With current mortgage rates low and demand for homes high, itâ€™s a sellers' housing market nationwide.
So, as a first time home buyer, you want 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 based on the state in which you live.
What follows is a guide to help you make a better choice.Click to see today's rates (Aug 27th, 2016)
The down payment required toÂ buy a home will vary basedÂ your loan program. There are programs available with no down payment. There are also a few downpayment assistance programs (DPA) available to first time homebuyers.
The majority of first time home buyers, however, should expect to put down anywhere from 3% to twenty percent of the purchase price. Note, though, that buyers have options to put no money down, and can put more than twenty percent down at any time.
After saving for a downpayment, buyers will have closing costs to pay on the loan, too. Closing costs vary by state and can add up to several thousand dollars. However, it's common for sellers to pay closing costs on behalf of a buyer.
Be sure to ask your real estate agent to work that into a contract.
Lastly, be mindful that some lenders may require additional cash reserves so don't plan on spending everything you have on your home. Aside from putting your ability to get approved in jeopardy, it's poor financial judgment to leave yourself without money in reserve.
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.
ItÂ is recommended that homebuyers look for homes that cost no more than three to five times their annual household income, assuming a 20% down payment and only moderate debt in addition to new housing payment.
Another general guidelineÂ is that a buyerâ€™s total debt payments should notÂ exceed 36% of their total household income, a ratio known as debt-to-income (DTI).
Lenders use this guideline because it has been shown to be a level at whichÂ most borrowers can comfortably repay their mortgage, whileÂ still having money left over for "life".
The "36% figure" is just a recommendation, however. Some households are able to manage ratios in excess of 36 percent and, for some households, 36 percent is too high.
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.
Before applyingÂ for a mortgage -- or any other loan type -- it's helpful to know your credit standing. By law, you can 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 ranges from 300-850. Generally, the higher your credit score, the better loan for which youâ€™ll qualify.
When you receive your credit report, be sure toÂ review it for errors and omissions. If you find something wrong, dispute it. This will start the process of removing the error from your record and mayÂ also improve your credit score.Click to see today's rates (Aug 27th, 2016)
Before shopping for a home, it is important to know how much youâ€™ll be able to actually 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 youâ€™ll be able to spend on a home.
Getting pre-approved is the next step.
Getting pre-approved for a mortgageÂ is more in-depth than getting pre-qualified. During the pre-approval process, you will be asked for documentation which support the information youâ€™ve verbally provided as part of your pre-qualification.
Documentation typically includes W-2s, pay stubs, and bank statements; and may include federal tax returns.
A distinct advantage of completing the pre-qualification and pre-approval steps before looking for a home is that youâ€™ll know in advance exactly how much you can afford.
In addition, gettingÂ Â pre-approved also allows you to move much faster when you find that perfect home. In todayâ€™s competitive market, a pre-approval lets the seller know your offer is serious. Not having one can weaken your bid and cause you to lose out to another buyer whose financing is already in order.
AlthoughÂ itâ€™s possible to search for homes using internet sites devoted to real estate, you can give yourself an immediate advantage by enlisting the services of a professional. Real estate agents have 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, if you're like most Americans, buying a home is the most expensive purchase you'll make in their lifetime. In addition, the process ofÂ buying a home can be complex.
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.
With the help of your real estate agent, you can begin touring homes in your price range. It will be 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.
Some even take pictures or videos to help them remember.
Not only will you want to take notes about the home, youâ€™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. Itâ€™s good to know whatâ€™s most important to you and your family before shopping for a home.Â Take the necessary time to find the right home. But. donâ€™t take too much time.
In a sellers' market, homes which are priced right sell quickly.
After viewing homes for a few days, chances are youâ€™ll know which one or two youâ€™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.
Then, once you and the seller reach an agreement on the price, youâ€™ll go under contract, or in escrow depending on your geographic location.
After youâ€™ve found a home and negotiated a sales price, there are two steps to pursue simultaneously. The first is to schedule your home inspection.
Home inspections are a common â€śnext stepâ€ť between buyer and seller after a home goes under contract. Theyâ€™re so common thatÂ purchase offers are typically written with a contingency clause stating that the offer is subject to a satisfactory inspection by a licensed home appraiser.
As a home buyer, 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 be performed by a licensed home inspector who will be impartial to the inspectionâ€™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 to 8 hours to complete.
Several days after the inspection, the licensed inspector will provide to you a report which details the homeâ€™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 â€śwalk-thruâ€ť the home prior to closing to ensure all repairs were made, as agreed.
Inspections should be performed on all homes â€” even newly-built ones.Click to see today's rates (Aug 27th, 2016)
An appraisal is an opinion of value from a licensed real estate appraiser who visits the home andÂ inspects its size, condition, function, and quality.
First, an appraiser comes out to the property and inspects the home. Next, the appraiser researches similar homes in the area and compares recent sales to determine a fair market value.
The appraiser then gives a final appraisal report which includes a final â€śopinion of value.â€ť
A real estate appraisal helps to establish a home'sÂ market value â€“ the expected price it would fetch if offered in an open, competitive real estate market. Appraisals can help buyers ensureÂ that they donâ€™t overpay for a home.
ByÂ law, mortgage companies cannot complete their own appraisals so many hire an appraisal management company (AMC) to handle the work which, in turn, gives the work to a licensed professional appraiser.
The appraisal must be performedÂ by a third party who has no interest in the outcome of the appraisal.
When you submit a loan to your lender, it's known as "going into underwriting".
The term "underwriting" refers to the process that leads to a final loan approval or denial. A loan's approval status is made by a professional underwriterÂ which usesÂ specialized software programs and number-crunching analysis.
Once anÂ underwriter has reviewed all of a mortgage applicantsÂ information and documentation, a decision will be made on the loan's status. There are a few possible outcomes at this point.
The majority of loan applications are â€śapproved with conditions.â€ť This means that the loan is approved -- so long as the borrower provides additional, clarifying information. Conditions typically fall into three categories: explanation and correction of anomalies, verifications and attestations, and supplementary documentation.
Explanation and Correction of Anomalies refers to inconsistencies in a credit reports; and may include official explanations of out-of-the-ordinary pay stubs, tax statements, and wages.
Verifications and Attestations includeÂ verifying a borrower's income, employment, housing history, and gift funds, when applicable.
Lastly, supplementary documentation requests may include clarification on credit profile items, profit-and-loss statements from a business, and tax-related documents.
Once yourÂ home inspection is complete and your loan is underwriting, it's time toÂ get started with your homeowners insurance policy.
Known officially as â€śhazard insuranceâ€ť, 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 wonâ€™t approve your home loan until such a policy is in place.
YouÂ shop for your hazard insurance, knowing that quotedÂ premiums will vary by insurer based on the age of theÂ home, its construction type, its proximity to services such as police and fire departments, and your deductible amount.
Youâ€™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 yearâ€™s premium, which typically occurs at closing -- not before.
After a file has been fully underwritten and all of the conditions are satisfactorily met, a final underwriting approval will be issued. This is known asÂ a â€śClear to Closeâ€ť.
Clear to Close means that the documentation you provided to your lender have met their approval, and that no additional paperwork is required.
When you're Clear to Close, your lender is ready to fund your loan and will begin communicating with the closing agent to prepare your documentation for closing.
Depending on where you live, â€śclosingâ€ť on a home goes by different names. In many states, itâ€™s simply known as â€śclosingâ€ť. In other states, notably California, closing is often referred to as â€śgoing to escrowâ€ť.
Closing is also known as â€śsettlementâ€ť.
Regardless of what you call it, however,Â closing is the last step prior to getting the keys to your new home. Itâ€™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 -- called the HUD-1 -- will mirror the preliminary settlement statement which was sent to you in advance.
Often,Â closing is just the formality of â€śsealing the dealâ€ť. 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.
Today's mortgage rates remain near historical lows. Get a live rate quote and how your monthly mortgage payment may fit with your household budget.
Get today's live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.Click to see today's rates (Aug 27th, 2016)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
Elaine A. Marketing
The Mortgage Reports is fantastic. I read it thoroughly and learn so much.
Marie M. Real Estate Agent
I have been a Realtor for more than 30 years and enjoy The Mortgage Reports. It's terrific to learn something new almost every day.
Thaddeus C. Systems Analyst
I am an aspiring homeowner and The Mortgage Reports helps me daily. Thank you for your excellent information.
2016 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)