The Home Buying Process
- Step 1 - Beginning the Process
Select Real Estate Agent:
Your real estate Agent will help you to determine your needs, select an area, and understand the buying process.
Among other things, your real estate agent will recommend a number of reputable lenders. It is wise at this stage to request a "Pre-Qualification" which allows you to know how much mortgage loan you qualify for and what kind of loan best meets your needs. There are many varieties of loans available, but in general you will select between the following types:
Conventional Loans:
Conventional financing is offered by almost every lender and are available to borrowers who make a down payment of 0% of the sales price or more. Loans up to $333,700 are referred to as "conforming" because they can be sold to Fannie Mae (Federal National Mortgage Association - FNMA) or Freddie Mac (Federal Home Loan Mortgage Corporation - FHLMC). Loans over $333,700 are referred to as "Jumbo" or "Non-conforming" and are sold to private investors in the Secondary Mortgage Market. When there is a down payment of less than 20%, Private Mortgage Insurance (PMI) is required. The cost of this insurance varies depending on the amount of your down payment and type of loan. Qualification Generally, lenders require that your proposed mortgage payment (including taxes and insurance) not exceed 28% of your income. In addition, your total monthly debts, when combined with your proposed mortgage payment should not exceed 36% of your monthly income.
There are many varieties of conventional loans available; 30, 20 and 15 Year Fixed Rate, 5 and 7 Year Balloons, Growing Equity Mortgages, and Adjustable Rate Mortgages (ARMs) which generally offer a rate lower than prevailing fixed rates, but whose interest rate can change. Your loan officer will review these with you in detail.
FHA Loans:
FHA (Federal Housing Administration) is a mortgage insurance program which allows lenders to make loans to borrowers with a smaller down payment. It is intended to provide "First Time" or lower income homebuyers financing to purchase moderately priced housing. Condominiums and newly constructed homes must be prior approved by FHA in order to obtain this financing. Qualification: Like conventional loans, FHA establishes a maximum percentage of your gross income which you can devote to your mortgage payment (29%) and towards total debt (41%). FHA will insure 30, 20 and 15 year Fixed Rate Mortgages as well as a 1 Year ARM.
VA Loans:
VA (Veteran's Administration) is a loan guarantee program. The VA will guarantee your loan in the same way a co-signer would help to promise to repay. Ordinarily your entitlement must be fully in place (not tied in to another house) before you can be considered to have full entitlement. The maximum VA Loan is 203,000. Qualification: The total debt to income ratio is 41% (no housing expense ratio). There is significant flexibility in this as the VA's Philosophy in underwriting is "let's get the veteran into the home".
- Step 2 - Writing the Contract
Making an Offer:
You offer contract specifies contingencies like financing and home inspection. It also specifies the down payment, settlement time frame, and the costs you are asking the seller to pay.
Once you have been pre-qualified, you can go ahead and find a home you like. Your Real Estate Agent will help you present an offer which will set forth the sales price, how much your down payment will be, what the terms of the financing are and whether the seller will assist you with your closing costs.
Your down payment will be determined, in part, by the kind of financing you select. You are generally required to deposit a portion of the down payment with your contract. This is referred to as an "Earnest Money Deposit" and represents your good faith in presenting an offer. However, this is not the only cost associated with your home purchase. You will also have closing costs. There are 4 basic components of closing costs:
- "Hard" Closing Costs: These are transaction costs borne by the purchaser which will not generally vary from transaction to transaction. These include the attorney's fees, title review and title search, survey, document preparation, appraisal and credit report charges, notary and courier charges, municipal recording charges, title insurance, and termite inspection. These will amount to about $1,500.
- Loan Fees: Commonly known as points, loan origination fees and discount fees, these will vary depending on your interest rate. For instance, a lender may offer a 30 year fixed rate at 5.875% with no points or at 5.625% for 2 points. A point is 1% of the loan amount.
- Prepaid Items: As the term implies, a prepaid item is something paid for at closing which will come due in the future. Pro-rated real estate taxes, homeowner's and flood insurance, PMI, and interim interest are among the most common prepaid items.
- Step 3 - Your Contract is Accepted
Offer Acceptance:
Your offer, now accepted, becomes a contract. This starts the process of making the home yours. Now you need to order a Home Inspection (Go along. It is a very informative process.) and order the title search and survey through the Settlement Agent or Attorney.
The Loan Application Process
This Pre-Application Kit will help speed your loan application process. It cannot be overstated how important it is to collect all of the information required on the application checklist prior to your appointment with your loan officer. With certain types of loans (FHA/VA) the lender must independently verify the information stated on the application. This process can take 45-60 days. But with the information given at application, your loan can be approved in a matter of days.
- Meet with Loan Officer Bring your completed Pre-Application and all of the supporting documentation requested on your 72 Hour Complete Application Checklist.
- Lender Orders Appraisal The appraisal must support the price you are paying. Usually takes 5 - 10 days.
- Obtain Mortgage Approval Once the Credit Report, Appraisal and all application documents are received, the lender can submit the loan for approval. The loan decision is made by an underwriter. Usually takes 2 - 5 days. However, if independent confirmation of any facet of your application is required, as on FHA or VA loans, and certain conventional loans, the process can easily take 3-7 days.
- Step 4 - Get Ready for Settlement!
Settlement Preparations:
Mortgage Approval means you must begin to prepare for settlement. Buy a homeowner's insurance policy, a termite report, contact utility companies, and arrange a pre-settlement walk-through.
Congratulations! Your loan is approved. But before you own your home there are a number of important steps before you can proceed to settlement. Once again, your Real Estate Agent will help you in this regard.
Buy Your Homeowner's Insurance Policy: Your Insurance must cover the loan amount. You must provide your lender with the original copy of the insurance policy and a paid receipt well in advance of closing. (1-2 Weeks).
Arrange for Inspections: All lenders will require a termite inspection to assure the property is free of wood destroying insects. This is true even if the property is a condominium. A Well & Septic inspection is required if the property is serviced by a well or septic field. New Construction properties must be inspected by the municipality for code compliance. The property appraiser will also want to see that the house has been completed according to the plans that were provided.
Attorney Prepares Title Work: The settlement attorney will prepare a report on the title to the property for you and the lender. The lender must receive all closing conditions no less than 3 - 5 days prior to closing.
The lender has sent loan instructions, the Title Company has prepared the title work, you have inspected the property again, and it is time to prepare to move in and enjoy the pride of homeownership. Congratulations!
A happy conclusion to the process is at hand. The lender, Real Estate Agent, and attorney have all worked hard to help get you to this point. The process is fairly standard, but before keys are exchanged, the following steps must occur.
Lender Sends Loan Instructions to Attorney: The lender will not normally go to settlement, but sends closing instructions to the attorney who will prepare a settlement statement. This is an exact summary of the costs of the transaction. Once prepared, the settlement statement will show exactly what you will be required to pay at closing. You must always bring a certified check for the remainder of your down payment (if any) and closing costs. Make sure that you leave yourself enough time (2 hours) for a satisfactory review of all documents at the closing table.
Now that you are a homeowner, we are pleased to join you in the pride of homeownership and the satisfaction it brings.
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