms used and help our home buyers understand the mortgage process, we’ve begun this “All About” series. With these posts, we hope to help you find quick answers to your questions, getting you acquainted with how buying a new home works, and putting you comfortably on the road toward homeownership.

Mortgage Insurance is Necessary

Getting mortgage insurance might just be a good option.

Today, we’re covering a common term which often confuses many first-time home buyers: mortgage insurance.

What is mortgage insurance?
Mortgage insurance, also known as private mortgage insurance or lenders mortgage insurance, is a small insurance fee used to offset a lender’s liability in extending a borrower a loan. The insurance protects the lender in case they cannot recoup the full amount of money that they lent to the borrower in the event they have to take back ownership of the property.

Why is mortgage insurance necessary?
Mortgage insurance, by off-setting a lender’s potential for monetary loss, actually makes the cost of borrowing lower than it would be without the insurance, as it reduces the need for the lender to raise the mortgage interest rate. This insurance also opens up lending to people who may not otherwise qualify (due to credit problems, for instance) by reducing the risk the lender takes on when extending such a large loan.

Does every borrower have mortgage insurance?
Not necessarily. Typically, anyone who carries equity of at least 20 percent in their home is not subject to mortgage insurance. Borrowers who make downpayments of at least 20 percent are not subject to mortgage insurance, and even those borrowers who don’t make downpayments can make arrangements to cancel the insurance once their property value has appreciated and they hold a 20 percent equity stake in their home.

How much does mortgage insurance cost?
The costs of mortgage insurance vary, but the average in the United States is about $55 per month for every $100,000 borrowed in the mortgage.

Is there any way to avoid paying mortgage insurance?
Financial situations vary widely from borrower to borrower, but for some home buyers, it makes more sense to opt for a second mortgage instead of paying monthly for mortgage insurance. To find out more about this alternate financing method—or to answer any of your questions about home loans and the home buying process—simply contact us, or stop by one of the LGI Homes communities near you.

All About: Mortgage Application Paperwork

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Congratulations! You’ve finally found your brand new home, and you’re ready to begin the process of financing your purchase. Many homebuyers—particularly those going through the process for the first time—are often overwhelmed at the paperwork involved in getting a mortgage, and the number of fees, laws, and disclosures they have to sign or initial.

mortgage application paperwork

If you've ever purchased a home, you know that there is a mountain of paperwork.

In this blog post, we’re going to cover some of the most important pieces of paperwork you’ll run across in the course of procuring your loan, and cover in brief what they mean to you as a borrower. We’ve also linked to examples of these forms, where available.

Good Faith Estimate (GFE). The GFE serves a dual purpose: protect borrowers from indiscreet lenders that may bury unfavorable terms deep in the loan paperwork, and ensure borrowers understand clearly the nature and cost of the mortgage for which they are applying. To that end, the GFE outlines all of the fees and charges associated with your loan, and clarifies the terms of the loan itself. The GFE also makes it easier for consumers to comparison shop for loans, since the costs of the loan are clearly stated. While the GFE is the current standard, a new mortgage disclosure form is in the works, so you may receive an entirely different form when you shop for your own mortgage.

Form 1003. This form is the core of your loan application, and as such should be carefully and thoroughly completed. The form outlines the amount of (and use for) the loan, then requests in-depth information about the borrower (and any co-borrowers), including marital status, assets (what you own), liabilities (what you owe), and the details of your monthly expenses. If you have any income from self-employment, you may be required to provide additional documentation in addition to the information you provide on this form. Once completed, you’ll return this form to your lender, who will then use the form to determine the amount and costs of your loan.

Rate Lock-In Agreement. If you decide to “lock-in” your mortgage rate (useful if you think that mortgage rates may rise before your loan is processed), you will be asked to sign this form. It stipulates the condition of the lock, and defines when it will expire. Some states require borrowers to sign lock/float agreement, in which they explicitly choose to either lock in the rate, or let it “float” (change along with market rates).

Credit Report Authorization. In order to process your loan, your lender will request your credit file from one of the credit bureaus, and possibly make inquiries to confirm information you have provided on Form 1003. Your signature on this form authorizes the lender to do so.

Keep in mind that the forms linked to above are just examples and are for informational use only! Laws vary from state to state, so the paperwork you receive from your lender may vary accordingly. Always request paperwork from your lender or broker, to ensure that you are filling out the correct forms.

Online Tools and Resources for Homebuyers

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It used to be that the first step in buying a home was to make a phone call to a real estate agent, who held the key to closely-kept information about the homes for sale in a given location. Buyers were often at the mercy of the agent’s research and advice, and countless days were spent driving from one house to another, looking for the perfect home, ideally, no money down home. Once a home was found, a confusing and complicated journey through financing and mortgage procurement was begun, which many homebuyers found frustrating and difficult—and impossible to understand.

Homebuyer Guide and Resources

The way we go about buying a home has changed drastically in the past decade or so, be sure to know where to go and obtain the best tools and resources before making your next purchase.

Luckily for the modern homebuyer, the internet has changed all that, empowering first-time and repeat homebuyers with information, tools and resources designed to make purchasing a new home easier, more efficient, and more enjoyable. Here we’ve outlined some of the best; if you find some other great ones, be sure to let us know in the comments!

1.) Calculators, calculators, calculators. Online calculators are useful for those making the first steps toward homeownership. Mortgage calculators (such as those provided by online financial site Bankrate.com) can help you get a sense of the costs of homeownership, as well as how much home you are able to afford. Ginnie Mae also has a number of useful calculators online, including one that can help you determine whether it makes more sense for you to buy or rent. While these calculators can give you a ballpark figure, keep in mind that only a seasoned and professional mortgage broker or lender can give a proper assessment of your financial situation, and help you determine what you can comfortably borrow.

2.) Homebuyer Guides. There are a number homebuyer guides online—including this homebuyer guide from LGI Homes—most of which cover the basics of how purchasing a home works. Our own guide covers the steps involved in buying a home, clarifies common terms and acronyms encountered by homebuyers, and provides basic information on the process of applying, qualifying and signing for a mortgage. All helpful information for de-mystifying a very important (but complicated) process.

3.) Websites Galore. Nowhere has the internet proven of more use than for homebuyers interested in seeing what’s for sale in their target neighborhood, and at what price. Online new homes listing sites such as NewHomesSection.com and NewHomeSource.com give buyers an instant overview of the homes available in their neighborhood and at their price point, while also providing links to home and community photos, floor plans, and builder information. Many builders also maintain extensive websites with information about their communities, such as the listing website for LGI Homes, making it easy to learn about nearby communities.

With all of these resources available, it’s easy to start your journey toward homeownership off on a well-educated and informed foot. For any other questions you may need answered, our new homes associates are always ready and eager to help, so don’t hesitate to check in with us at any one of our new homes communities