Home Buyer’s Guide
Whether you’re a first-time homebuyer or an experienced homeowner, this guide can steer you through the mortgage process and make your homebuying experience much easier. The guide offers everything you need to know as you prepare to buy a home and will help you:
- Understand your costs up front
- Determine a price range that’s realistic and comfortable for you
- Know more about how a real estate agent can help you
- Learn how your credit score can impact your loan
- Identify the paperwork you need for a smooth loan process
FIVE KEY QUESTIONS
As you prepare to buy a home, this guide will help you answer these important questions:
- Am I ready to buy? The first step in buying a home is making sure you understand the homebuying process.
- What do I need to know before I apply for a loan? Feel confident that you’re making the right choice.
- What do I need to do before I start shopping for a home? Learn what you can do to get a head start.
- How do I go about finding the perfect home and making an offer? Know what you want in your future home and how to find it.
- What do I do after my offer is accepted? Make sure the final stretch goes smoothly, so you get your new home with minimal stress.
AM I READY TO BUY?
Think about whether you’re ready to own a home.
Determine if you are ready to apply for a mortgage loan.
- To get the best rates and the best results from lenders, you must meet certain requirements. Review what those requirements are and how well you might meet them.
Compare owning vs. renting.
- There are advantages to owning a home, but there are also disadvantages. Decide if owning or renting is the right choice for you.
Understand the costs of homeownership.
- From one-time fees and closing costs to monthly and annual expenses, there are many costs homeowners face that renters don’t.
Your credit rating is important.
- Banks will use your credit rating to decide whether to lend you money and how much to lend. See how the credit bureaus rate you and what you can do to boost your score.
Before you start looking for a house, ask yourself:
Are you comfortable with what you can afford?
- If you can’t afford to buy in a certain neighborhood where you want to live, or if you’ll face a significantly longer commute from the places you can afford to live, it may make more sense to continue renting.
Do you have a reserve of cash saved?
- You’ll need money for your down payment, and you may be responsible for closing costs on the loan. You’ll also face new costs in addition to your mortgage payment. If you have limited savings, it may make sense to continue a lower cost living arrangement until you can save more.
How financially stable are you?
- If your income is unpredictable, your job status is unstable or if you might be transferred soon, buying may not be the best choice for you right now.
Do you have good credit?
- If you have recently missed payments or maxed out your credit cards, you may consider waiting to purchase a home until your credit improves so you can qualify for a lower interest rate.
There are many great advantages to owning a house, financially and emotionally. But home ownership also includes a lot of responsibilities: repairs, taxes, insurance and utilities. Weighing these against the advantages helps make your decision more clear-cut.
Understand the different mortgage options
While the details of every loan are different, each lender has a variety of mortgage options. You will want to ask each lender you contact which special loan programs may be right for you. Here are some of the basics you should know about mortgage options. Discuss the different options available with your lender.
- WHAT DO I NEED TO KNOW BEFORE I APPLY FOR A LOAN?
It will be helpful to have a general idea of a home price and monthly payment you think you can comfortably afford.
Before you begin to look at homes, find out how much you can borrow. The best way to do that is to talk to a loan officer and get prequalified. If you have already started your search, be sure that you receive a conditional approval.
Your ideal home price will depend on how much money a bank will lend you, which is based on:
- Your payment history/credit score — The higher your credit score, the better chance you have of getting a loan and obtaining a lower interest rate.
- Your ability to pay — The portion of your monthly income that will be devoted to your house payment and other debt. The amount of debt you carry on credit cards and revolving charge accounts will impact how much additional credit a lender is willing to extend to you. The more money you bring home every month, the more you will be qualified to borrow.
- The market value of your home — The home you purchase will be valued based on an appraisal and will be used as collateral. The house becomes the property of the bank if you fail to repay your loan.
As you can see, the actual amount of the loan for which you qualify will vary based on factors such as the amount of your down payment, your income, credit score and assets. When interest rates are low, it costs you less to borrow the same amount than when interest rates are high.
You will also want to consider how much of your monthly income you are comfortable devoting to your house payment and how much you will have left over after purchasing your home. Each person is different when it comes to those decisions.
WHAT DO I NEED TO DO BEFORE I START SHOPPING FOR A HOME?
What documents will I need to apply for a loan?
When you apply for a loan, you will typically need to provide quite a bit of information. The documents will enable your lender to verify your income and assets.
Here is a list of typical documents and data you will need to provide:
- Names and addresses of employers for two years
- W-2s for two years
- One to two years of tax returns
- Most recent year-to-date pay stub reflecting a minimum of 30 days of income or other proof of income
- If self-employed, year-to-date profit and loss statement, plus signed returns for last two years
- Proof of pension income, if applicable
- Social Security and Disability payments, if applicable
- Dividend earnings
- Child support earnings (optional)*
- Alimony or separate maintenance (optional)*
- Asset verification
- Bank account numbers and balances
- Bank statements for two to three months
- A copy of earnest money deposit
- Information on debts such as car loans, student loans and credit card debt
Select a lender with whom you are comfortable to obtain a prequalification or conditional approval. A prequalification is simply an estimate of how much you can borrow based on information you provide. Prior to choosing your lender, you will want to compare rates and fees.
- The best way to compare rates among lenders is to look at the Annual Percentage Rate (APR) charged — NOT just the simple interest rate.
- The APR typically combines the interest rate and fees, so the higher the APR, the higher the costs.
HOW DO I GO ABOUT FINDING THE PERFECT HOME AND MAKING AN OFFER?
To buy a home you love, you need to know what you want and need in a house, then find a home that meets those needs. Here is some help on how to navigate through the process.
Know what you want in a house.
Single-family home, condo, or gated community? How much privacy do you want? How important are local schools? Consider all the factors that will make you satisfied when you move in.
Select a real estate agent.
The right agent is your partner in finding the right home and negotiating a good price for it.
Make an offer and negotiate the price.
The price of a home depends on many ever-changing factors, and negotiating that price involves insight, intuition, tact, and steady nerves. Find out how to play the game and who can help.
A good real estate agent is your partner in the homebuying process.
You may be working with him or her for several months, so It is important to find someone with whom you are totally comfortable.
- You might ask your mortgage banker, friends or family to recommend agents.
- Interview each agent and do some research to make sure the agent is qualified and that there is good rapport.
- As a buyer, you do not pay any sales commissions (sales commissions are paid by the seller). It is in your best interest to find an agent you trust before you begin the house hunting process.
Understand the difference between agents:
- A “Buyer’s Agent” works for YOU to help you buy the right house at the lowest price.
- A “Seller’s Agent” (or “Listing Agent”) works for the SELLER and helps the seller get the highest price and best terms for them.
An agent will:
- Help you find a house you love
- Be knowledgeable about neighborhoods, pricing, local schools and public safety
- Make your home search more efficient by narrowing down your choices based on your preferences
- Assist you in negotiating a fair price
- Answer your questions and provide guidance
WHAT DO I DO AFTER MY OFFER IS ACCEPTED?
You will work closely with your mortgage banker to complete your application.
If you did not provide verification of your income and assets in the prequalification process, you will need to provide those documents now along with an executed purchase contract.
If you already provided income and asset documentation, you will just need to provide a signed purchase contract.
- IMPORTANT: Your loan will be delayed if you do not submit the correct financial documents, such as copies of your pay stubs, bank statements and tax returns.
- Your Mortgage Banker may ask you if you want to lock in your rate.
How do you decide if you should lock in your rate?
Most lenders allow you to lock in your interest rate for 60–90 days
- “Lock in” means your interest rate will not change even if interest rates go up or down while you are waiting for your loan to be approved.
No one can predict what will happen with interest rates
- If you think interest rates will go down, you may want to wait to see if you can lock in a lower rate.
- If you think interest rates will go up, or if you don’t want to worry about it, it makes sense to lock in the rate.
Your mortgage banker will submit your application and financial information to a loan processor who will examine your financial information more closely. The loan processor will contact you directly if he or she needs any additional information. Be sure to reply quickly.
During this period:
- Obtain a homeowners insurance quote – All lenders will require that you buy homeowners insurance, which covers the cost of repairing or rebuilding the house in case of damage or catastrophe. Contact an insurance company to determine what information they will need to insure the home and obtain an estimate of its costs. Proof of adequate insurance coverage (hazard and in some cases, flood) will be needed before your loan can close.
- Decide if you should pay points (discount points) – A portion of your interest that you pay to the lender up front in exchange for a lower interest rate. One discount point is typically equal to 1% of the loan amount, paid at closing. For example, one point on a $100,000 loan would require an up-front payment of $1,000. There is no requirement to pay discount points. As a rule of thumb, the longer you plan to remain in a property or hold your mortgage, it is to your advantage to pay points.
Depending upon what documentation you provided during the prequalification process, your loan processor will send all of your information to an underwriter who will review it and make a final decision on your loan.
- If your loan is approved, the loan processor will schedule your closing.
- “Closing” refers to the actual transfer of the title of the house from the seller, to you, the buyer. It can also be called “settlement.”
- What it costs: a Good Faith Estimate will be mailed to you within three business days of application.
- A day before your closing, you will receive an itemized list of exact costs.
- IMPORTANT: Your itemized list of exact costs should only vary slightly from your original Good Faith Estimate. Talk to your mortgage banker immediately if there are charges you did not expect.
- You will likely need to wire funds or bring cashier’s checks or bank checks to pay for the charges due at closing.
- Be sure to bring proof of identification!
Attend the closing and get the keys to your new home!
Congratulations, and welcome to your new home!