Getting Professional Help — choosing a real estate agent
In American real estate transactions the seller pays all sales commissions, so if you are looking for a home it makes sense to use an agent because the search should go faster and ought to cost you no more than doing it by yourself. Or that's the theory.
A good agent will help you find the right house in the right neighborhood and act as your representative in any negotiation thereby getting you the best price. A bad agent will cost you both time and money. So be sure to find an agent with whom you can get along — one who listens to your opinions and shows you houses you love. If that's not the case then fire that agent and get another one. You have no obligation as a buyer to stick with an agent with whom you have no rapport.
So choose your agent carefully. Ask friends for referrals. Check the Internet sites of local realty companies. Then interview at least three agents before picking one to work with. Only pick an agent with whom you feel comfortable — one you feel will work in your interest. Tell the agent what kind of home you are looking for and ask if they can provide information about area schools, taxes, or some other special interest. Then see how quickly they respond and how accurately they follow your request. Once you?ve selected a good agent, stick with that agent even when you?re looking at homes listed by other agencies.
Finding the right home is a compromise between desire and affordability. You generally know how much you can spend and the sort of home you would like to buy. Ideally these goals intersect in your dream home. If they don't — if you don't have enough money or can't find the right house —then some compromise is required. But remember to never buy beyond your means.
How much house can I afford?
FHA funding guidelines suggest that you pay no more for a home than 31 percent of your gross household earnings. This refers to the mortgage payment, itself, plus taxes and insurance, so the total cost of the house could be greater since that would include a down-payment. Going further, the FHA guidelines refer to household income so you can include in that figure the income of a spouse, in-law living with you or even working children. It is a bad idea, however, to stretch this concept too far. You want a home you can afford without undue financial hardship. You'll be happier in a home you can truly afford.
Choosing a neighborhood
Location is an extremely important factor in determining long-term happiness in your new home.
The right real estate agent should be able to give you a lot of information. Do the schools meet your needs? Is the commute time acceptable? Are there services and shopping nearby? Is the neighborhood likely to deteriorate during the time you own your home? If homes are being well maintained and renovated it?s a good sign.
Start Looking Online
Searching in your price range is a good way to narrow down the neighborhoods you?ll choose from and figure out a few areas you?d prefer to skip entirely. Write down the MLS numbers for any properties that sound good and give them to your real estate agent for further research. Remember that your agent can show you homes listed by any agency.
Check school reports
If you?ll need to send kids to school now or in the future, the quality of area schools is very important. Ask your real estate agent to provide you with the school reports for any neighborhoods you?re interested in.
You've found the perfect house, now how will you pay for it?
Most people need a mortgage to help them buy a house. A mortgage is a loan secured by real estate. In return for the funds necessary to purchase a home, a lender gets your promise to pay back the funds over a certain time period at a certain cost. Backing your promise to repay is the property. Should you default, or stop paying on the loan, the lender could take over ownership of that property. Typically, the repayment of a mortgage occurs through monthly payments.
Usually, your monthly mortgage payment is made up of four parts —principal, interest, taxes and insurance
(PITI), but it can also include maintenance expenses, such as condominium homeowners? association dues. The principal is the amount in your monthly payment that reduces the original amount borrowed. Over the life of a standard mortgage loan, the entire original amount borrowed is generally scheduled to be fully paid off, or amortized. The interest rate is the fee charged to borrow the outstanding balance for the past month. In addition, a monthly amount may be collected and held in a separate escrow account to cover property taxes, homeowner?s insurance and mortgage insurance. Your lender uses the money in the escrow to pay your tax and insurance bills, as they come due.
Mortgage Payment Breakdown — PITI
Principal is the amount of money you borrow based on the sale price of the home minus your down payment.
Interest is the cost of borrowing money.
Taxes are paid by homeowners to local governments, and are usually charged as a percentage of the assessed property value.
Insurance offers financial protection in the event of a loss. Homeowner?s or hazard insurance protects you against financial losses on your property as a result of fire, wind, natural disasters or other hazards. Most lenders will require you to have a homeowner?s insurance policy on your home because it will help protect their investment as well as yours. Mortgage insurance (MI) is required on certain loans to protect the lender against financial losses if the borrower fails to repay the loan. When the down payment is less than 20 percent of the home?s purchase price lenders typically require some type of insurance. Loans insured by FHA/HUD programs require a mortgage insurance premium (MIP), while VA loans require a funding fee. Conventional loans, or those without government backing, can be insured with Private Mortgage Insurance (PMI).
Typically, the portion of your monthly mortgage payment that covers taxes and insurance is held in a special account by your lender.Then,when these bills are due, the lender forwards payment on your behalf to the local government or insurance company. This process is known as escrow. Using escrow for taxes and insurance is an option for the homeowner and not a requirement.
How Do I Qualify For a Mortgage?
In general, all lenders use the same four basic standards to approve applicants for a mortgage. Different mortgage products have varying guidelines within those standards. The lender looks at what is referred to as the ?the four C?s?: capacity, character, capital and collateral.
Income (Capacity)
Do you have steady and sufficient income to make the monthly payments? This income can come from a primary, second, or part-time job(s), overtime and bonuses, commissions, self-employment, retirement benefits, pensions and annuities, public assistance, child support, alimony or maintenance payments, veterans benefits, disability payments or rental property income. In most cases, you need to provide documentation regarding your income. Alimony and child support need not be noted unless you want to have them included as the basis for repayment of the debt.
Credit History (Character)
Have you paid back money you borrowed in the past? Have you been late in making your payments? Have you filed for bankruptcy? Do you have a record of judgments and collection accounts filed? If you have a limited or no credit history, a nontraditional credit history may be considered. You may need to show paid receipts and canceled checks for rent and utility payments that document a pattern of paying your monthly obligations on time.
Savings (Capital)
Have you saved any money that can be used toward the purchase of your home? The savings can be money in a savings account, certificate of deposit, retirement [401(k)] account, or a gift from a relative or friend. A lender wants to see that you have the capital to fulfill your current obligations as well as your new mortgage. Ideally, you should have enough savings to act as a source of funds for your down payment and several months of reserve funds to cover your anticipated monthly mortgage payments should anything happen to you or your job.
Property (Collateral)
Your lender may require an appraisal on your home to determine its market value in comparison to similar houses that sold recently in the neighborhood. Your lender will also look at the type of the property and whether there are additional fees such as homeowner?s association dues. If you?d like to be pre-approved for a mortgage loan, you do not need to have a specific property in mind. The pre-approval is of you as a borrower, not the property.
How Much Money Can I Borrow?
To answer that question, Home-Account looks at all the elements that make up your financial profile, including your credit history, the cash you have available for a down payment and closing costs, your income and your existing debt and financial obligations. Then, taking the current market interest rate into account, we can give you an estimate of the maximum mortgage amount you can borrow. By adding your maximum mortgage amount to the funds you plan to use for your down payment, you will know your home purchase price range.
Two general guidelines are used by lenders to determine the loan amount for which you may qualify.
The first guideline, known as the housing expense-to-income ratio (or front-end ratio), compares your proposed monthly house payment plus taxes and insurance (PITI) to your total household gross monthly income. The second guideline, known as the debt-to-income ratio (or back-end ratio), compares your anticipated monthly housing payment to your gross (pre-taxed) monthly earnings and your monthly debt requirements. Monthly debt includes expenses such as credit cards, car loans, student loans, consumer loans plus other financial obligations such as child support and alimony.
How Important Is My Credit?
Your credit report is an important consideration to lenders reviewing your financial profile. If you have a history of paying your monthly obligations on time, that?s a signal to a lender that you are likely to make your monthly mortgage payments on time as well. So your credit can be a factor in the kind of mortgage program you may qualify for. Your credit history can also affect the amount required for a down payment, the amount of money you can borrow in relation to your income, and the interest rate you are offered. But keep in mind that even if you have no established credit history or less-than-perfect credit, there are still loan programs that can help you buy a home.
How Much Do I Need for a Down Payment?
In the past, saving money for a down payment on a home was often the largest obstacle to homeownership with lenders requiring a minimum of a 20 percent down payment. But today?s flexible home loan programs make this issue less of a challenge, with some programs allowing you to put very little down (three percent or even less). Still, the more money you can put down the easier it will be to find a mortgage. If you decide to use less than a 20 percent down payment, your lender may require Private Mortgage Insurance (PMI). These insurance programs protect the lender in the event you do not fulfill your commitment to repay the mortgage.
What About Closing Costs?
Here is another area where Home-Account comes to the rescue. The cost of buying a home is more than just the purchase price. Each home buying transaction can involve the services of professionals from a variety of fields, all of whom expect to be paid. With traditional lending it is common for these costs to total three to five percent of your total mortgage amount. Home-Account tries to keep these extra costs as low as possible, in part by forgoing fees that would be charged by a traditional mortgage broker. We will give you a Good Faith Estimate of your closing costs shortly after you apply. While it is only an estimate, this can help you budget for your closing. Some closing costs can be included in your loan amount to reduce the amount of out-of-pocket money involved.
Closing cost fees generally fall into one of three categories: out-of-pocket expenses, pre-paid items and points.
Out-of-pocket expenses usually cover third-party services that are directly charged to you, such as fees for appraisals, attorneys, credit reports, title (deed recording), or tax services. Which services you must pay for varies on the property location and home financing program. At Home-Account we do all we can to keep these expenses to a minimum.
Prepaid items can vary based on the type of property and the time of the closing, but they generally include homeowner?s insurance, mortgage insurance, and fees associated with establishing an escrow account. Escrow accounts are set up by lenders to pay property tax and insurance premiums. Instead of paying the entire premium every six or twelve months, the borrower pays a portion of the cost along with every monthly mortgage payment. This helps the borrower avoid the hassle of planning for the large payments, while reassuring the lender that tax and insurance payments are always up to date. Using an escrow account can be an option, but is a requirement with less than a 20 percent down payment.
Points are additional loan fees with each point representing one percent of your loan amount. Origination points are an extra fee by the lender or some middle man like a mortgage broker for making the loan.
Discount points are a fee that allows you to buy down your interest rate. In other words, in return for paying more discount points upfront, you can lower your interest rate and thus your monthly payment.
Generally speaking, points are good for lenders and bad for borrowers. Mortgages offered through Home-Account have no points of either kind, making our mortgages the least expensive you can get.
Kinds of Mortgages
Fixed-rate mortgages. The interest rate remains fixed for the life of the loan. Fixed-rate loans offer predictable monthly payments of principal and interest throughout the life of the loan. They provide protection from rising rates. No matter how high market rates go up, your interest rate stays the same. These mortgages are ideal for most borrowers, especially those who have a lower tolerance for financial risk.
Adjustable-rate mortgages. The interest rate adjusts periodically to reflect market conditions. The initial introductory period usually offers a lower rate relative to fixed-rate mortgages, after which the rate adjusts periodically, based on a market index. Borrowers can be protected from steep increases in rates through annual and lifetime adjustment caps. The initial rate can be locked in for different periods of 1-10 years. Typically, the rate readjusts annually after the introductory period. Because of the introductory period?s lower rate, some borrowers may be eligible for a larger loan amount with an ARM than with a fixed-rate mortgage. ARMs can be part of a strategy for home buying in times of high interest rates or if a tacticl refinance is expected shortly after the first year.
FHA Loans. The Federal Housing Administration (FHA) insures loans designed to meet the needs of homebuyers with low or moderate incomes. FHA loans feature low down payments, more liberal qualifying guidelines, and the use of gift funds for down payment and/or closing costs. The size of FHA loans are limited based on your geographical area with maximum loan amounts varying from $271,500 to $729,750 depending on your state and county.
VA Loans. The Department of Veterans Affairs (formerly the Veterans Administration) guarantees mortgages for qualified veterans and active duty military personnel and their spouses who are first- or second-time homebuyers. VA loans feature low or no down payment requirements, a wide range of rate, term, and cost options, flexible qualifying guidelines, and use of gift funds for closing costs. Like FHA loans, VA loan limits vary from state to state with the maximum loans amount typically being either $471,000 or $729,750 (slightly higher in Alaska and Hawaii).
As a Home-Account subscriber we will take into account your qualifications for these loan programs and their limits when making loan recommendations. You don't have to worry which loan is best for your situation. We do that worrying for you.
Fannie Mae, Freddie Mac, and Ginnie Mae Loans. These are like FHA loans in that they have similar underwriting rules though aimed at home buyers with somewhat more money than the target FHA customer. These programs no longer support three percent or even five percent down payments, generally requiring 10 percent down or more. Loan limits are identical to current FHA guidelines. Fannie Mae stands for the Federal National Mortgage Association, founded in 1938. Freddie Mac is the Federal Home Loan Mortgage Corporation, founded in 1970. Both are Government Sponsored Enterprises ? private companies founded by the U.S. Government to buy home mortgages and issue securities backed by those mortgages. From the customer home owner perspective there is little difference between these two operations. Ginnie Mae is the Government National Mortgage Association, carved out of Fannie Mae in 1968 specifically to buy FHA, VA and similar special interest group federal mortgages like those of the Rural Housing Service and Office of Public and Indian Housing. Ginnie Mae loan limits are similar to those of Fannie Mae and Freddie Mac. Though these agencies don't directly issue or fund mortgages they control the mortgage industry through the rules they set for what mortgages they are willing to buy.
Jumbo or Non-conforming Loans. A ?conforming? loan is a mortgage that is within the lending parameters set by the FHA, Fannie Mae, Freddie Mac, or Ginnie Mae. But not all loans are conforming, mainly because some people want houses that cost more than these quasi-Federal funding guidelines allow. These bigger non-conforming loans are called ?jumbo? and typically carry a slightly higher interest rate.
Interest-only Loans. This is not a type of mortgage but more of an option that can be attached to any kind of mortgage ? to not amortize or pay-down the balance of the loan for some period of time. The result is a somewhat lower monthly payment but usually a slightly higher interest rate since there is higher risk of default. Adjustable Rate Mortgages are a preferred alternative to interest-only in that they tend to have lower initial rates.
Annual Percentage Rate Is important, but TrueRate is even better
There is more to getting a good mortgage than just picking the lowest interest rate. A better number to look at is the Annual Percentage Rate (APR), which is required by law to be displayed for every mortgage offered. While APR is nominally based on the loan rate, it adds-in the other costs and fees to determine your loan?s total finance charge expressed as a percentage over the scheduled life of your loan. After you apply for your mortgage, you will receive a Truth-in-Lending Statement. Homebuyers often find this document confusing because it states the APR only, and not the interest rate. Generally speaking APR is a more honest (and nearly always higher) estimate of what the loan will cost.
Home-Account's TrueRate is a third number you should consider alongside the basic loan rate and APR. TrueRate is the APR adjusted for your particular circumstance and mortgage strategy since some assumptions behind APR calculations apply differently for different borrowers. APR is good, but TrueRate is even better for comparing mortgages.
Locking or Floating
An interest rate lock gives you a specified period of time ? from 30 to 120 days ? of protection from financial market fluctuations in interest rates by setting the range of pricing available to you. Your rate may still be affected by changes you might choose to make in the loan?s terms or changes that take place in your credit profile. The alternative to a rate lock is a floating rate, which will fluctuate with the market. The benefit to floating is you have the option of locking at a lower level if rates should interest rates decrease. The risk, of course, is that you would face a higher interest rate should interest rates rise before you lock. Generally, you?ll be able to lock once you have found a property and as late as up to five days before closing. When you lock, make sure the lock period allows enough time for your loan to be processed. If your lock period expires before you?re ready to take ownership of the house, your loan pricing may be adjusted to reflect current market conditions. Some loan programs allow a one-time float down option that can be used during the rate lock period. The one-time float down allows you to seek a lower rate should rates drop while your loan is locked, if you qualify.
The Mortgage Process
Pre-approval
As a member of Home-Account we can generate for you a pre-approval letter showing how big a mortgage you can qualify for at the time you are looking. Getting this pre-approval letter is a smart move because it lets you know exactly how much you can spend and shows prospective sellers and real estate agents that you?re a serious buyer. Some sellers may require a pre-approval letter prior to even reviewing an offer.
Completing the Application
One of the joys of being a member of Home-Account is it means there are no mortgage applications to be filled out. We generate that for you from the data previously gathered and send it electronically to the lender you ultimately choose. Whew!
Loan Approval
We take care of that, too. With rare exceptions in the case of unusual property types like farms and co-op apartments, if Home-Account presents a possible mortgage to you it doesn't mean that you can qualify but that you did qualify. There are no teaser rates here. All mortgages offered by Home-Account are real and ready to be funded.
Based on your credit report and the type of property you want to finance, you may need to provide additional documents or letters that verify your income, confirm your down payment and closing expenses in your bank account, or verify any debts not listed on your credit report. If you are a full member of Home-Account and have given us access to all your account information we will have this information automatically and no further effort will be required.
Then what happens?
Once your completed loan application has been submitted it traditionally goes through a four-step process of processing, decision, documentation, and closing. As a Home-Account member the first step — processing — is automatic and done for you. Depending on the type of property and the proposed loan terms, processing may indicate that additional documents are required, possibly a home appraisal or proof of your income. We'll let you know if these or other documents are needed.
The second step is getting a decision from the lender and with Home-Account doing most of the legwork this step, too, should be very quick, taking anywhere from a few seconds to a day or two in unusual cases. The longer it takes a lender to decide on a loan generally the less profit they make on that loan, so quick approvals are in the interest of all parties.
Step three is documentation — bringing together any additional required documents with the information and decisions already gathered or made. In the case of a mortgage or refinance involving debt consolidation, for example, the details on which debts are to be retired and how it is to be done would be a part of this step. The documentation step can also involve a title search and title insurance. There are two types of title insurance: one protects the lender, the other protects the borrower from claims against your ownership of the property. Such claims might be made by undisclosed spouses, heirs of previous owners, creditors holding liens against previous owners, or other parties. Your lender may require you to purchase a title policy which will cover their interest in the property. It?s up to you if you would like to purchase a policy to protect your interest in the home. We will have a recommendation on that as part of your approval process at Home-Account. When you are ready to schedule your closing date, all involved parties will be contacted to arrange for the closing to take place at a convenient time and location. The closing procedure and associated fees vary depending on where you purchase. You will be notified of the exact amount you need in order to close and any additional documents you may need to bring.
Step four is the actual closing of the loan. At your closing, ownership of the property is transferred from the seller to you. A closing agent (an attorney of your choice or a title agency representative, depending on what is customary in your area) coordinates and distributes all the paperwork and funds, according to the terms agreed upon by you and the seller. Now you are a homeowner and a whole different kind of adventure can begin.
