A SOUTH DAKOTAN’S GUIDE TO BUYING YOUR FIRST HOMEVOLUME 1: FINANCING

3 INTRODUCTION

4-7 HOW MUCH CAN I AFFORD?

4 Establishing your budget 5 Comparing renting vs. owning 6 Deciding on a downpayment 7 Obtaining a credit report

8-9 WHERE CAN I GET ASSISTANCE?

8 Understanding the First-Time Homebuyer Program 9 Understanding the Downpayment Assistance Program

10-12 HOW DO I FIND A LENDER?

10 Understanding terms 11 Understanding rates 12 Shopping for a mortgage

13 CONCLUSION

TABLE OF CONTENTS

Your first time applying for a mortgage, house-shopping, obtaining a home inspection - it can get daunting. Arm yourself with the knowledge you need to feel confident in your decision-making process, from setting your budget to closing on your first home.

After all, there are several key benefits to buying a home, including setting yourself up with more living space, the tax benefits that come from mortgage interest or a mortgage credit certificate, the ability to make improvements as you see fit and a sense of pride and ownership of your own space.

The following volume will help you decide if now is the right time to buy and guide you through the financial process of purchasing a house.

INTRODUCTION

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You’ll need to keep your monthly payment (including mortgage, taxes and insurance) to what’s left in your budget. Communicate your monthly limits with your lender and real estate agent when you start the process.

ASK YOURSELF:

• Which utilities and fees do you already pay? • What home-related additions will you need to make to your monthly budget? • Do you know your monthly spending limits?

ESTABLISHING YOUR BUDGET

Don’t start the process until you’ve established your budget – it’s important to know what you’re able to afford before getting too far into the process. Determine the average costs of necessities (i.e., groceries, internet access, etc.) and the cost of your current monthly bills (i.e., car payments, student loan payments, etc.), and account for additional home-specific costs, such as utilities (i.e., electric, gas, garbage disposal, water, etc.) and lawn care- or home maintenance-related expenses.

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HOW MUCH CAN I AFFORD?

COMPARING RENTING VS. OWNING

Many new homeowners say their decision to buy a house instead of continuing to rent is to feel a sense of investment in the monthly payments they’re making. But there’s more to owning a home than just that.

Depending on your living situation, it’s not outside the realm of possibilities that you could pay a similar amount in monthly mortgage as you do on your monthly rent, but owning a home comes with many more financial responsibilities than renting an apartment – upkeep, additional utilities, taxes, insurance, lawn care and appliance repair and replacement, to name just a few. Know your financial limits, and be smart about the monthly payment to which you agree.

TRY OUR PAYMENT CALCULATOR >

ASK YOURSELF:

• How much do you currently pay in rent? • What range of amounts can you afford in a monthly escrow payment (mortgage, property taxes and homeowner’s insurance)? • How much do you have set aside in an emergency fund for unforeseen expenses?

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HOW MUCH CAN I AFFORD?

DECIDING ON A DOWNPAYMENT

One of the first steps you should take when you’re about to take the plunge into homeownership is determining how much downpayment you can afford on a house. Many lenders will require a percentage of the purchase price in upfront downpayment.

The South Dakota Housing Development Authority (SDHDA) First-Time Homebuyer Program, for example, requires 0-3% of the loan amount, depending on the type of mortgage insurance. Keep in mind that mortgage insurance is often required for loans with less than a 20% downpayment. Try to save up as much as you can before beginning the process to afford a downpayment on the type of house you want – the more you pay upfront, the less you’ll pay in interest later.

ASK YOURSELF:

• How much do you have in savings? • Can you afford as much as 3% of the purchase price of the house you want? • Will you need downpayment assistance?

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HOW MUCH CAN I AFFORD?

OBTAINING A CREDIT REPORT

Your credit score will affect what type of mortgage you can secure. You are entitled to a free credit report from each of the three reporting agencies – Equifax, Experian and TransUnion – once per year.

Paying bills on time, establishing good credit and only applying for credit that you need can positively affect your credit score. According to Experian, a majority of scores are between 600 and 750. Know the requirements of your mortgage – does your credit score meet the minimum standards?

OBTAIN YOUR FREE ANNUAL REPORT >

ASK YOURSELF:

• Do you know your credit score? • Do you pay your bills on time? • How much credit debt do you have?

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HOW MUCH CAN I AFFORD?

UNDERSTANDING THE FIRST-TIME HOMEBUYER PROGRAM

If you need some help in purchasing your first home, SDHDA has a program tailor-made for first-timers. Low-interest, fixed-rate mortgages are available for eligible homebuyers that meet certain income and purchase-price standards.

Participating Lenders work with SDHDA to provide these loans to residents with financial restrictions. Find out more about eligibility requirements and see a list of Participating Lenders at SDHDA.org.

TRY OUR ELIGIBILITY CHECKER >

ASK YOURSELF:

• Have you not owned a home in the past three years? • Is your household income at or below the limits set at SDHDA.org? • Is your home’s purchase price less than $250,200?

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WHERE CAN I GET ASSISTANCE?

WHERE CAN I GET ASSISTANCE?

UNDERSTANDING THE DOWNPAYMENT ASSISTANCE PROGRAM

If the idea of putting up a large chunk of your savings for a downpayment is unnerving or if you don’t have quite enough to get the ball rolling, SDHDA offers downpayment assistance to eligible residents.

Through the Fixed-Rate Plus interest rate option offered through SDHDA, a buyer can be gifted as much as 3% of the loan amount to help pay for your downpayment/closing costs. It doesn’t have to be repaid, but it affects your mortgage’s fixed interest rate. Don’t let the downpayment scare you away from making the right decision – talk to SDHDA’s Participating Lenders about your options.

ASK YOURSELF:

• Do you need to maintain your savings for other purposes? • Are you short the amount you need to afford a downpayment? • Are you open to the idea of a slightly higher mortgage interest rate?

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UNDERSTANDING TERMS

The terms of your mortgage loan refer to the length of the loan repayment plan. The terms will vary depending on your lender and the type of mortgage loan you sign. You’ll hear the terms “15-year” or “30-year” often when a mortgage is being described – these simply indicate the length of time you will be paying back the loan.

Traditionally, the longer you take to pay off your loan, the smaller your minimum monthly payment and the more interest you’ll pay in the long-term. Depending on the financial institution through which you obtain your loan, terms can include anything from 10-year to 20-year to 40-year. SDHDA only offers 30-year loans. Talk to your lender about what terms are available.

ASK YOURSELF:

• Do you understand “terms” when it comes to loans? • Are you able to make a larger monthly payment to pay less long-term interest? • Are you open to paying into your mortgage longer to spend less on monthly payments?

HOW DO I FIND A LENDER?

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HOW DO I FIND A LENDER?

UNDERSTANDING RATESOne of the most important aspects of selecting the right loan for your needs is the interest rate. Whether it’s the percentage amount itself or the rate behavior, it is a major factor in settling on the ideal situation. Your loan may be described as “fixed-rate” or “adjustable-rate.” Fixed-rate indicates a loan whose interest rate remains the same for the life of the loan. Adjustable-rate indicates a loan whose interest rate can vary throughout the life of the loan.

SDHDA’s standard fixed-rate option offers a lower interest rate than the Fixed-Rate Plus option, however the latter includes the 3% gifted funds to cover upfront downpayment and closing costs. You additionally also have the option on some loans of paying “discount points” at the time of closing to buy down your interest rate and monthly payment – a point is equivalent to 1% of your total mortgage amount. A lender may also offer a “rate lock,” in which you may be offered to “lock in” an interest rate sometime during the processing of your loan. Locking in your rate allows you to secure a lower interest rate should the rates go up, but can also lock you out of better market pricing should rates fall. Rate locks usually occur within 30 days of closing, if the mortgage is closed by a specified date, a rebate on your interest rate or discount points may be offered.

Finally, some lending situations may include balloon payments or prepayment penalties, neither of which are offered by SDHDA and are considered risky loan features. SDHDA only offers fixed-rate loans.

LEARN MORE ABOUT SDHDA’S RATE OPTIONS >

ASK YOURSELF:• Do you understand the differences between “fixed” and “adjustable” rates? • What is the highest interest rate you’re willing to pay on your loan? • Will you require assistance in paying for upfront costs?

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HOW DO I FIND A LENDER?

SHOPPING FOR A MORTGAGE

One great way to find out how much house you can afford is to get mortgage preapproval from a lender. Finding a lender can involve some shopping around – lenders typically provide a tentative preapproval amount at no cost. This should give you at least a ballpark idea of how much spending power you have.

To participate in the SDHDA First-Time Homebuyer Program, you’ll need to obtain your loan from an approved lender. There are qualified Participating Lenders available throughout the state.

SEE SDHDA’S LENDER LIST >

ASK YOURSELF:

• Do you have an existing relationship with a bank you’d like to use? • Do you know your preapproval amount? • Are you using an SDHDA First-Time Homebuyer Program lender?

Any questions about the first-time homebuying experience? We’re here to help. Register for updates from us at SDHDA.org or contact us via email at info@sdhda.org.

Be watching for Volume II of the Homebuyer’s Guide focusing on searching for your perfect home.

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CONCLUSION