Mortgage rates continue to remain at historic levels. According to Freddie Mac, last week’s 30-year fixed rates for the month averaged 3.82%.
Low rates, the pace and number of homes going under contract, as well as mortgage guidelines loosening, is turning today’s housing market into the hottest in a decade.
It’s a seller market. As a 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 according to the state you live in.
SAVING FOR DOWN PAYMENT
The down payment needed for buying a home will vary according to the loan program.
There are programs available with no down payment. There are also a few down payment assistance programs available to first time homebuyers. The majority of home buyers, however, will need to put down anywhere from 3.5% to 20% of the purchase price.
Unless otherwise negotiated and stated in the sales contract, buyers will also have to pay closing costs on the loan. Depending on the loan, closing costs can add up to several thousand dollars.
Be mindful that some lenders may also require additional cash reserves.
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.
As a general rule of thumb, it is recommended that homebuyers look for homes that cost no more than three to five times their annual household income. This is assuming the buyers intend to make a 20% down payment and have a moderate amount of other debt besides their new housing payment.
Another general rule is that a buyer’s total debt payments should be no more than 36% of their total household income. Lenders use this guideline because it has been shown to be a level that most borrowers can comfortably repay.
There are many factors that affect these percentages. 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.
CHECKING YOUR CREDIT
Before getting a mortgage or any other kind of loan, you should always know your credit standing.
By law, you’re allowed to 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 range from 300-850.
Generally, the higher your credit score the better loan for which you’ll qualify.
Be sure and check your credit report for errors. If there are any errors, dispute them. Not only is this a good decision because of the error, it may also improve your credit score.
Before shopping for a home, it is important to know how much you’ll be able to 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 involves providing documentation to support the information you’ve given for your pre-qualification (W-2’s, paystubs, bank statements, etc.).
A distinct advantage of completing the pre-qualification and pre-approval steps before looking for a home is that you’ll know in advance how much you can afford.
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 and could prevent you from losing out to another offer by a buyer who already has their financing in order.
HIRING A REAL ESTATE AGENT
While it’s possible to search for homes on your own by scanning internet sites devoted to real estate listings, you can place yourself at an immediate advantage by enlisting the services of a professional. Real estate agents will have a 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 for most Americans, buying a home is the most expensive purchase they’ll make in their lifetime. Not only is a large financial investment, buying a home is a complex process.
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.
There are a number of ways to find a good real estate professional. As with most service providers, nothing beats a good recommendation from someone you know and trust.
FINDING A HOME, MAKING AN OFFER
With the help of your agent, you can begin touring homes in your price range. It’s 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. Taking pictures or videos can help to 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. It’s seller’s market and homes are flying off the shelves.
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. At times like this, it is sometimes helpful if your agent and lender have worked together in the past.
Once you and the seller reach an agreement on the price, you’ll go under contract, or in escrow depending on your geographic location.
ORDERING A HOME INSPECTION
After you’ve found a home and negotiated a sales price, there are two steps you’ll want to pursue simultaneously. The first step is to schedule your home inspection.
Home inspections are a common “next step” between buyer and seller once a home is under contract. They’re so common that most purchase offers are written with a contingency clause stating that the offer is subject to a satisfactory inspection by a licensed home appraiser.
As a home buyer, you should 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 only 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 hours 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.
ORDERING AN APPRAISAL
An appraisal is an opinion of value that is completed by a licensed real estate appraiser who visits and inspects the size, condition, function and quality of the home.
First, an appraiser comes out to the property and inspects the home. Next, the appraiser will research similar homes in the area and compare recent sales to determine a fair market value. The appraiser will then give a final appraisal report with all the data and research to issue a final “opinion of value.”
Appraisals can vary by state, but there are three main parts to a home appraisal:
- The Inspection – a licensed appraiser comes to the property and inspects it to determine fair market value
- Comparables – the appraiser researches similar homes in your area and compares recent sales to determine market value.
- Final Appraisal Report – using the data gathered from the inspection and comparables research, your appraiser issues a final appraisal report.
A real estate appraisal helps to establish a property’s market value – the likely sales price it would bring if offered in an open and competitive real estate market. Appraisals protect both the lender, as well as the client, so they don’t overpay for a home.
Since by law mortgage companies cannot complete their own appraisals, a licensed independent professional appraiser selected by the Appraisal Management Company (AMC) conducts the appraisal. By law, the appraisal must be done by a third party who has no interest in the outcome of the appraisal.
LOAN SUBMITTED TO UNDERWRITING
The term “underwriting” refers to the process that leads to a final loan approval or denial, which is determined by a professional underwriter. Many factors are at play in a lender’s final decision on a mortgage loan. These factors are all analyzed during the underwriting process through specialized software programs.
Once the underwriter has reviewed all the necessary information and documents, he or she will make a decision on the loan application. There are a few possible outcomes at this point.
The majority of loan applications are “approved with conditions.” These conditions normally fall into three categories: explanation and correction of anomalies, verifications and attestations, and supplementary documentation.
An explanation and correction of anomalies refers to inconsistencies in credit reports and official explanations of pay stubs, tax statements, wages, etc.
Verifications and attestations refer to verifying income, employment, rental/housing history, and gift funds.
Lastly, supplementary documentation refers to handing over more credit, profit, loss, and account statements.
SHOPPING FOR HOMEOWNERS INSURANCE
Once the home inspection is complete, home buyers should begin preparing for their mortgage approval.
For pre-approved home buyers, getting prepped will be simple. Your lender may ask you to provide an updated pay stub from work; a recent bank statement; and for permission to review your current credit rating. You’ll likely be asked to sign a few templated loan documents, too.
While that’s all in process, 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 have the right to shop for your hazard insurance and your quoted premiums will vary by insurer based on the age of your home, the home’s construction type, your home’s 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.
OBTAIN UNDERWRITING APPROVAL
After a file has been fully underwritten and all of the conditions are satisfactorily met, a final underwriting approval will be issued.
After final underwriting approval, a “Clear to Close” will be issued. A Clear to Close means that the documents provided to the underwriter passed their scrutiny and that the closing agent has the underwriter’s consent to close your loan.
CLOSING ON YOUR HOME PURCHASE
“Closing” on a home goes by different names, depending on in which part of the country you live. In many areas, it’s known as “closing”. In other areas, such as California, closing is often called “escrow”. In some parts, closing is 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 (HUD-1) will mirror the preliminary statement sent to you prior to closing for your view.
Most times, 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.
Rates remain at historic lows. Take advantage of today’s low rates while you can.