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Home » M&Co. Buyer Center » Finding The One » Financing Your Purchase

Financing Your Purchase

Buying a home is likely to be the most expensive purchase you will ever make! Before finding the perfect home, you’ll want to have a plan in place to finance it.

There are 2 main components to think about when financing your purchase: your mortgage & your monthly payment (of which your mortgage is a significant portion!)

Don’t miss the Frequently Asked Questions at the bottom of the page!

Mortgage

You will need to obtain a mortgage if you plan to finance your purchase (unless you can pay in cash!). A mortgage is a loan to purchase a home issued by a lender or a mortgage company. Over the life of your loan, you will pay back the principal (the amount of money you borrowed) and the interest (what the lender charges you for loaning you the money). 

Before looking at condos, you need a pre-approval letter from your lender. The pre-approval letter is a commitment from your lender of how much money you can borrow. Your lender will look at your debt, income, assets, and credit to determine the amount. 

At M&Co., we always submit pre-approval letters with our offers. It tells the seller that you are serious and well-qualified! For this reason, it’s critical to have the pre-approval letter before you start your search. 

What will my interest rate be? Your lender sets your interest rate once you go under contract on a property. It is based on your credit score, down payment, loan amount, property type, and time to close.

How much do I need for a down payment? The average first-time buyer puts down 5%. Gone are the days of needing 20% for a down payment! However, the more you put down, the lower your interest rate. Your lender will help you balance lowering your rate and staying liquid!

Are there any other costs when I’m purchasing my home? In addition to your down payment, you’ll need some extra cash to pay your closing costs. These will be roughly 2-3% of the price, covering your attorney fees, lender fees, title company fees, and more.

Monthly Payment

Your monthly payment will consist of principal + interest (see above!), but you will also want to factor in: 

Home Insurance: Home insurance protects you financially from any disasters or accidents involving your home. If you’re financing your home, your lender will require proof of insurance!

HOA dues: HOA (Homeowner’s Association) dues are a monthly cost paid by owners to cover operating costs and amenities. Think utility bills for hallway lights, door staff, and pool maintenance (if you’re lucky enough to have a pool at your building!). As you can imagine, HOA dues vary greatly by building type and tend to be more expensive for larger buildings (high rises typically have the highest HOA dues). We’ll talk more about building types next week! 

Private Mortgage Insurance: Private Mortgage Insurance (PMI) protects the lender if the buyer can no longer repay their home loan. If you’re putting down less than 20%, you’ll need to purchase PMI. Your lender will arrange for this! 

Property Taxes: This is not a monthly expense but an expense due twice a year. The Cook County Assessor’s Office determines the market value of your home to calculate property taxes. You can learn much more about taxes here!

Home Maintenance: Home maintenance costs can vary greatly, but it’s a good additional line item to add to your budget. When you were renting, your landlord absorbed the costs of maintenance and repairs. Those are your responsibility now! At M&Co., we have a massive list of vendors our clients have used and loved to help you with this part of homeownership. 

Frequently Asked Questions

We asked our go-to lender, Chris Kinsella, VP at Guaranteed Rate, to weigh in on these frequently asked questions. His answers are below!

What is a pre-approval? Why do I need one? 

A pre-approval represents your lender’s due diligence on your financial situation (credit, income & assets) to ensure that we can get the loan through underwriting once you are under contract. Your lender will collect basic information/financial documentation to review and run the numbers for your search.  

You need a pre-approval to assure listing agents and sellers that you have been vetted & your offer is serious.

How much will my closing costs be?

There will be two buckets to make up your closing costs: 

  1. Lender charges to get the deal through underwriting (origination, credit report, appraisal)
  2. 3rd party costs that don’t change regardless of the lender (i.e., title costs, transfer taxes, attorney fee, recording fee, etc.).  

A good rule of thumb is to budget for 2-3% of the purchase price for net closing costs.  

What will my interest rate be, and when is it locked in?

Your particular financial situation determines your interest rate. The main factors are: 

  1. Credit score
  2. Down payment amount
  3. Property type
  4. Time to close

Your lender will give you an estimated interest rate and monthly payment when you get your pre-approval. The rate is not locked in until you have a signed purchase agreement with the sellers.

Should I put as much down as possible or less to stay more liquid?

Your lender will help you determine the right amount for your situation. You’ll want to find the right balance between getting a lower monthly payment versus having more cash on hand.

Typically, every $10,000 more you put down only decreases your payment by $40-50/month. So, it may be more beneficial to have extra reserves rather than saving a marginal amount on your monthly payment.  

Should I negotiate that the seller pays for some or all of my closing costs?

Negotiating a seller closing cost credit with your agent can be a helpful way to offset some or all of your third-party closing costs.  At closing, the seller will give you money from their proceeds to keep you more liquid and have less out-of-pocket due. You’ll want to chat with your agent as it is dependent on how competitive the market is.

Do pre-approvals expire? 

This varies per lended, but at Guaranteed Rate, pre-approvals have an expiration date of 90 days. During this time, you will want to keep your income, assets & credit the same — if something changes, it will affect the pre-approval.

As a rule of thumb, aim to get a pre-approval when you are looking at going under contract on a home in the next 90 days. 

Can I shop around for lenders? When should I do that? 

You can certainly shop around for lenders!  Everyone is fishing from the same pond when it comes to rate, so prioritize working with a lender with knowledge, expertise, and excellent communication.

Check your lender’s reviews online & talk to your realtor about their experience with different lenders. You can also interview the lenders to gauge their knowledge, communication, and expertise.

How many lenders can I get pre-approved by? Are there any limitations? 

You can technically get pre-approved by as many lenders as you like; however, this will result in multiple credit inquiries, & can also cause confusion about your situation.

What’s the difference between a big bank (like Chase, BofA, Ally) pre-approval and a smaller lending institution (like Guaranteed Rate, United Home Loans, Perl Mortgage)?

The rates will be very similar across different lenders because Fannie Mae/Freddie Mac will not accept a lower rate from one lender versus another.  

The biggest difference will be in your experience working with the lender. At a big bank, your loan goes into a general processing center after you go under contract. It can be challenging to contact someone during the process, which can unnecessarily slow down your transaction.

At Guaranteed Rate, we utilize cutting-edge technology and a team of experts to guide the loan through the process & hit all the critical dates and milestones.

What’s a renovation loan?

A renovation loan is where you finance the improvements to the property into the final loan amount. There are not 2 separate loans (one for the home & one for the renovation) — instead, everything is rolled into one loan, & is based on the future improved value of the home.

The challenge with a renovation loan on a purchase is that you have to get bids lined up before going into underwriting, & you may not know the full scope of renovations since you haven’t actually lived in the home yet!  Additionally, you’ll have a higher interest rate & more closing costs with these products. 

Most of the time, we recommend structuring the loan with less money down so that you can do the renovations after closing. This lets you figure out what renovations you want to do & have a more manageable timeframe to complete the renovations after you’ve closed. 

How many days do I have to start a loan application once my offer is accepted?

In the most updated Illinois purchase agreement, there is a 10 business day timeframe to apply for a mortgage.  Otherwise, the seller can declare the contract terminated.  However, once you go under contract, you will want to apply for the loan right away to stay ahead of financing and closing deadlines.

What happens if I get a new job or a promotion while under contract?  

If you get a new job as a salaried employee in the same line of work, we should be able to use that income for loan qualification.

I always advise clients to keep their employment the same after a pre-approval through closing, as it can affect the final loan approval.  The underwriter will check your employment during the loan approval process until closing. 

What if I lose my job?  

If you lose your job, you will want to let your lender know ASAP. Losing your job during the process will affect your ability to get a loan.  If you cannot get a loan because of a lost job, we want to communicate that to your attorney and let them advise on the best next steps for the contract. 

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