Home Buying Advice
Despite slowdowns in some markets, housing remains a good long-term investment. Homeownership offers immediate benefits and long-term value. Homeowners accumulate wealth for the future while enjoying the benefits of a shelter that they can use, improve and sell.
No two buying experiences are the same, but some people find the process of buying a home a little daunting and sometimes overwhelming. Finding the right real estate agent can make you a savvy consumer and improve your overall experience. A CENTURY 21® Agent can help you capitalize on current market opportunities and assist you in making an informed decision to get you on your path home.
Here’s why a CENTURY 21® Agent is right for you:
- Our local knowledge of neighborhoods, schools, market conditions
- Technology gives us an edge – you’ll enjoy the resources available on c21twincities.com
- We are ready and able to make a full-time commitment to your goal
- As Real Estate Professionals we can help identify mortgage specialists who can assist you with your financing
What's the Right Home For You?
To start, consider your lifestyle. If you love to cook, you’ll want a well-equipped kitchen. If you’re into gardening, you’ll want a yard. If you’re planning your office at home, you may want a room for a separate library or work space. If you have several cars, you may require a larger garage. Use this list as your search guide.
Next, think about what you might need in the future. As you consider your housing needs, it’s important to consider how long you may live in your home. If you’re newly married, you might not be concerned with a school district right now, but you could be in a few years. If you have aging parents, you may want to look at homes that offer living arrangements for them as well as you.
It’s important to think about your new home’s location just as carefully as you do about a house’s features. Location is a huge part of any move. In addition to considering the distance to work, you need to evaluate the availability of shopping, police and fire protection, medical facilities, school and day-care, traffic and parking, trash and garbage collection, even recreational facilities.
Perhaps the most important decision is deciding on the type of home you want. Do you want a condominium or a co-op? A town house or a detached single-family home? Do you want brick, stone, stucco, wood, vinyl siding, or something else? Do you prefer a new home or an older one?
Through all of this, make sure to talk to your real estate professional about where you want to live. While more buyers now use the Internet to gain access to listings, or available properties for sale, it is still a good idea to use an agent. The agent brings value to the entire home buying process: he or she is available to analyze data, answer questions, share their professional expertise, and handle all the paperwork and legwork that is involved in the real estate transaction. CENTURY 21® professionals have the expertise to help their clients narrow down their choices by sharing market trends and local information.
How Much Can You Afford?
Early on in the process, you’ll want to get pre-qualified for a mortgage loan, which helps determine how much you can afford. It enables you to move swiftly when you find the right home, especially when there are other interested buyers. It also indicates to the seller that you are serious and can afford to buy the property. A pre-approval is a simple calculation done by a mortgage lender that tells you the amount you’ll be able to finance through a loan and what your monthly payment will be. When you find a home to buy, a pre-approval also reassures the seller that you have the financial means to purchase his or her home.
Know what you can afford is the first rule of home buying, and that depends on how much income and how much debt you have. It pays to check with several lenders before you start searching for a home.
The price you can afford to pay for a home will depend on several factors, such as:
- gross income
- the funds you have available for the down payment, closing costs and cash reserves required by the lender
- your debt
- your credit history
- the type of mortgage you select
- current interest rates
Another figure lenders use to evaluate how much you can afford is the housing expense-to-income ratio. It is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes and hazard insurance (also known as PITI).
Each buyer is unique and a mortgage professional can help you find out just what you can afford. Your income and your debts will typically play the biggest roles in determining your price range.
Know Your Neighborhood
- Evaluate the properties proximity to other important locations in your life. How long will your commute time be? Is there a hospital or doctor’s office nearby? What about schools, childcare, shopping, family and friends?
- Consider all your transportations options. A new home could lend itself to public transportation options or car-pooling. Depending on the type of community, you may be able to find alternative methods of transportation. Take the time to drive from the new home to your commuting destinations to understand the impact it will have on your lifestyle.
- Visit and understand the school district you’ll be moving in to. Even if you don’t have children in the school system now, you may some day. The district reputation could positively or negatively impact the selling price of your future home as well.
- Make sure you feel comfortable in the area. Drive around the neighborhood at different times of the day and night on multiple days of the week to observe activity/noise levels. Discovering that barking dog next door or noisy road conditions will eliminate unneeded stress from a hasty decision.
- CENTURY 21® real estate professionals are experts in the areas they serve. Ask your agent for a list of schools, shopping centers, parks or other important amenities. Buying a new home is about more than the structure and property. It’s about your new lifestyle as well.
What If You Already Have a Home?
Before putting your house on the market or committing to buying a new one, take a look at the prices of houses in the areas where you’ll be both selling and buying. You’ll need a realistic idea of how much similar houses are going for. Since you’re both a buyer and a seller, you’ll need to protect yourself in your weaker role while letting your stronger role take care of itself.
What if you’re unable to perfectly time the sale of one house with the purchase of another? You may own no houses for a time, in which case you’ll need money in the bank and a temporary place to live. Or, you may own two houses at once. That’s why it’s important to have a back-up plan. Here are some options to consider:
- Research short-term rental and storage options (family, friends, storage facilities, containers).
- A bridge financing is a loan for the down payment on a new home backed by the equity in your old house, typically at prime plus two percentage points.
Another option is a no-ratio mortgage. A no-ratio mortgage is usually made based on the buyer’s down payment, credit scores or assets. Income isn’t used or reported, and therefore will not exclude a borrower from receiving this mortgage. Rates are often higher but you can refinance later.
Alternatively, you may be able to draw on a home equity line of credit on your old home. However, you might pay a penalty fee if you sell the house within a year.
Buying a Second Home
Buying a second home isn’t that much different than buying a first home. Affording it usually depends on your ability to qualify for a mortgage on the second home. Benefits include tax breaks, a getaway for the family on vacations or holidays, a future retirement home, renters making your mortgage payments for you, or just a smart investment.
Many people see buying a second home as an investment opportunity. You’ll need to identify sources for your down payment, since you’re not selling your current house and using the proceeds, and you’ll need to expect a larger monthly obligation for housing expenses.
Keep in mind that if you declare it as a rental, your mortgage might be slightly higher. Work with your lender to create a customized loan program with the best combination of rate, points, and closing costs for your needs.
Shopping For a Home
When you’re ready to visit houses, ask your CENTURY 21® professional champion to help you with:
- Arranging showings
- Tracking of the properties you’ve seen.
- Identify if the home meets your criteria – refer to your “what’s right for you” list
- A digital camera to record what you see
- After touring each home, write down what you liked and didn’t like. Develop a rating system that will help narrow the field. For example, pick the house you like best on day one and compare all other houses to it. When you find a better one, use the new favorite as the standard.
Working with a Real Estate Agent
Making a Home Purchase Offer
Multiple home purchase offers on the same home are not uncommon, so you may only get one chance to make an offer that the seller will consider. That’s why it’s important to think carefully about your strategy. In most cases it is better to have your real estate professional negotiate the offer. If you have any personal interaction with the homeowner, don’t give out any information about your move, your current housing status, financial status or your feelings about their property – positive or negative. This could hurt you in future negotiations.
Find out what other homes have sold for in the area, how much money you might have to put into repairs or renovations. These considerations factor in with how much you’re comfortable spending.
Also, it helps to know the features that help or hurt resale. In some areas, a swimming pool actually detracts from a home’s value and makes it harder to sell. In neighborhoods with two-car, attached garages, a single-car or detached garage may affect the home sale and future value.
In addition to sale prices for other homes, there are several ways you can determine a good amount to offer:
- The condition of the house. Is the home in move-in condition, in need of paint and other cosmetic improvements, or a fixer-upper that needs some real work?
- The market. If you are in a buyer’s market — where there are more homes for sale than there are people to buy them — prices are probably stable or falling. If you are in a seller’s market — where there are more buyers looking for homes than there are homes for sale — prices are probably moving upward.
- Your ceiling. If you’ve gotten a credit pre-approval, you know how much you can borrow for your home purchase. Of course, you may not be comfortable paying as much as you’ve been approved to borrow, so think carefully about your financial situation before making an offer.
Next, decide how much you are willing to pay for a home. Remember, the advertised price of a house is just a starting point – it may take quite a bit of negotiating to arrive at a final cost.
A lease option is an arrangement between you and a seller to exercise the option to buy a house after you have rented it for a specific period. A portion of your rent would be applied toward the purchase if the option is applied. This is referred to as rent credit, which most institutional lenders will accept as part of the down payment if rental payments exceed the market rent and if a valid lease-purchase agreement is in effect, a copy of which must be attached to the loan application. Read any lease option arrangement carefully for details on transferring the option and other important concerns.
For information on lease options, contact your CENTURY 21® real estate agent (some even specialize in such transactions) or read up on lease options at the public library or on the internet. If you have a real estate attorney, ask if he or she has any prepared information you can review.
Buying a Home With Cash
Though most buyers don’t buy a home with all cash, anyone considering such a move may be wondering how. Because all cash buyers sidestep the time-consuming loan qualification process, the deal can close very quickly. The primary advantage of buying a home with all cash is completely avoiding mortgage interest. Buyers also save money that would be spent on loan origination fees, required appraisal , some closing costs and various other charges imposed by the lender.
At the same time, all-cash buyers should consider potential pitfalls of the transaction. Buyers who want to use the home as their primary residence lose out on many of the tax advantages available to homeowners with conventional loans.
If you can afford to pay cash but are concerned about price appreciation, you may be better off obtaining some financing. Also, look at other investments that are paying off and determine if spending cash on a home is worthwhile.
Mortgage Loan Options
Today, there are hundreds of different programs to choose from, but don’t let that overwhelm you. Most of the home loans are variations of a fixed-rate mortgage and adjustable-rate mortgage. Knowledge of how these mortgage programs work will help you to understand the majority of available loan options. You may qualify for a new loan without even selling your current home.
Home Purchase Loans
A fixed-rate mortgage keeps the same interest rate for the life of the loan. For most people, especially first time homebuyers, this is the best option because you pay the same monthly principal and interest rate.
A fixed-rate mortgage means the interest rate and the payments remain the same for the entire life of the loan (taxes, of course, may change.) Advantages include consistent principal and interest payments, making this loan stable. In other words, your rate won’t change, so you don’t need to worry about market fluctuations.
Disadvantages include a possibly higher cost. These loans are usually priced higher than an adjustable-rate mortgage. Keep in mind that, on average, most people move or refinance within seven years. If rates in the current market are high, you’re likely to get a better price with an adjustable-rate loan.
- 30 Year Fixed-Rate Mortgages offer consistent monthly payments for the entire 30 years you have the mortgage. So if the market is good, you can benefit from locking in a lower rate for the full term of the loan.
- 20 Year Fixed-Rate Mortgages allow you to make a consistent monthly payment throughout the 20 years you have the mortgage. The shorter term means you pay the loan off more quickly, and therefore pay less interest. And you’ll build equity faster than you would with a 30-year loan. (But remember the shorter term means higher payments, when compared to the 30 year fixed-rate mortgage.)
- 15 Year Fixed-Rate Mortgages provide consistent monthly payments for the 15 years you have the mortgage. By building equity even more quickly than with a 30 year or 20 year loan, and paying less interest, you’ll save money in the long run. It’s an ideal option if you can handle the higher payments and if you’d like to have the loan paid off in a shorter period of time – for instance, if you plan to retire.
An adjustable-rate mortgage (ARM) is one that the interest rate changes over the life of the loan – according to the terms specified in advance. The interest rate fluctuates based on several money market indexes, which cause the cost of funds for lenders to vary. All ARMs are amortized (paid down) over 30 years.
- The initial interest rate is usually lower than with a fixed-rate mortgage.
- The monthly repayment would also be lower.
- The interest rate may be adjusted (up or down) at predetermined times.
- The monthly payment will then increase or decrease.
ARMs are usually priced lower than fixed-rate mortgages so you can increase your buying power and lower your initial monthly payments. If interest rates go down, you’ll enjoy lower payments. Usually an ARM is the best choice for homeowners who plan to relocate (for example, with their company or the military), or for those who are purchasing their first home and plan to be in the property only for three to five years. Remember that, on average, most people move or refinance within seven years.
Conversely, monthly payments could increase if monthly payments if interest rates go up. Keep in mind that ARMs are best for homeowners who aren’t planning on staying with a property for a long period. If you’re on a fixed income, an ARM (especially a short-term ARM) may not be your best choice.
10/1 Adjustable-Rate Mortgages provide a fixed initial rate of the loan for the first ten years of repayment. After 10 years, the rate adjusts every year thereafter for the remaining life of the loan. The loan is amortized over 30 years.
7/1 Adjustable-Rate Mortgages offer an initial rate that is fixed for the first seven years of repayment, then the rate adjusts every year thereafter for the remaining life of the loan.
5/1 Adjustable-Rate Mortgages mean the initial rate remains fixed for the first five years of repayment, and then adjusts every year thereafter.
3/1 Adjustable-Rate Mortgages provide three years at the initial fixed-rate, then the rate adjusts every year for the remaining life of the loan. A good choice if you expect to move or refinance in a relatively short period of time. But a much shorter fixed-rate period means your interest rate (and therefore monthly payments) may begin to fluctuate after three years.
New Construction Loan
If you are working with a builder in a sub-division or development you may be able to obtain a standard mortgage loan. But if you’re hiring contractors, electricians, plumbers, and painters, you will probably need a construction loan, which provides funds to pay subcontractors as work progresses.
Assumable loans permit one borrower to take over a loan from another borrower without any change in the loan terms. Such loans still exist but they aren’t very common or popular (for buyers) in a low-interest-rate environment. Plus, today new assumable loans are almost always adjustable rate mortgages. To find out if a loan is assumable, look to the loan agreement to determine if it is assumable by someone else, then talk to the lender about specific requirements based on the value of the home.
Home equity mortgage
A home equity mortgage, like a second mortgage, lets you tap into a percent of the appraised value of your home, minus your current mortgage balance. Like a line of credit, you will not be charged interest until you actually make a withdrawal against the loan, although you will be responsible for paying closing costs.
Of particular importance: make sure you understand the terms of the loan. If, for example, your loan requires that you pay interest only for the life of the loan, you will have to pay back the full amount borrowed at the end of the loan period or risk losing your home.
Reverse Annuity Mortgages (RAMs)
A reverse annuity mortgage is a special type of loan available only to older homeowners with full or nearly full equity in their homes. Such owners can borrow against the equity they have built up over the years, but no repayment is necessary until the borrower sells the property or moves elsewhere. If the borrower dies before the property is sold, the estate repays the loan (plus any interest that has accrued). These loans have become increasingly popular. If you believe you qualify for such a loan, be sure to have the document reviewed by an attorney or financial advisor.
Home equity line of credit
A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer’s largest asset, many homeowners use their credit lines for major expenses such as education or medical bills.
With a home equity line, you will be approved for a specific amount of credit, and this is the maximum amount you may borrow at any one time under the plan. The interest rates on these loans are usually variable.
A bridge loan is short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short-term (up to one year) with relatively high interest rates and are backed by some form of collateral such as real estate or inventory. Bridge loans are also known as interim financing, gap financing or a swing loan.
As the term implies, these loans “bridge the gap” between times when financing is needed. They are used by both corporations and individuals and can be customized for many different situations. For example, let’s say that a company is doing a round of equity financing that is expecting to close in six months. A bridge loan could be used to secure working capital until the round of funding goes through. For an individual, bridge loans are common in the real estate market. As there can often be a time lag between the sale of one property and the purchase of another, a bridge loan allows a homeowner some flexibility.
A wrap-around mortgage is a loan transaction in which the lender assumes responsibility for an existing mortgage. A seller will usually incorporate a late charge to encourage the buyer to make monthly loan payments on time.
A wrap-around is attractive to lenders because they can leverage a lower interest rate on the existing mortgage into a higher yield for themselves. Usually, but not always, the lender is the seller. In general, only assumable loans are wrappable.
Federal National Mortgage Association, commonly referred to as “Fannie Mae” is a congressionally chartered secondary-mortgage market company that buys loans from private lenders. Because the firm is so big and has been involved in purchasing packages of loans from lenders for 25 years, it has enormous influence on the mortgage market.
Fannie Mae’s [Community Home Buyers Program] allows first-time buyers with little cash to obtain 95 percent financing. Participants may put down as little as 3 percent of their own money, with the remainder permitted in the form of a gift from family members, a government program or nonprofit agency. Mortgage insurance is required on all loans above 80 percent loan-to-value ratio when borrowers do not use their own funds for at least 5 percent down.
The program is administered through participating lenders, and there are income limits in different states. However, the income restriction is waived when borrowers participate in the Fannie Neighbors program. Fannie Neighbors also has lower income requirements for borrowers who want to buy in designated central cities. Fannie Mae’s Community Home Buyers program has an income cap of 120 percent of the area’s median income. In addition, the borrower must attend a seminar on home ownership and the home buying process. It is not geared only for first-time homebuyers, unlike many of the other low-down -payment programs on the market.
Fannie Mae is expanding the availability of low-down-payment loans in an effort to help more people nationwide qualify for a mortgage. Two new programs will help potential buyers overcome two of the most common obstacles to home ownership, low savings and a modest income.
To address many first-time buyers’ struggles to save the down payment, Fannie Mae developed Fannie 97. The program provides 97 percent financing on a fixed-rate mortgage with either a 25- or 30-year loan term through Fannie Mae’s Community Home Buyers Program.
Fannie Mae’s Start-Up Mortgage assists buyers with a 5 percent down payment who are at any income level. Yet applicants do not need as much income to qualify and less cash for closing than with traditional mortgages. Borrowers receive a 30-year, fixed-rate mortgage with a first-year monthly payment that is lower than the standard fixed-rate loan. Freddie Mac, Fannie Mae’s counterpart, also offers low-down-payment loan programs.
For a list of participating lenders, call Fannie Mae at (800) 732-6643.
Alternative (A,B,C,D) Loans
Traditional lenders who offer conforming loans are extremely competitive. They must offer desirable terms or lose their share of the market. Meanwhile, hopeful home buyers who were rejected often turn to mortgage brokers and specialized mortgage lending businesses. Alternative lending sources not only offer a variety of loan products but also are more willing to deal with higher debt-to-income ratios, credit problems and other credit challenges.
In cases where negative information on a credit report may be due to disappear in the next few years, or a borrower expects their income to increase significantly, non-conforming loans without excessive prepayment penalties can be excellent. The borrower can obtain a conventional loan as soon as they qualify, yet enjoy the benefits of home ownership and establish equity in the meantime. Many homebuyers engaged in this process look at these unconventional loans as a penalty while others are grateful for a second chance.
Easy-Qualifier Loans (No-Doc Loans)
Generally, lenders will not make loans to unemployed persons because someone without an income would seemingly have no way of making monthly mortgage payments. However, there are home loans for which lenders require very little loan documentation as long as the borrower puts down a sizable down payment, generally 25 percent or more. These “no-doc” loans are common among self-employed people who say they earn a certain amount of money but whose income tax returns show that their earnings are much lower. Borrowers should check directly with lenders when seeking a no-doc loan.
Negative amortization occurs when the monthly payments on a loan are insufficient to pay the interest accruing on the principal balance. The unpaid interest is added to the remaining principal due. When home prices are appreciating rapidly, negative amortization is less of a possibility than when prices are stable or dropping, particularly for the borrower who has made a small cash down payment to begin with. The combination of negative amortization and depreciation in home prices can result in a loan balance that is higher than the market value of the home. Adjustable rate mortgages with payment caps and negative amortization are usually re-amortized at some point so that the remaining loan balance can be fully paid off during the term of the loan. This could necessitate a substantial increase in the monthly payment. Most ARMs have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount. If the loan balance exceeds this amount, the borrower has to start paying off the excess.
A Balloon Mortgage is a loan in which the entire unpaid principal becomes due and payable on a given date, five, ten, or any number of years in the future. The borrower must pay up, refinance, or lose the property. Interest rates on balloon mortgages are lower than for fixed-rate mortgages. So the monthly mortgage payments will be lower than the monthly payments for conventional mortgages.
There isn’t really such a thing as a low-cost loan. The term “no-cost” loan is misleading because borrowers are actually paying a higher interest rate in exchange for not having to pay fees or closing costs up front when the loan is secured. While some lenders may promote “no-cost” loans, regulators have tightened restrictions on this. Advertised “no-fee” loans may actually cost the borrower more because these costs are rolled into the new note through higher interest or more principal.
A typical no-fee loan is one in which the points charged and all fees are included in the loan principal, meaning that the borrower does not pay these expenses at the close of escrow, but instead ends up paying them over the life of the loan. The loan is called a no-fee loan because the borrower is not charged any fees up front.
A “no-points” loan is one that the lender does not charge points (one point is equal to 1 percent of the loan amount). But there are other fees involved in no-point loans, as with most loans.
Getting a Mortgage
There are several ways to secure a mortgage. You can get one directly by working with a mortgage banker or you can go to a bank, credit union or savings and loan. A CENTURY 21® real estate agent can help connect you with a reputable mortgage lender.
Many home buyers choose to arrange financing before shopping for a home and most lenders will “pre-qualify” them for a certain amount. Pre-qualification helps buyers to focus on homes that fit your plans and budget. Nothing is more disheartening for buyers or sellers than a deal that falls through due to a lack of financing.
Mortgage Interest Rates
Some lenders are willing to negotiate on both the loan interest rate and the number of points. Most established lenders set their rates like large corporations set the prices on their goods. However, it pays to shop around for loan rates and know the market before you talk to a lender. You should always look at the combination of interest rate and points and get the best deal possible. The interest rate is much more open to negotiation on purchases that involve seller financing. These loans involving seller financing usually are based on market rates but some flexibility exists when negotiating such a deal. When shopping for rates, look for published rates in local newspapers or check the growing number of Internet sites that publish such information.
Locking in a mortgage rate with a lender is one way to ensure that same rate will be available when you need it. Lock-ins make sense when borrowers expect rates to rise during the next 30 to 60 days, which is the usual length of time lock-ins are available. A lock-in given at the time of application is useful because it may take the lender several weeks or longer to prepare a loan application (though automated loan practices are cutting this time dramatically). However, some lenders require borrowers to pay lock-in fees to assure particular rates and terms. Be sure to check that the rates and points are guaranteed and that your lock-in period is long enough. If your lock-in expires, most lenders will offer the loan based on the prevailing interest rate and points. Lenders may have preprinted forms that set out the exact terms of the lock-in agreement. Others may only make an oral lock-in promise on the telephone or at the time of application.
Price discounts and interest rate buy downs are common incentives offered by new-home builders trying to overcome slow sales. Buy downs are a financing technique used to reduce the monthly payment for the borrower during the initial years of the loan. Under some buy down plans, a residential developer, builder or the seller will make subsidy payments (in the form of points) to the lender that “buy down,” or lower, the effective interest rate paid by the home buyer. State agencies often offer lower rate loans. But to qualify, borrowers usually must be a first-time home buyer and meet income limits based on the median income level of their county.
APR: Annual Percentage Rate
The Annual Percentage Rate (APR) is the relative cost of credit as determined in accordance with Regulation Z of the Board of Governors of the Federal Reserve System for implementing the federal Truth-in-Lending Act. The APR is the actual yearly interest rate paid by the borrower, figuring in the points charged to initiate the loan and other costs. The APR discloses the real cost of borrowing by adding on the points and by factoring in the assumption that the points will be paid off incrementally over the term of the loan. The APR is usually about 0.5 percent higher than the note rate.
A point is calculated as one percent of the loan amount. Points that you get charged are additional to the interest rate that is charged on the loan and the point charges varies from lender to lender. A lender often makes his fees by charging points or by negotiating a lower interest rate.
Your Credit Report History
A credit report is used by lenders as one measure of the risk and a borrower’s likelihood to repay. There are numerous types of credit report issues that would cause a lender to reject your application for a loan, including: missed credit card payment(s), default on a prior loan, bankruptcy in the past seven years, or non payment of taxes. Other black marks on a credit report include any judgment (perhaps for non-payment of spousal or child support) or any collection activity.
If you feel that your credit report is wrong, experts say it’s best to take it up with the organization or company claiming you owe them money. But if you’ve been late paying your bills, regroup by paying in full and on time for six months to a year to prove to the lender that the late payments were an aberration.
You can order a copy of your own credit report by calling the three major credit reporting agencies: Experian at (800) 311-4769, Equifax at (800) 685-1111 and Trans Union at (312) 408-1050. Please note that every time your credit report is ordered, there are points deducted which could lower your overall score.
Negative Credit Rating
There is no fast and easy way to repair damaged credit that took months or years to occur. The law allows negative information to appear on an individual’s credit record from seven to 10 years. Credit problems are the main reason would-be home buyers are denied a loan. The first step to clearing up your credit is to get a copy of your credit report to make sure that the negative credit information is indeed accurate. Some states now have mandatory timelines to respond to your inquiry or remove the blemish.
For a copy of your report, contact one of the three major credit reporting agencies: Experian at (800) 311-4769, Equifax at (800) 685-1111 and Trans Union at (312) 408-1050. The bureaus should provide instructions on how to read the report and how to dispute any inaccuracies it contains. Please note that every time your credit report is ordered, there are points deducted which could lower your overall score.
If your credit report is correct, take care of any outstanding delinquent obligations first. Lenders usually won’t consider any borrower who has had a delinquent payment in the past year.
Private Mortgage Insurance (PMI)
Private mortgage insurance, or PMI, insures the lender against a default. It is required when the borrower is making a cash down payment of less than 20 percent of the purchase price.
PMI costs vary from one mortgage insurance firm to another, but premiums usually run about 0.50 percent of the loan amount for the first year of the loan. Most PMI premiums are a bit lower for subsequent years. The first year’s mortgage insurance premium is usually paid in advance at the close of escrow, and there is usually a separate PMI approval process.
Lenders generally turn to a list of companies with whom they regularly work when lining up private mortgage insurance. In most cases, PMI can be dropped after the loan to value ratio drops below 80 percent. The Homeowners Protection Act requires PMI to be dropped when the loan-to-value ratio reaches 78 percent of the home’s original value AND the loan closed after July 29, 1999. For other loans, find out from your lender what procedure to follow to have PMI removed when your equity reaches 20 percent. For homeowners who have improved their properties and believe that their equity has increased as a result of these improvements, refinancing the property at a loan-to-value ratio of 80 percent or less is another possible way of eliminating PMI payments.
A growing number of private lenders are loosening up their requirements for low-down-payment loans. But private mortgage insurance, or PMI, usually is required on loans with less than a 20 percent down payment.
How to Apply for a Mortgage Loan
When you apply for a mortgage, the lender will want a lot of information about you (and, at some point, about the house you’ll buy) to determine your loan eligibility. Here’s what you’ll need to provide:
- The name and address of your bank, your account numbers, and statements for the past three months
- Investment statements for the past three months
- Pay stubs, W-2 withholding forms, or other proof of employment and income
- Balance sheets and tax returns, if you’re self-employed
- Information on consumer debt (account numbers and amounts due)
- You’ll sign authorizations that allow the lender to verify your income and bank accounts, and to obtain a copy of your credit report. If you’ve already made an offer on a house or condo, you’ll need to give the lender a purchase contract and a receipt for any good-faith deposit that you might have given the seller.
Once you apply, your lender will verify all the information you’ve provided. This is a loan approval process and it can take one to eight weeks, depending on the type of mortgage you choose and other factors that will affect your approval such as fulfillment of contract contingencies.
As your mortgage application is processed and finalized, your lender is required by law to give you several documents. Within three business days of applying for the loan, the lender must inform you of the mortgage’s effective rate of interest, or annual percentage rate (APR). If relevant, the lender must also give you consumer information on adjustable rate mortgages. In addition, the lender is required to give you an itemized good-faith estimate of your closing costs and a government publication that explains those costs.
Since the home that you’re purchasing will serve as collateral for the loan, the lender will order a market value appraisal of the property. The lender will not lend you more than a certain percentage of the value of the property. If your down payment will be less than 20 percent of the value of the property, your loan will require private mortgage insurance, and the lender will obtain insurer approval. If the lender has not already done so as part of a pre-approval process, it will verify your employment and bank accounts as well as obtain and evaluate your credit report.
CLOSING AND BEYOND
- room-by-room review
- exterior home components
- electrical systems
- foundation and structural components-both interior and exterior
- heating/air conditioning systems
- plumbing systems
- attic/basement/crawl spaces
A typical inspection costs $300-$400 and takes about three hours.
Some common items a home inspection could uncover are:
- maintenance problems such as rotting decks, paint chips, water damaged ceilings, etc
- electrical problems (even faulty fuses can lead to bigger difficulties in the future)
- structural damage caused by water seepage into the foundation, floor joists, and door headers that should be discovered at the source
- drainage problems; these could include water intrusions below the home.
- roof leaks and defects from aging
- poor ventilation, especially in an attic; this is the time to assure that all vents are clean and working properly
- excess air leakage due to poor weather stripping and subpar caulking around fixtures
- failed window seals, which are routinely found with dual pane windows
- environmental contamination caused by asbestos, mold, formaldehyde
- lead paint, radon, soil contamination, and/or water contamination
- faulty lines in water heaters, overflow piping, and/or hazardous flue conditions
To learn more about home inspections please visit:
A standard policy will suffice in most instances. It protects against several natural disasters and catastrophic events. However, it will not guard against earthquakes, floods, war, and nuclear accidents. The policy can be expanded to include these disasters as well as coverage for such things as workers’ compensation. In fact, the lender may require that you purchase flood or earthquake insurance if the house is in a flood zone or a region susceptible to earthquakes. You also can increase coverage beyond the depreciated value of personal property such as televisions and furniture by purchasing a replacement-cost endorsement.
Home Buying Process - Timeline and Paperwork
First, the closing agent reviews the settlement sheet with you and the seller and answers any questions. Both you and the seller sign the settlement sheet.
Then, the closing agent asks you to sign the other loan documents. Evidence of required insurance and inspections is also presented (if it wasn’t previously given to the lender).
After that, if everyone agrees that the papers are in order, the buyer submits payment to cover the closing. If the lender will be paying your annual property taxes and homeowners’ insurance for you, a new escrow account (or reserve) is established at this point.
Finally (here’s the best part) you receive the keys to your new home!
After the meeting, the closing agent officially records the mortgage and deed at your local government clerk’s office or registry of deeds. This legal transfer of the property may take a few days after closing. The closing agent usually will not disburse the funds to everyone who is owed money from the sale (including the seller, real estate professionals, and the lender) until the transaction has been recorded. It is at the point of deed recordation that you become the official owner of the home.
Home Moving Checklist
- Purchase or rent moving supplies: tape, markers, scissors, pocketknife, newspaper, blankets, moving pads, plastic storage bins, rope and a hand truck. Free boxes can usually be obtained at a local supermarket, but consider purchasing wardrobe boxes for moving clothes.
- Have a garage sale to clear out unwanted items and plan accordingly. Consider donating unwanted items.
- Keep a detailed record of all moving expenses. Your costs may be tax deductible depending on the reasons for your move.
Two weeks prior:
- Hire a reputable mover or rent a moving truck. Be sure to get referrals or references, check with the Better Business Bureau, get estimates, purchase moving insurance.
- Two weeks before moving day, contact your telephone, electric, gas, cable/satellite, refuse and water companies to set a specific date when service will be discontinued. Contact utilities companies in your new town about service start dates, including Internet & long distance telephone services.
- Notify healthcare professionals (doctors, dentists, veterinarians) of your move and ask for referrals and record transfers.
- Register children for school and ask for school records to be transferred.
- Notify lawn service, cleaning and security companies when service should be terminated.
- Advise the post office, publications and correspondents of change of address and date of move.
- Check your homeowner’s insurance and make arrangements for new coverage.
- Have tools handy for breaking down beds and appliances.
- Move valuables (jewelry, legal documents, family photos & collections) yourself – don’t send them with the moving company. Make sure you have a complete Home Inventory of all your possessions.
- Give every room a final once over. Don’t forget to check the basement, yards, attic, garage and closets.
- Have the final payment for the movers and money for a tip
- Don’t forget to check in with your local CENTURY 21® Real Estate Professional – he or she may be able to provide useful local advice, and/or referrals.