In buying a house in today’s mortgage industry, lenders first look at the potential borrower’s credit score, to see if the score is acceptable for a loan to be
done. Depending on the credit score some programs might or might not be allowable. Most government loans (FHA and VA) require a 600/620 credit score and at least a 640 is needed for a Conventional loan (Fannie Mae or Freddie Mac). Certain programs are still available below the above mentioned credit scores, but might require larger down payments.
The other two factors which determine the borrower approvability are the borrower’s debt to income ratio and the borrower’s financial ability (ability to make a down payment and pay for closing costs/pre-paids). The various loan programs require different amounts for the required minimum down payment (VA loans allow a zero down payment, FHA a 3.5% down payment and Conventional allows a 5% down payment).
The various types of loans have guidelines which regulate the (DTI) debt to income ratios (monthly housing and credit debt/monthly income) limitation. The conventional DTI ratios are more conservative and will fall between 36 to 45% (depending on strength of the entire loan); the government loans DTI ratios range from 41% to 55% (depending on strength of entire loan). Your loan officer will understand how the various federal guidelines effect how the DTI is calculated.
The borrower’s financial ability is access to funds needed to meet the down payment and closing costs/prepaid items requirement. The amount of closing cost assistance the Seller can contribute depends on the type of loan and the down payment required. The government loans allow enough closing cost contribution (up to 6% of sales price) to allow a borrower to purchase with only the down payment required; however, conventional loans will generally need a 10% down payment. Conventional loans with a 5% down payment only allow a maximum 3% seller contribution; a 10% or greater down payment allows up to a maximum of 6% contribution from the seller.
Finally the house must appraise for at least the contract sales price. The loan guidelines are based upon the lesser of the sales price or the appraised value.
Buyers should keep in mind, when they discuss the contract offer, that the sellers are not required to pay any contribution towards the buyer’s closing costs. Sellers usually have a net profit in mind when selling and tend to be flexible on how they achieve it (unlike bank owned, foreclosures and short sales).
BUYING A HOUSE – STEP ONE
Buying a home is a big job; however, there is no reason to feel overwhelmed. Everyone starts from square one and it starts with step one. There are plenty of things which can be read books or found on the internet. If you can connect with an experienced a loan officer who will listen to your concerns and draw on their experience to educate you further and make you feel comfortable with your choices. The loan officer will allow you to understand the numbers (money needed and debt to income ratios) and confirm that your credit is satisfactory. Having an experienced real estate agent is important too, they will serve as your guide in locating your property and writing the contract offer.
Usually, the two most important people you are likely to work with in your quest for a home are your realtor and your mortgage officer. While you don’t have to hire a real estate agent to make a purchase, it’s difficult to go it alone, and most people do need to get a mortgage to purchase a property.
Many buyers rely on real estate agents to help them find the dwelling that best suits their budget and their needs. Realtors are aware of what homes are on the market and future upcoming buying opportunities. You should discuss with your agent issues as price negotiation, home inspections and homeowner association fees. The loan officer will educate further on mortgage loans, escrow, and closing costs.
Realtors often can put you in touch with reputable lenders or mortgage brokers who can help you get preapproved for a loan and lenders will also know who are the better agents and can help with advice.
Although shopping for a home and securing financing takes time, the rewards of homeownership can be great. Owning a place of your own is one of life’s great accomplishments. Homeowners are not at the mercy of landlords who can abruptly raise the rent or decline to extend a lease. Over time, most residential real estate appreciates in value, creating financial security for the owners.
While it’s fine to seek the advice of trusted professionals, in the end you will be the one who has to live with your home-buying choices. If you take a little time to prepare before starting your search, you will increase your chances of finding a home that enhances your lifestyle and helps secure your financial future.
Your lender should be able to tell you what house price that you qualify to purchase and approximate payment. Armed with that knowledge, you and your real estate agent can locate the houses you wish to see in your price range. After you have viewed the house choices and determined that you wish to offer a contract on one of the homes; you, your agent and lender will come up with an offer that gives you the best chance of getting the house. If the contract is accepted, then a home inspection and appraisal need to done. Hopefully, you have already begun your application with your lender; however, if you have not then you should begin.
Once your application for a mortgage loan has been approved and you have received a “commitment letter” (Approval) from the lender, the final step before you can call the house your own is the closing, or settlement, of the purchase transaction and mortgage loan. Even though you have signed purchase agreement and your loan request has been approved, you have no rights to the property, including access, until the legal title to the property is transferred to you and loan is closed. You should have a good understanding of what is involved in the closing process, because there are a number of things that you can do to make sure that it goes smoothly and on time.
At closing, you will sign the mortgage loan documents, the seller will execute the deed to the property, funds will be collected and disbursed and the closing agent will record the necessary instruments to give you legal ownership of the property. Settlement of a mortgage loan is a legal process, so specific procedures and requirements will vary according to state and local laws. You are not finished, but the hardest is behind you.
BUYING A HOUSE – STEP 2
As soon as you receive firm approval from the lender who is making your mortgage loan, you should confirm the actual date of loan closing. An estimated closing date was probably specified in the sale contract, but you need to firm this up with your agent on a purchase and your Loan officer on a refinance. You want to make sure that settlement will take place before your loan commitment expires and before any rate lock agreement (guaranteed terms of the loan) expires. The settlement date also has to allow adequate time to assemble all of the required documentation. If repairs or maintenance on the property are a part of the lender’s commitment, there must be time to complete them. The real estate agents involved in the sale transaction and the lender are often the best people to coordinate the closing arrangements.
Some of the costs you acquire along the way are:
Third party costs are fees that you or the lender pays on your behalf for you to obtain a mortgage, including appraisal fee, credit report fee, title fee and attorney fee, City, County or State transfer fees. These fees are generally the same except, perhaps there are some small differences in appraisal and credit report fees (occasionally lenders charge an origination fee -instead of credit report and appraisal fee).
Mortgage taxes and Insurance escrows will be exactly the same between all lenders, so they do not have to be reviewed.
Points and lender fees are essentially what the lender charges to originate your home loan when home refinancing and for a new home loan. Points and fees should be reviewed carefully.
Prior to the actual closing, you and your real estate agent will make a final inspection of the property to make sure any required repairs have been completed, all property described in the sale contract, such as kitchen appliances, carpeting and draperies are present and that no recent fire or storm damage has occurred. In most cases, the lender will make a similar inspection before closing.
The actual loan closing procedure, including who conducts the closing and who is present, depends upon local law and custom and lender practices. Some states require that you be represented by an attorney, others do not. Even if it is not required by law, you may want to have an attorney, review the closing documents.
Some lenders will close the loan in their offices, most will use title or settlement companies, and some will send their instructions and documents to their attorney or yours to conduct the closing. As soon as you receive your commitment letter from the lender, you should determine who is responsible for closing arrangement (on purchase transactions usually the realtor is handling tis for you).
The actual closing is conducted by a closing agent who may be an employee of the lender or the title company, or it may be an attorney representing you or the lender. The lender and seller, or their representatives, and the real estate agents may or may not be at the actual closing. It is not unusual for the parties to the transaction to complete their roles without ever meeting face to face.
The closing agent will have received instructions from the lender on how the loan is to be documented and the funds disbursed, and will have collected all of the necessary exhibits from you, the seller and the lender. The closing agent will make sure that all necessary papers are signed and recorded and that funds are properly disbursed and accounted for when the closing is completed.
You typically need to come to the closing with a certified check for the closing costs, including the balance of the down payment. You can get the exact figure a day or two prior to the closing from lender or the closing agent. You should also bring the homeowners insurance policy and proof of payment if it has not been delivered earlier.
For the most part, your role at closing is to review and sign the numerous documents associated with a mortgage loan. The closing agent should explain the nature and purpose of each one and give you and/or your attorney an opportunity to check them before signing. A brief description of the major documents may help you understand their purpose and significance.
Settlement Statement – CD Form: This form is required by Federal law and is prepared by the closing agent. It provides the details of the sale transaction including the sale price, amount of financing, loan fees and charges, proration of real estate taxes, amounts due to and from buyer and seller and funds due to third parties such as the selling real estate agent. It must be signed by both buyer and seller and becomes a part of the lender’s permanent loan file.
Some of your charges on the CD may have already been paid, such as credit report and appraisal fees. They will be noted as P.O.C. (paid outside the closing). You will usually be charged interest on the loan from the date of settlement until the first day of the next month and your first payment will be due on the first day of the month and your first will be due on the first of the following month. Make sure you know exactly when your first and subsequent payments are due and what the penalties are for being late.
First Mortgage Payment letter In addition to your monthly payments on the loan, most lenders will require you to maintain an “escrow”, or “impound,” account for real estate taxes and insurance. Current law permits a lender to collect 1/6th (2 months) of the estimated annual real estate taxes and insurance payments at closing. Additionally, real estate taxes for the current year will be pro-rated between you and the seller and paid at closing. After closing, you will remit 1/12 of the annual amount with each monthly payment. Tax and insurance bills should be sent to the lender who will pay them out of the escrow funds collected. If your loan is greater than 80 percent of the value of the property, you will probably have to pay for mortgage insurance that protects the lender in case you default
The Mortgage Note: The mortgage note is legal evidence of your indebtedness and your formal promise to repay the debt. It sets out the amount and terms of the loan and also recites the penalties and steps the lender can take if you fail your payments on time.
The Mortgage or Deed of Trust: This is the “security instrument” which gives the lender a claim against your house if you fail to live up to the terms of the mortgage note. It recites the legal rights and obligations of both you and the lender and gives the lender the right to take the property by foreclosure if you default on the loan. The mortgage or deed of trust will be recorded, providing public notice of the lender’s claim (lien) on the property.
Title Insurance Policy: Every lender will require title insurance. The company issuing the title insurance policy will have researched legal records to make sure that you are receiving clear title, or ownership, to the property. Their title search has established that the seller of the property is the legal owner, and that there are no claims, or liens, against the property. The title company offers both a lender’s policy and an owner’s policy. You will have to pay for a lender’s policy and it is advisable for you to have an owner’s policy as well. For a small additional premium, it will protect you up to the full value of the property if fraud, a lien or faulty title is discovered after closing. (Title Attorney)
Homeowner’s Insurance: The lender will require you to have homeowners insurance on the property at least in the amount of the replacement cost of the property. You should make sure the policy covers the value of the property and contents in the event they are destroyed by fire or storm. This is usually paid prior to settlement or if you have made arrangements (with your lender) than perhaps it can be collected at the settlement table. (Buyer\Purchaser)
Termite Inspection and Certification: In many areas of the country, the property must be inspected for termites and the inspection is required in the purchase contract. In some parts of the country, this may be called a “wood infestation” report. The report is required on all FHA and VA loans as well as many conventional loans. (Real estate Agent)
Survey or Plot Plan: Your lender may require a survey of the property, showing the property boundaries, the location of the improvements, any easements for utilities or street right-of-way and any encroachments on the boundaries by fences or buildings. Encroachments can be minor, such as a fence, or may be serious and have to be corrected before closing. In some areas, an addendum to the title policy eliminates the need for a survey. (Title Attorney)
Water and Sewer Certification: If the property is not served by public water and sewer facilities, you will need local government certification of the private water source and sanitary sewer facility. Properties with well and septic water sources are usually governed by county codes and standards. (Real estate Agent)