Financing Your Home Purchase

Lender, banks, and other loan sources take into consideration a combination of items when determining whether or not to loan you money:

  • Current income
  • Length of time at your current job
  • Debt-to-income ratio
  • Past rent or mortgage payment history
  • Your credit report
  • Tax returns
  • Down payment amount
  • Months of reserve money

Your income level, debt and credit information will be used to pre-qualify you for an amount the lender thinks you can afford. A pre-approval takes into account your credit report, the debt-to-income ration and a more in-depth analysis of your financial situation. Once pre-approved, you will receive a pre-approval letter that can be provided to a seller with an offer.

A pre-approval can provide a more definitive price range for your search and is best completed as a first step.

There are benefits to obtaining a mortgage on your home. These benefits can help you decide if it is the right time for you to buy, and provide other values such as the mortgage interest deduction to offset income against your taxes or making mortgage payments as an investment into building your wealth.

Once you have identified a property for purchase, and have an accepted offer, the lender will begin processing your loan. They will take into account other factors impacting an approval:

  • The preliminary title report
  • Any homeowners association dues
  • An appraisal report
  • Homeowner insurance payments
  • Property taxes

The combination of your financial profile and the property gives the lender a complete picture of the risks and benefits of providing you with the loan. Once all these items are reviewed and approved through the escrow process you will be in the home stretch for closing on your new home.

Is It The Right Time to Buy?

Deciding when to buy a home is a personal, financial, and emotional decision. Exploring the idea, stages and requirements involved in home buying is a good first step to making the right decision.

RENTING VS. BUYING. It is important for your mortgage or rent payment to be manageable, but take into consideration the mortgage interest deduction, or the emotional comfort of having your own home.

CURRENT INTERET RATES AND HOME PRICES. The market is cyclical and the value of owning a home isn’t just in the equity you build, but also in the memories you build.

YOUR FINANCIAL STATUS. You should consider all costs involved: Down payment requirements, mortgage payment, homeowners insurance, property taxes, association dues, etc.

FUTURE PLANS. There are options of what to do with your property in the short or long term, like living in it, renting it or selling it. These options will depend on future market values and if you are planning to expand your family, or eventually move.

BUILDING WEALTH AND INVESTING IN YOUR FUTURE. You will build equity in your home over the long run by paying down your mortgage or realizing an increase in value when you sell.

THE COMFORT OF A HOME. It is a place to create a comfortable environment, a place for family and friends, and a place to create memories.

Home Buying: Appraisal

Home values are constantly in flux. Market values increase, decrease, or stabilize. These changes can happen daily, weekly, monthly, or over an extended period of time, based upon that particular market area. There can even be spots within the same city that are doing one of each, at the same time. Due to these changes, there is a need to determine current values for properties, which is why lenders hire appraisers when working on a new loan. The lenders want to be able to assess the risk of loaning a certain home.

To assist the lender in this decision, they hire an appraiser to “evaluate” the property. It is then up to the appraiser to come to an objective opinion of value – Uniform Residential Appraisal Report. The appraiser will select comparable properties and make adjustments based upon the condition and features of those homes. NOTE: The lender’s appraisal is not used to determine market value, it is used for the lender to verify the security for the amount of the loan.

Home Buying: Purchasing in a Tight Market

When there are more Buyer’s than homes out there, it can get very frustrating. There’s always seems to be multiple offers on the home they liked, a home went into escrow within a few days on the market, etc. Here are some tips to help increase your chances of getting into a home in such a market:

  1. Get pre-approved for a mortgage
  2. Stay in close touch with your real estate agent to find out first about new listings that come on the market
  3. Scout out new listings yourself
  4. Be ready to make a decision
  5. Bid competitively
  6. Keep contingencies at a minimum
  7. Don’t get caught in a buying frenzy

 

Home Buying: Mortgage

If you want to be respected and considered a “real buyer”, then you need to have the evidence that you are prepared. One way to show that you are prepared is to have that preapproval letter from you lender in hand. Further, your agent would love to see you having that preapproval before they take you out to view homes because it not only protects you, but them as well. Overall, when you are preapproved, you are ready to buy!

Your preapproval letter should include the information that has been checked and evaluated (credit history, employment), along with the maximum loan amount, the type of loan (FHA, VA, USDA, Conventional), and the interest rate you are approved for.

Here is a fun fact for you, did you know there is a difference between a mortgage broker and a mortgage banker? A mortgage broker is a licensee through the state, who is able to sell loans to consumers. A mortgage banker is someone who works directly for an institution loaning the money, they can also issue you a preapproval letter directly.

When it comes time to apply for your loan, your lender will need the following financial records from you:

  • W2 forms or business tax return form if you’re self-employed, for the last two or three years for every person on the loan
  • Copies of one or more months of pay stubs from every person on the loan
  • Copies of two to four months of bank or credit union statements for both checking and savings accounts

A lender will also, most likely, require a credit report as well.

Tip: Compare loan programs first! When you are ready, then let the lender pull your credit. Wait to compare interest rates when you are ready to lock.

Your credit report can be defining factor is your ability to obtain a loan, even the amount of loan you are able to get. Here are five factors that determine your credit score:

  1. Your payment history
  2. How much you owe
  3. The length of your credit history
  4. How much credit you have
  5. The types of credit you use

When it comes time to compare loans, you should compare the interest rates among the lenders at the same time on the same day; ask for a written estimate of fees; ask for better terms if you can see that there are certain fees that are negotiable. Following are also ten questions that you should/could ask your lender:

  1. What are the most popular mortgage loans you offer?
  2. Which type of mortgage plan do you think would be the best for us? Why?
  3. Are your rates, terms, fee, and closing costs negotiable?
  4. Will I have to buy private mortgage insurance? If so, how much will it cost and how long will it be required?
  5. Who will service the loan? Your bank or another company?
  6. What escrow requirements do you have?
  7. How long is your loan lock-in period? Will I be able to obtain a lower rate if they drop during this period?
  8. How long will the loan approval process take?
  9. How long will it take to close the loan?
  10. Are there any charges or penalties for prepaying the loan?

When you are out there shopping for a mortgage that will work for you, remember that you are also shopping for the right lender as well. Be prepared to ask everything you need/want to know to assist you in making the best decision.

Home Buying: The Lender

It is important to have that preapproval letter in hand before making an offer for a home. Most Sellers now-a-days want to see that letter in hand, manly to confirm that you, as the buyer, is ready, willing, and able to purchase their home. After shopping for and finding the lender that is right for you, there are going to be several things that your lender is going to need from you.

A lender makes their decisions based on avoiding high risk situations and follow guidelines to ensure the sale ability of those loans in a secondary market. The amount of your home loan is based upon four criteria: (1) income, (2) assets, (3) debts, (4) interest rate that you can lock in.

A lender will qualify you based on your gross yearly income – including overtime, part-time, seasonal pay, commissions, bonuses, and tips. They will also include dividends from investments, business income, pension or Social Security, veteran’s benefits, alimony, and/or child support. What’s important is that you, as the buyer, should see what kind of loan you can qualify based strictly on your yearly salary, without the extra bonuses. This is because you know this is a steady income, plus this gives you some wiggle room during the bargaining process later.