According to Freddie Mac, mortgage rates continue to remain at historic levels, hovering near four percent nationwide.
Today’s mortgage rates, the pace and volume of homes going under contract, as well as the loosening of mortgage guidelines, is turning today’s housing market into the hottest in a decade.
It’s a seller market. As a first time home buyer, you’ll want to be well-equipped to enter this market with as much knowledge as possible.
One of the best ways to understand the process of buying a home is to go through it step by step. The process will vary from one buyer to the next. It will also vary slightly based on the state in which you live.
SAVING FOR A DOWN PAYMENT
The down payment required to buy a home will vary based your loan program. There are programs available with no down payment. There are also a few downpayment assistance programs (DPA) available to first time homebuyers.
The majority of first time home buyers, however, should expect to put down anywhere from 3% to twenty percent of the purchase price. Note, though, that buyers have options to put no money down, and can put more than twenty percent down at any time.
After saving for a downpayment, buyers will have closing costs to pay on the loan, too. Closing costs vary by state and can add up to several thousand dollars. However, it’s common for sellers to pay closing costs on behalf of a buyer. Be sure to ask your real estate agent to work that into a contract.
Lastly, be mindful that some lenders may require additional cash reserves so don’t plan on spending everything you have on your home. Aside from putting your ability to get approved in jeopardy, it’s poor financial judgment to leave yourself without money in reserve.
DETERMINE HOME AFFORDABILITY
When buying a home, mortgage lenders will look at your income, your assets, the down payment you have, as well as your other debts, liabilities, and obligations.
It is recommended that homebuyers look for homes that cost no more than three to five times their annual household income, assuming a 20% down payment and only moderate debt in addition to new housing payment.
Another general guideline is that a buyer’s total debt payments should not exceed 36% of their total household income, a ratio known as debt-to-income (DTI).
Lenders use this guideline because it has been shown to be a level at which most borrowers can comfortably repay their mortgage, while still having money left over for “life”.
The “36% figure” is just a recommendation, however. Some households are able to manage ratios in excess of 36 percent and, for some households, 36 percent is too high.
The best approach is to work with a mortgage professional to determine exactly what you can afford, both from a loan approval standpoint, as well as a comfort level for making the monthly payments.
CHECK YOUR CREDIT
Before applying for a mortgage — or any other loan type — it’s helpful to know your credit standing. By law, you can receive one free copy of your credit report per year.
Mortgage lenders will evaluate your credit using the FICO scoring model. The FICO model scoring ranges from 300-850. Generally, the higher your credit score, the better loan for which you’ll qualify.
When you receive your credit report, be sure to review it for errors and omissions. If you find something wrong, dispute it. This will start the process of removing the error from your record and may also improve your credit score.
Before shopping for a home, it is important to know how much you’ll be able to actually spend. The best way to do this is to get pre-qualified for a mortgage.
The process of getting pre-qualified involves providing some personal and financial information to your mortgage lender, such as income and asset info, as well as information for pulling credit.
Your mortgage lender will review this information and let you know how much you’ll be able to spend on a home.
Getting pre-approved is the next step.
Getting pre-approved is more in-depth than getting pre-qualified. During the pre-approval process, you will be asked for documentation which support the information you’ve verbally provided as part of your pre-qualification.
Documentation typically includes W-2s, paystubs, and bank statements; and may include federal tax returns.
A distinct advantage of completing the pre-qualification and pre-approval steps before looking for a home is that you’ll know in advance exactly how much you can afford.
In addition, getting pre-approved also allows you to move much faster when you find that perfect home. In today’s competitive market, a pre-approval lets the seller know your offer is serious. Not having one can weaken your bid and cause you to lose out to another buyer whose financing is already in order.
HIRE A REAL ESTATE AGENT
Although it’s possible to search for homes using internet sites devoted to real estate, you can give yourself an immediate advantage by enlisting the services of a professional. Real estate agents have more in-depth and up-to-date knowledge of the communities and real estate markets that you are considering.
Why hire a real estate professional? Because, if you’re like most Americans, buying a home is the most expensive purchase you’ll make in their lifetime. In addition, the process of buying a home can be complex.
Unlike buying a car, laws that affect home buying change every year and vary from state to state. Real estate agents are required to stay current on the various laws and regulations. Additionally, real estate agents can help point out features or faults with a property that may otherwise go unnoticed.
A real estate agent can usually negotiate better sales contract terms, and offer greater knowledge of search areas.
With the help of your real estate agent, you can begin touring homes in your price range. It will be helpful to take notes on the homes that you visit as it may be possible that you will view a lot of houses. After a while they may run together.
Some even take pictures or videos to help them remember.
Not only will you want to take notes about the home, you’ll also want to evaluate the neighborhood. In what condition are the other homes ? Is there a lot of traffic on the street? Is there adequate parking? How about proximity to shopping?
Depending on the buyer, these examples may or not be as important. It’s good to know what’s most important to you and your family before shopping for a home. Take the necessary time to find the right home. But. don’t take too much time.
In a sellers’ market, homes which are priced right sell quickly.
After viewing homes for a few days, chances are you’ll know which one or two you’re serious about buying. After you find the right home, your real estate agent will help you come up with and negotiate an appropriate offer based on the value of comparable homes in the same neighborhood.
Be mindful of your financial circumstances, down payment amount and closing costs when negotiating a price. Then, once you and the seller reach an agreement on the price, you’ll go under contract, or in escrow depending on your geographic location.
ORDER A HOME INSPECTION
After you’ve found a home and negotiated a sales price, there are two steps to pursue simultaneously. The first is to schedule your home inspection.
Home inspections are a common “next step” between buyer and seller after a home goes under contract. They’re so common that purchase offers are typically written with a contingency clause stating that the offer is subject to a satisfactory inspection by a licensed home appraiser.
As a home buyer, always exercise your right to a home inspection.
Home inspections will cost between $200-600, depending on the size and age of the home; and should be performed by a licensed home inspector who will be impartial to the inspection’s outcome.
Licensed home inspectors are trained to look for defects in a home which you, or your real estate agent, may have missed including faulty electrical wiring, building code violations, roof issues, and other health or safety hazards.
A thorough inspection will take anywhere from 2 to 8 hours to complete.
Several days after the inspection, the licensed inspector will provide to you a report which details the home’s system and structure. Expect for the report will note deficiencies. It will then be your choice whether to ask the seller to remedy the deficiencies found.
If the seller agrees to make repairs (e.g.; replace jiggly door handle; repair cracked window sill), you will have an opportunity to “walk-thru” the home prior to closing to ensure all repairs were made, as agreed.
Inspections should be performed on all homes — even newly-built ones.
ORDER AN APPRAISAL
An appraisal is an opinion of value from a licensed real estate appraiser who visits the home and inspects its size, condition, function, and quality.
First, an appraiser comes out to the property and inspects the home. Next, the appraiser researches similar homes in the area and compares recent sales to determine a fair market value.
The appraiser then gives a final appraisal report which includes a final “opinion of value.”
A real estate appraisal helps to establish a home’s market value – the expected price it would fetch if offered in an open, competitive real estate market. Appraisals can help buyers ensure that they don’t overpay for a home.
By law, mortgage companies cannot complete their own appraisals so many hire an appraisal management company (AMC) to handle the work which, in turn, gives the work to a licensed professional appraiser.
The appraisal must be performed by a third party who has no interest in the outcome of the appraisal.
SUBMIT LOAN TO YOUR LENDER
When you submit a loan to your lender, it’s known as “going into underwriting”.
The term “underwriting” refers to the process that leads to a final loan approval or denial. A loan’s approval status is made by a professional underwriter which uses specialized software programs and number-crunching analysis.
Once an underwriter has reviewed all of a mortgage applicant’s information and documentation, a decision will be made on the loan’s status. There are a few possible outcomes at this point.
The majority of loan applications are “approved with conditions.” This means that the loan is approved — so long as the borrower provides additional, clarifying information. Conditions typically fall into three categories: explanation and correction of anomalies, verifications and attestations, and supplementary documentation.
Explanation and Correction of Anomalies refers to inconsistencies in a credit reports; and may include official explanations of out-of-the-ordinary pay stubs, tax statements, and wages.
Verifications and Attestations include verifying a borrower’s income, employment, housing history, and gift funds, when applicable.
Lastly, supplementary documentation requests may include clarification on credit profile items, profit-and-loss statements from a business, and tax-related documents.
SHOP FOR HOMEOWNERS INSURANCE
Once your home inspection is complete and your loan is underwriting, it’s time to get started with your homeowners insurance policy.
Known officially as “hazard insurance”, homeowners insurance is a requirement of your loan approval. Lenders want to be sure that your home can rebuilt to its same specifications in the event of catastrophe, and won’t approve your home loan until such a policy is in place.
You shop for your hazard insurance, knowing that quoted premiums will vary by insurer based on the age of the home, its construction type, its proximity to services such as police and fire departments, and your deductible amount.
You’ll be asked to show proof that your policy is in effect as of your closing date. Many insurance policies are pre-written, and made effective upon payment of the first year’s premium, which typically occurs at closing — not before.
RECEIVE YOUR APPROVAL FROM YOUR LENDER
After a file has been fully underwritten and all of the conditions are satisfactorily met, a final underwriting approval will be issued. This is known as a “Clear to Close”.
Clear to Close means that the documentation you provided to your lender have met their approval, and that no additional paperwork is required.
When you’re Clear to Close, your lender is ready to fund your loan and will begin communicating with the closing agent to prepare your documentation for closing.
CLOSE ON YOUR HOME
Depending on where you live, “closing” on a home goes by different names. In many states, it’s simply known as “closing”. In other states, notably California, closing is often referred to as “going to escrow”.
Closing is also known as “settlement”.
Regardless of what you call it, however, closing is the last step prior to getting the keys to your new home. It’s the legal process by which ownership of a home moves from one person to another, in the form of a deed.
Closing is a relatively simple process. In advance, all of the necessary paperwork for signature will have been delivered by your lender, and your final Settlement Statement — called the HUD-1 — will mirror the preliminary settlement statement which was sent to you in advance.
Often, closing is just the formality of “sealing the deal”. Sometimes the seller is there; or, an agent for the seller is there. Your real estate agent may be there, too, as may your lender.
Closings can take anywhere from 25 minutes to two hours, depending on the complexity of the transaction.