For first time home buyers, obtaining a mortgage is a completely foreign experience. Most people only complete a few transactions of this magnitude in their lives. The process is longer and more involved than any other normal purchase or loan application. While obtaining a credit card or a student loan takes a couple hours of your time, and maybe a week of waiting, financing a home is a bigger job. Not to worry- hundreds of people in the US do this every week, and you can too! There are three phases to the home financing process, and at Coastal Point Properties we will be here with you each step of the way, encouraging you and the process.
Phase One: How Much House Can You Afford?
Before you have an answer to the question, “how much house can I afford?” there are some main pieces of information to gather.
- Determine your monthly income. Your lender will require proof of income as well, so save a few weeks of pay stubs. If you are self employed, your lender will likely use your previous two years of tax returns to average your monthly income.
- Figure out what you owe. Most of us carry some debt around with us, and life has expenses. Figure out the total sum of the debt you owe to other collectors: student loans, credit cards, monthly bills, etc. Don’t forget to calculate your own lifestyle spending into this as well. A loan officer won’t work in the fact that you spend $100 a week on breakfast sandwiches and lattes! If you are accustomed to a certain habit, think about whether you want to keep that habit, or save that cash.
- Get a copy of your credit report. You will want to know what your credit score is. It should be atleast 680 for financing a home, if not 700 or above. Using a credit monitoring site may be a good idea. You also will want to make sure that there are no errors on your credit report. If you pull the report on yourself, it shouldn’t lower your score as an inquiry- you have the right to know how you look on paper and what debts have been secured in your name. Knowing before you talk to a loan officer will help you to have prepared responses to any questions about your credit. Also, you will know whether or not you need to work on your credit before you ever walk into a bank.
- It’s all about the Benjamins. You will need to know how much cash you will have on hand. Mortgage lenders require down payments! When you submit an offer, there is generally a $1000 binder placed as earnest money. Later, when the offer is accepted, you will drop another deposit at the signing of the Purchase and Sale agreement. That deposit is usually 5% of the purchase price. These moneys go into an escrow account and count toward the down payment at closing. Your total down payment will be anywhere from 3.5% on an FHA loan to 20% on a conventional loan. Figure out what your savings capacity is before you talk with a lender, and start working toward a serious stash of cash.
Once you have that information together, you will be able to decide just what you can afford. A rule of thumb to begin with is that total housing costs should eat up about one third of your monthly income. This includes mortgage, taxes, homeowner’s insurance, PMI and any other fees associated with the property you will be buying. Think about how your life would change if you were spending that amount of your income on a house. Would your lifestyle still be acceptable? Would your lifestyle improve, because your rent is currently higher than that!? Adjust this percentage until you get comfortable with it, and as a saving measure, see if you can’t start living that way. If you are currently spending less money than you have budgeted on housing, start saving the funds that would go towards your mortgage. That strategy will help you build up your down payment and will help you adjust to the lifestyle shift of owning a home while the stakes are relatively low!
Phase Two: Speaking With a Mortgage Lender
Once you have figured out your budget for yourself, go check in with a professional! You can start at whichever bank you currently do business. Make an appointment to go in and talk with a loan officer, bring your proof of funds, credit report, and any other documentation you think will help along with you. If you need some guidance of where to start, Coastal Point Properties can certainly lead you in the right direction.
- Pre-qualification letters roughly approximate what you could be approved for. They are relatively informal and are non-binding. It is a good way to check that your personal budget is in line with reality.
- Pre-Approval letters are the next stage in showing your purchasing power. Each time you submit an offer on a home, your real estate agent will likely want to request a property specific pre-approval from your lender. That letter will be submitted with the offer as proof that you are a qualified buyer. These letters show you exactly what you would expect to pay when purchasing a specific property. They, like pre-qualifications, are non-binding.
At this point in your housing search, there will likely be more than one pre-approval written. It is common to write more than one offer during your search. Some offers will not be accepted, some offers will be rescinded due to inspection contingencies, and some offers will not negotiate satisfactorily. Your loan officer and real estate agent should be in contact with each other so that you are not having to manage the pre-approval letter process. Once you get the ball rolling on the first pre-approval, most loan officers will send additional letters at the request of your agent.
Phase Three: Accepted Offer, Secure Financing
The true loan application process begins after your offer has been accepted. It is likely that by now you either have built rapport with your loan officer, or found one you like. It is very important that you trust your loan officer! They are managing one of the biggest purchases of your life, and they will know a lot about you. If you get the feeling that something is off, find someone else to apply for a mortgage with. Your real estate agent likely knows a few trustworthy cats in the business. Don’t be afraid to ask for a referral! Your real estate agent doesn’t gain anything from referring a loan officer- other than the piece of mind that you are working with someone who will move the purchase along competently and smoothly.
- Settle on which bank you want to work with. Choose based on the best rates offered to you, the best closing timeline, and the trustworthiness of your loan officer. Apply for the loan!
- Once you have applied for your mortgage loan, the bank’s underwriting department truly goes to work. They will verify your income, source of funds, and credit information in order to assess your ability to pay your loan.
- Underwriting will also require an appraisal of the property, to make sure it is worth what you are paying. In the event that a client defaults on a mortgage loan, the bank ends up with the property. Making sure it is worth the funds to protect the bank, and it protects you. No one wants to over-pay for anything!
- Obtain Homeowners’ Insurance before you close. The bank will want to make sure that you are insuring their investment, and will require proof of insurance.
At this point, you have hopefully gotten through to the end of the house hunt. With the help of your Coastal Point Properties real estate agent, legal counsel, and loan officer, each step, due date, and payment will be made on time. At the closing table, you will be able to use the funds obtained from your mortgage to pay for that new abode! Of course, there will be closing costs associated with finalizing the details that day- check out next month’s post to learn more about how much you can expect to pay in fees and where that money goes!
