Am I ready to become a homeowner?
Before starting the home buying process, it is important that you answer the following question: How much can I afford to pay? A budget analysis will help you determine your financial capacity and identify how much you can spend on a home. Do not forget that in addition to the mortgage payment you will have other expenses.
The budget will allow you better understand your financial situation and assist you in the process of deciding if you are really ready to become a home owner. To perform this analysis you will need to list your monthly income, expenses and debt payments.
Your credit history plays a major role in determining your ability to finance a home. You can obtain a copy of your free credit report by accessing the following web page: www.annualcreditreport.com
• Annual Percentage Rate (APR) - the cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fees, and certain other credit charges that the borrower is required to pay.
• Conventional Loans - mortgage loans other than those insured or guaranteed by a government agency such as the FHA (Federal Housing Administration), the VA (Veterans Administration), or the Rural Development Services (formerly known as Farmers Home Administration, or FmHA).
• Down payment - the amount of a property's purchase price that the buyer pays in cash and does not finance with a mortgage. Most mortgage lenders require a cash down payment of 5 percent, 10 percent or 20 percent of the sale price, though some lenders have zero-down mortgage programs. You can often lower your mortgage payment or afford a more expensive house by putting more money down. If you come up with less than 20 percent of the buying price, you may have to obtain private mortgage insurance, or PMI, to protect the lender before your loan is approved.
• Escrow - the holding of money or documents by a neutral third party prior to closing. It can also be an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.
• Good Faith Estimate – a written estimate of expected closing costs that a lender must provide a prospective home buyer within three days of the home buyer submitting a mortgage loan application. Brokers and lenders are required by law to make as accurate an estimate as they can.
• Interest Rate - cost of borrowing money expressed as a percentage rate. Interest rates can change because of market conditions.
• Loan Origination Fees - fees charged by the lender for processing the loan and are often expressed as a percentage of the loan amount.
• Mortgage - a written document evidencing the lien on a property taken by a lender as security for the repayment of a loan. The term “mortgage” or “mortgage loan” is used loosely to refer both to the lien and the loan. In most cases, they are defined in two separate documents: a mortgage and a note.
• PITI – acronym for Principal, Interest, Taxes and Insurance.
• Points - fees paid to the lender for the loan. One point equals 1 percent of the loan amount. Points are usually paid in cash at closing. In some cases, the money needed to pay points can be borrowed, but doing so will increase the loan amount and the total costs.
• Prepayment Penalty - fee charged to borrowers who pay a loan off faster than the prescribed payment schedule. Some prepayment penalties can add up to thousands of dollars, so they're worth asking about. Many states place limits on prepayment penalties. Make sure to call your state banking commission to see if prepayment penalties are allowed where you live and, if so, how large they can be.
• Pre-qualification - the process of determining whether a prospective borrower has the ability, meaning sufficient assets and income, to repay a loan. Qualification is sometimes referred to as "pre-qualification" because it is subject to verification of the information provided by the applicant. Qualification is short of approval because it does not take account of the credit history of the borrower. Qualified borrowers may ultimately be turned down because, while they have demonstrated the capacity to repay, a poor credit history suggests that they may be unwilling to pay.
• Private Mortgage Insurance - protects the lender against a loss if a borrower defaults on the loan. It is usually required for loans in which the down payment is less than 20 percent of the sales price or, in a refinancing, when the amount financed is greater than 80 percent of the appraised value.
• Real Estate Settlement Procedures Act (RESPA) - sets disclosure rules for closing costs and procedures and prohibits abusive practices.
• Settlement / Closing Costs - may include application fees; title examination, abstract of title, title insurance, and property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorneys’ fees; recording fees; and notary, appraisal, and credit report fees. Under the Real Estate Settlement Procedures Act, the borrower receives a good faith estimate of closing costs at the time of application or within three days of application. The good faith estimate lists each expected cost either as an amount or a range.
• Title insurance- A policy that guarantees that an owner properly has title to a property and can legally transfer title to someone else. Should a problem arise, the title insurer pays any legal damages. A policy may protect the mortgage lender, the home buyer or both.
• Contingencies - conditions that must be satisfied or you will not be required to go through with the purchase after your offer is accepted. The following are some examples: Obtaining mortgage financing; Getting a satisfactory home inspection within a specified period of time; Obtaining a termite inspection; Obtaining satisfactory well and septic tests; Requiring evidence that the property meets building and safety code requirements; Obtaining an appraisal with a value not less than the offered price; Getting a satisfactory attorney review of your Offer to Purchase (if offer was not prepared by an attorney).
How to find the right property for you
The time to start looking for a property starts after you have determined your financial capacity to purchase one.You must set clear expectations and priorities about what you are looking for.Some factors to consider are:
- Household size
- Number of bedrooms and bathrooms
- Distance from workplace
- Proximity to schools, churches, shopping centers
- Possibility of appreciation
- Property type: Single Family, condominium, apartment, etc.
Suggestions for the process of searching for a home
- Take notes, bring a writing pad and a map.Mark the location of each property on the map and write down specific and particular features of each property on the notebook.
- Do not scout more than three properties at a time. If you are planning to visit many houses in one day, take long breaks between each sighting.See at most three properties during in the morning, then stop, and see the rest in the afternoon.
- Take pictures of the properties that you like.The interior and exterior images will refresh your memory and help you remember the details of each property.
- Ask questions.As a first-time home buyer, you want to know everything you can about each property.You may uncover disturbing issues that you may have initially overlooked.
How do I find the appropriate home?
There are a number of resources that are at your disposal to help you find the right property. Following is a list of options:
- Drive around the neighborhood in search of "For Sale" signs
- Real Estate agents / brokers
- Friends, acquaintances and coworkers
- Mortgage companies
- Credit unions
- Foreclosed Properties Listing
How should I submit an offer?
The offer must clearly specify all terms and conditions related to the sale, especially your name and the name of the party to whom you are making the offer, the address of the property, all of the fixed and electrical appliances that will be included as part of the sale, the amount being offered as total purchase price, as well as any other relevant clauses and deadlines.
The following are some of the issues that must be taken into consideration prior to making an offer:
- How much you can afford based on your current financial capacity and your budget
- How desperate you are to acquire this property
- The number of prospective buyers who would also like to purchase this property
- The seller’s reasons for putting this property in the market
- The structural condition of the house
- How the property compares with similar properties within the neighborhood
What factors should I consider when comparing mortgage loan options?
The following are some of the factors that you should evaluate during your mortgage bank search:
1. Down Payment: The more money you put down on the purchase of your property, the less money you will have to finance, and the lower the probability that you will be charged higher finance charges. On the other hand, if your down payment represents 20% or more of the sales price you will not need to pay for Mortgage Insurance.
2. Fixed Rate vs. Adjustable Rate: Fixed rates do not change over the life of the loan, whereas adjustable rates can vary from month to month. If you are planning to remain living in this same property for more than five years, it is recommended that you use a fixed rate.
3. Interest rate: The interest rate is how much you’ll have to pay on top of the principal monthly payment. Rates are based on various factors, especially your credit score.
4. Length: The length of your mortgage loan will be based on how much you put down, how much you can pay each month, and how long you plan on living in your home. The shorter the length of your mortgage loan, the higher your mortgage payment will be and the less finance charges you will end up paying.
5. Monthly mortgage payment: Every month, you’ll have to pay a certain amount to your mortgage. At first, your monthly payments will be primarily interest. Over time, the amount of money you pay in interest will go down and more of your payment will be applied to the principle.
6. Points: Mortgage points represent charges and fees that have to be paid before you can get the mortgage. Each point equals 1 percent of the loan amount. The more discount points (prepaid interest) you pay prior to closing the mortgage loan, the lower the interest rate that you will be charged. The purchase of each point generally lowers the interest rate on your mortgage loan by 0.25%.
Following the analysis of the above factors, you will ultimately favor a mortgage bank representative with whom you have established more chemistry or rapport thanks to their professionalism and attentiveness.
What is a house inspection?
A home inspection is an objective visual examination of the physical structure and systems of a house, from the roof to the foundation. It allows you to learn about problems that could potentially arise later if you decided to buy the house.
A standard home inspection should include the following:
- Heating system
- Central air conditioning system
- Interior plumbing and electrical systems
- Roof, attic and visible insulation
- Walls, ceilings, floors, windows and doors
- Foundation, basement and structural components
If the inspection uncovers current or potential problems with the property that you wanted to purchase, you need to decide if you will continue with your original plans. If your budget is limited, or if you are not interested in getting involved in future repair work, you might withdraw your offer. On the other hand, you could ask the seller to make the repairs prior to the closing of the mortgage loan.
What are closing (settlement) costs?
These are fees that are charged by lenders and third parties as part of the home-purchasing process. Closing costs include the following:
- loan origination fees
- discount points
- appraisal fees
- title searches
- title insurance
- deed-recording fees
- credit report charges
Typically, home buyers will pay between 2 and 5 percent of the purchase price of their home in closing costs. This means that if you purchase a property for $100,000, you will end up paying $2,000 and $5,000 in closing costs.
Lenders are required by law to give you a good faith estimate (GFE) of what the closing costs on your home will be within three days of your loan application. But these figures are only an approximation, as there is a 10% margin of error in the fees listed on the GFE. Within a day of your closing, the lender should provide you a HUD-1 settlement statement, which outlines the final closing costs. You should compare the fees listed in the statement with the ones provided in the GFE. You have the right to request for an explanation of any major discrepancy
Some closing costs are negotiable, so you should be ready to haggle. You may find other lenders who might be willing to offer you lower closing costs.