How to buy a home has changed over the years. Buying a home can be different for a 1st time buyer vs. repeat buyers. The steps and home buying process in 2019 are not the same as even 5 years ago. The decision you make can be affected by many factors: Market availability, mortgage financing options, personal finance and research efforts.
Repeat home buyers have been through the process but need a refresher since the process and market is ever changing. First time buyers soon learn it is not as intimidating when you have home buying related experts working with you. Either way, it’s always good to be up to date on current market conditions and mortgage lending options.
How to buy a house
If you are buying your first home or a repeat buyer, preparing for the requirements is the first step. Maybe you are considering purchasing a second home or a vacation home. Or perhaps being a landlord, and buying a rental unit.
Q. Where do I start if I want to buy a house?
A. Start by getting a pre-approval from a mortgage lender. You need to know the financing you are qualified for so you know the price range to look in. The first step is preparing your income, debts & assets documentation for a lender.
Preparation is an important first step. Knowing what you can afford for the monthly home loan payment is a good starting point. And evaluating how much liquid cash you have to work with for a down payment and closing costs.
Q. How much do you have to put down on a house?
A. Down payments can be as low as 3 percent of the purchase price. Eligible veterans can go with a VA loan with zero down. FHA is 3.5 percent down. Conventional has 3 percent down programs but you need a very good credit score.
Tax advantages for home-buyers can vary from year to year. This can change a monthly budget when you learn how current tax laws may benefit you and make your “net” payment lower than you thought. A good mortgage loan officer or a CPA can help you evaluate this. Once you feel comfortable on what you feel is affordable for housing and related expenses, start to gain an understanding of the housing market you are interested in.
Q. Is 2019 a good year to buy a house?
A. Yes because mortgage rates are still very low. Next year the rates may be higher which can have a big impact on the price range you will be able to qualify for. The real estate market is strong for both home buyers and sellers. The economy is booming so if you are serious about owning a home, there is no better time to buy than 2019.
Nowadays, you won’t get past first base without a pre-approval from a mortgage lender. So if you are serious about buying a home, start by interviewing some lenders to check current mortgage rates and programs.
Q. How do you qualify for first-time home buyer?
A. FHA is usually the best first-time buyer mortgage program. You only need 3.5 percent as a down payment and the credit score requirements are very flexible, as low as 620 FICO credit score. There are other first-time home buyer programs but these can differ from lender to lender. Ask this question when you are shopping for a lender to see how they may offer special programs that other lenders do not.
Shop for a lender you feel meets your needs and would be a trust worthy partner in this process. Learning what you are qualified for will impact the market you decide to search for a home in. Apply for a pre-approval so you have this step completed (Sellers will require this).
Serious home buyers will need to complete the process of getting pre-approved. This is different than getting pre-qualified. Home sellers will require this before accepting an offer. Shop around for a good lender and make an application for pre-approval. Once you complete this step and have satisfied any underwriting conditions that the lender may have, the approval then will be subject to a satisfactory appraisal. You will need a signed purchase agreement before a lender will proceed with the appraisal.
We all have different financial profiles & situations. The four main categories lenders review:
- FICO Credit score
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Organize the documentation that will be needed for the lender and obtaining an official pre-approval. Home loan lenders can vary on these document requirements.
For example, proof of income requires different documentation for a self-employed individual than employee’s for a company. Commission income also requires different documentation. Debts and minimum payments are usually listed on the lender credit report. You may have to provide further proof or explanations for debts. Asset documentation for both liquid and non-liquid investments is needed to build your strength in the lenders eyes. And verifying if you will have the amount needed to buy a home and have asset reserves after the closing.
Each person that will be on the mortgage, will have their debt-to-income (DTI) ratio’s analyzed. The acceptable ranges for these ratios depend on the type of mortgage you are applying for. The industry norm is 38% to as high as 43% for the maximum allowed for your debt to income ratio most home loan programs require.
The home loan application process can create additional questions from the lenders underwriter. What you may feel is adequate documentation, an underwriter may not. These are called “conditions” that must be satisfied for a clean lender pre-approval. Conditions can vary after a lender reviews your income, debts, assets and credit.
Q. Is getting pre-qualified the same as obtaining a pre-approval?
A. No, pre-qualifying is only an opinion and will not satisfy realtors or sellers.
FHA loans: Require only a 3.5 percent down payment. FHA mortgages have long been one of the most affordable loans for first-time home buyers. With relatively loose credit requirements and rates that tend to be more favorable than conventional loans for borrowers with lower credit scores, they're also are a good choice for first-time home buyers with bad credit.
VA loans: VA loans are one of the few options out there for a first-time homeowner loan with no down payment. They also offer attractive rates and in some cases, additional financial assistance is available as well. However, you must be a qualified veteran or active duty member of the U.S. armed services to be eligible, or must be in one of several other eligible categories, such as the surviving spouse of a veteran.
Conventional loans: Both Fannie Mae and Freddie Mac, the agencies that back what are commonly called "conventional mortgages," offer several mortgage programs allowing as little as 3 percent down for borrowers with good credit. Some of these are specifically designed for first-time home loans and have features designed to make them more accessible to first-time buyers. 20 percent down payment buyers usually go with conventional or jumbo programs.
USDA Rural Development Loans: First-time home buyer rural development loans are backed by the USDA (U.S. Dept. of Agriculture) and require no down payment or mortgage insurance. These are need-based loans for borrowers of modest incomes who presently lack adequate housing. They are limited to home purchases in rural areas, although the definition of "rural" includes many suburbs and small -to-midsize communities.
Financial assistance: Though not actually loans, there are many programs that offer financial assistance toward the purchase of a home for qualified first-time buyers. These are often in the form of loans or direct grants to help with down payments or closing costs. For more information, check with the housing agencies of states and local governments, or the U.S. Dept. of Housing and Urban Development (HUD).
Q. Does the type of home loan I want change what lender I go decide on?
A. Yes because banks, mortgage brokers and mortgage bankers tend to have their niche mortgage products they are experienced in and specialize in. Once you know the program that is best for you, choose a lender that understands that home loan program fully. Ask the loan officer what their experience is in that program. Many mistakes are made by choosing a lender that simply is not good with a specific loan type.
What is your budget for the new house payment and cash needed for the closing? Are you buying alone using only your income or will there be others that will be part of the contract and bring income to the table? Keep in mind another person’s debts, assets and credit will also be considered.
Current interest rates will have an impact on your housing payment budget. A half percent can change your payment substantially. So you need to consider mortgage rates from the time you apply for a pre-approval to the time you actually find a home. You may have to adjust your home price range search accordingly.
If you’re buying a condo you need to factor in the monthly homeowners association dues as part of your desired budget. Lenders generally don't want to see more than 31percent of your gross monthly income going toward your mortgage payments (including association dues, homeowner's insurance and property taxes). No more than 43 percent should go toward debt payments of all kinds, though there is some flexibility for borrowers with good credit. This is called your debt-to-income ratio (DTI).
Q. How do I know what property taxes will be?
A. When you zero in on an area or sub-division, property taxes are usually consistent.
There are a variety of mortgage calculators you can use to determine how much you can borrow. Some will figure the monthly payment required to buy a home of a certain value; others will tell you how much you can borrow with a certain monthly payment. Many calculators will also take into account the amount of your down payment and potential closing costs.
FHA only requires a minimum of 3.5 percent for a down payment. A larger down payment may get you better terms. Putting at least 20 percent down will allow you to avoid additional charges for mortgage insurance and perhaps secure you a better mortgage rate.
The amount of closing costs will vary depending on the interest rate and mortgage program you decide on. Some opt for a higher rate to reduce or eliminate discount points and origination fees. Request a Loan Estimate (LE) from a few lenders to compare costs and the required investment a home purchase will cost you. This form will detail all the fees and give you a better understanding of your options.
Remember to include in your budget potential repairs or home remodeling you may plan on doing. As well as any ongoing maintenance costs you might incur.
Share with the lender what your budget is. Get pre-approved for the maximum price range you are looking in. This will give you a ceiling, so you know you are safe with anything lower than that. Your home search experience may change the price range you thought you wanted to stay in.
Q. What if my budget changes from year to year?
A. Figure out the worst case scenario for your budget and use that number.
Buying a home
Q. How do you know if you are ready to buy a house?
A. The best way to really know is by getting a pre-approval from a home loan lender. Besides the financial side, you should be ready to take care of a home and have savings left over after you buy a home. The emotional aspect of homeownership is very rewarding and tends to elevate careers and pride. If you are renting then you are not building equity like you would if you owned a home. Home appreciation in in itself can be very lucrative.
Now that you are pre-approved with a lender, you can shop for a home with confidence. Whether you have a realtor that specializes in working with home buyers or are including for sale by owners (FSBO) in your search, it is an exciting time. Buying a home or real estate is one of the most positive steps in achieving the American dream.
As most have heard, location, location and location! If you live near the area you plan on buying in, drive around to get a feel for the various neighborhoods and the type of location you like most. There are many factors to be considered depending on your family size, pets etc.. How big of a lot do you want? Is a corner lot acceptable? Do prefer a quiet street or is a busy street ok?
With transferees, it is a little more difficult, especially if you are not very familiar with the area you are moving to. The internet has certainly made it easier these days to get a feel for areas you would want to live in. And online home videos used by many realtors and home sellers provide a deeper glimpse of potential homes. Online sky maps and surround rotations help with the location a particular home is situated in.
Is new construction a possibility or will you stick with existing homes? Is it a fixer upper or is it move-in ready?
Q. Does the home loan program I choose have an effect on the type of home I am interested?
A. Yes it can have an impact. Many factors can affect underwriting guidelines. It is best to share with your lender the home you are interesting in before proceeding with an offer. Good realtors usually know if a certain home has potential lending issues.
Q. What kind of credit score do you need to buy a house?
A. This depends on the mortgage type you need or want. The lowest acceptable FICO score is usually for FHA loans which is as low as a 580 score. Of course the higher your credit score is the better options you will qualify for.
Once you decide to purchase a home, you will want to get a home inspection completed by a certified home inspector. Realtors can refer good ones or you can shop around on your own. Beneath the surface of what the eye can see, can be quite different from what an inspection reveals.
Locking in an interest rate will help give you the peace of mind that your mortgage payment will be what you are budgeting for. Each lender has its own policy regarding lock-in options. Some choose to float the rate, meaning they are gambling on what future rates may be. If you float the rate then you should communicate with your lender daily to check current rates. When the rates are where you are comfortable, you can then lock-in. Get it in writing and make sure you pick a lock-in timeframe that is reasonable to close on your mortgage. Don’t be too aggressive in selecting a short term lock, as this will add stress to the whole process (especially if rates are on the upswing).
This is very important when selecting a lender, so you fully understand your options and what their policies are. Lock periods can be anywhere from 15 days to 9 months (long term locks are usually for new construction). They do not come cheap either. The length you need for a lock will impact the costs related to that specific lock period. Most mortgage rate quotes assume a 30 to 45 day lock period.
Q. Can I lock-in the interest rate? And for how long?
A. Once you have an executed signed purchase agreement (PA) you can lock-in a mortgage rate. Be sure to select a lock-in period that will be long enough to close on your new home.
The lender will order a new appraisal when they receive the signed PA and all addendums. Lenders each have their own approved appraiser list so you will not be selecting the appraiser. Be sure to request a copy of the appraisal. You are paying for it and it is very useful to keep for your records.
Next, loan processing will take place and you will be notified of any questions or conditions that are required for a clean mortgage approval. This will need to happen before you can close on your home. Not all lenders have great processors so you should stay in touch to make sure nothing is pending that you can assist with. Be proactive!
Any year is a good time to buy a house. There is no better time than 2019 with mortgage rates still very low.
Down payment options
Like most of us, we like options. Down payment options can be as low as zero down for VA loans all the way up to a 20% or more for a down payment. Repeat buyers may want to use their previous home’s equity to invest into their new home purchase. First-time buyers may want to take advantage of lower down payment options to get homeownership under their belt.
Once you have shared with your loan officer all your financial information, it will become clearer which mortgage product best suits your cash on hand situation. And consulting with a financial advisor is always a smart move. Everyone has different financial goals and a preferred mortgage payment that they are comfortable with.
Your investments play a large part in deciding which way to go. Will you be tapping yourself out by spending most of your money on a down payment? Or perhaps it is wiser to put as little down and keep your money in your pocket? Most times the decision comes down to the home loan programs you qualify for. If you have the luxury of making a sizeable down payment, you still may not want to depending on your asset portfolio.
There is additional cost you should be aware of when putting less than 20 percent down. Rates can be a bit higher and mortgage insurance can come into play.
If you need to put the minimum down for a home purchase, many like to go with an FHA mortgage. This only requires 3.5 percent down. For example, on a $150k sales price you would need only $5,250 as a down payment. Remember to allow for closing costs. And underwriters like to see liquid cash left over equaling a few months of reserves for future mortgage payments.
Q. Does my mortgage payment change much between 5 percent down and 10 percent down?
A. Not as much as you might think. Have your lender run the numbers and you will see what effect there is.
Buying a foreclosed home
Q. Is it a good idea to buy a house in foreclosure?
A. Yes it is always a good time to buy a foreclosed home. If you can be patient the type of deal you can get could be a large savings. The home market is not as vast as it was a few years ago in finding foreclosure homes to purchase. They are still out there and an online search can help find them. Your realtor will also know what might be available in areas you are interested in.
You need to be prepared to renovate the home if needed. Repairs are commonly needed if it is not a total renovation. Checking if liens are on the property is important as well. Once you find a home you are interested in, a home inspection on these type properties are essential.
Q. How long does it take to buy a foreclosed home?
A. The amount of time it takes to purchase and close on a foreclosed property can take anywhere from 3 months to a year. The process is pretty much out of your hands as the lender who owns the property has their own policies & procedures that need to be satisfied. Patience is the key but can pay off handsomely if you have the time to wait. The bank will want to recoup as much of their investment as possible.
Bank will try to sell their foreclosed homes in an auction. If no one buys it, then they will hire an agent to help them sell the property, which is called real estate owned or REO properties.
Q. Can you get a loan to buy a foreclosed home?
A. Yes you can. The only differences in buying a foreclosed home vs. buying a home from an owner, is the length of time to close on a mortgage. The bank that owns the property has to go through a longer process to have everything ready to close on the property. The condition of the home is also an important factor. The home needs to be in approvable condition from your lender eyes.
Q. How can I buy a foreclosed home with no money down?
A. These are not currently available to purchase with no money down. There are programs like FHA 203b that can get you a foreclosed home with no out of pocket investment. These loans provide financing to repair and renovate a home as well as the end mortgage. You need a lender and loan officer that are well versed in this program.
Short sales also come into play. These are situations where the homeowner sells the property for less than what is owed to the lender. The lender has to approve the sale since they are the ones losing money. Many times this is acceptable for lenders to avoid a lengthy process which will cost them more money, making recouping their investment even more challenging.
Q. What is a foreclosed home?
A. The home is bank owned and not owned by an individual homeowner.
The home closing date is finally set! This will not happen until all conditions of your approval have been satisfied and cleared by your lender’s underwriter. It is a group effort to get to this stage. Realtors, loan officers, sellers and of course you, are involved in getting to this final step.
Your biggest questions are most likely how much cash do I need to bring to the closing (certified checks payable to yourself are required)? When will I gain occupancy and get the keys?
Yes, you have the original loan estimate (LE) from your lender but the numbers will change based on the day of the month you close on the home. You should request a closing disclosure (CD) at least a few days prior to closing. This will be the actual numbers you are agreeing to pay. Review these numbers (with a real estate attorney if possible), to make sure everything is in line for what you signed up for. Ask your loan officer to explain any questions you may have after reviewing the CD.
By now it should already be established on when you can gain occupancy and get the keys. This is usually negotiated as part of the purchase agreement contract.
Property taxes are prorated based on the closing date. This makes it difficult to properly estimate the total cost when you first received the loan estimate (LE) from your lender. If you plan on not escrowing for property taxes and home insurance, then this will not be as much of a factor. Whether you escrow or not with your lender is not always your choice. This is a discussion you need to have when you first apply for the mortgage. Some lenders do not allow this and some charge extra for the privilege of you paying escrows on your own. Usually a 20 percent down payment is required to even be considered for paying on your own.
You will need to have your proof of homeowners insurance prior to the closing. Each lender will have specific requirements for what your homeowner insurance agent needs to provide.
Congratulations you made it, you’re now a homeowner!
Q. How long does it take to get to the closing table?
A. Anywhere from 4 to 6 weeks is the norm. If lenders are extremely busy due to market conditions it may take a bit longer. The more you help and participate with clearing underwriter conditions, the faster you can close.
Personal finance covers many aspects from your credit score to investment portfolios. Increasing ones assets is everyone’s goals. Investments in real estate can be a huge payoff.
If you’re just starting out, having a good financial advisor in your corner is a smart decision. Or even if you are experienced in personal finance, it is good to have another set of eyes and suggestions.
We included this topic here because you need to understand some important aspects to personal finance. Like how important it is to have a good credit score. How important it is to save asset documentation. How it may affect your finance strategies and so on.
Making smart solid plans with your money has many impacts on what you decide to invest in currently and in the future. Including home buying, credit cards and debts, emergency funds and interest rates you’re paying. Savvy consumers stay on top of the market and interest rates.
In today’s world, your credit score impacts many things regarding credit purchases. If you do not have debts, that is great, but most do rely on their ability to be approved for a loan. Maybe it is for a home equity loan or HELOC line of credit to make improvements to your home, or debt consolidation to help minimize your monthly expenses.
Bankruptcy is in none of our plans. But if you have an emergency situation you cannot control, you at least need to know what the options are and if it makes sense or not.
Q. How do I build my credit?
A. If you have bruised credit or no credit at all, start with a secured credit card or co-signed loan. This will help you establish a better credit score. Just make sure you make all payments on time.