Be an educated home buyer
Why buy a home? Why not just rent? The first reason is, reguardless of whether you rent or buy, you still end up making a mortgage payment. It's just that when you rent, you are making the mortgage payment for someone else. Interest rates on owner occupied home loans are kept low by the Federal Government. You also get to write the interest off on your federal income taxes.
I am not a lending professional, and the specifics of these programs change over time. If you have more questions about any of these programs, please call me and I will put you in touch with a home mortgage professional.
Learn the financing basics
It is important to learn the fundamentals of finance before you begin shopping for a home. You need to know how much money you can borrow and the kind of loans you qualify for so you don't spend a lot of time looking at houses that you can't buy.
The first step in your education process is to learn your credit score and your credit history. When I say "your credit score", I specifically mean your FICO credit score. Look at your credit reports and see if the information is accurate.
If you need to repair your credit, this is the time to do it. Different loans have different credit requirements. Generally, better credit scores get lower interest rates.
Prequalification for a loan is not the same as preapproval. Prequalification is something that a lending professional can do after a quick phone conversation and it is based on the information that you give them. The preapproval process is more involved and will probably take a few days. Not only will a preapproval give you a better idea of what you can afford, but an offer submitted with a preapproval letter is a much stronger offer than one without.
Do not run up high debt. This is not the time to make large purchases; this is the time to pay your debt down. It is important for you to understand what a debt to income ratio is because it will affect how much house you can buy. There are two ways to calculate debt to income ratio, and they are both important.
Pre-Approval vs. Pre-Qualification
Most of you have heard the term "pre-qualified" when it makes reference to a person's ability to buy a home. You have also likely heard the term "pre-approved". Are these terms interchangeable? Do they mean the same thing? No to both.
A pre-qualification is something that a lender can do over the phone without the barrower supplying any documentation. This is valuable for a potential buyer who wants to know what price range of house they should look at.
A pre-approval requires the borrower and the lender to do a little more work. The borrower will need to gather all the documentation that they would need to make loan application. The lender will need to go through the steps that an underwriter will need to go through to close the loan.
After this has been done, the lender can give the buyer a pre-approval letter when they are ready to buy a house. An offer that comes with a letter of pre-approval is a lost stronger offer that one without; all other things equal.
Even with a letter of pre-approval, there is still no guarantee that the loan will close. Much of the documentation that the buyer gives the lender for the pre-approval will need to be updated during the loan process. Specifically, this would include bank statements and pay stubs.
The pre-approval also has everything to do with the barrower and nothing to do with the home. If the home appraises below value or has title issues, the deal will fail and this has nothing to do with the buyer's ability to pay back the loan.
Loan Programs Very On Closing Times
There are a number of different types of home mortgages available to fit a wide variety of buyers. The loan that is best for you may not be the same loan that is best for me. How much time it takes a loan to close is just one more consideration on a list of many that may make one type of loan a better option for you than another.
New mortgage laws came into effect October 3rd 2015 that increased the time to close all home mortgages whether it is for a purchase or a refinance. Loans that closed in 30 to 45 days earlier this year would take 45 to 60 days now.
A conventional home loan with at least 20% down will be the fastest to close. You need to allow at least 45 days for this type of loan. The same conventional loan with less than 20% down that requires private mortgage insurance; (PMI) will take closer to 50 days to close. A government guaranteed loan will normally take even longer. You can expect 55 days on an FHA loan and almost 60 days on a VA.
Because of the longer time required to close, some loans are more likely to delay a closing than others. In the past, the government loans have delayed the closing on nearly 25% of transactions where they were used. Conventional loans delay about half that many. A delay in closing can be costly or even cause the deal to fall through. At the very least it is stressful and inconvenient.
It is important to understand that because the game has changed so significantly and the changes are so new, my timelines are estimates. As more data is gathered, I will make adjustments to my estimated timelines.
Needs and Wants
As an educated consumer, you should always know what you are looking for before you start shopping. This is especially true when you are shopping for a home. If two people are buying a home together, there needs to be a lot of communication before you start looking.
One of the ways that you can categorize what you are looking for in a home is into; needs, wants, and dreams. The needs are absolute must haves, but the wants have a little more flexibility. The dreams are things that you really don't expect to find in your price range, but would be nice. This way if you find a house that has a lot of your wants, and even a few of your dreams, but doesn't have one of your needs, you know you need to keep looking. A house can have all the upgrades of your dreams but if it isn't in the school district you need to be in it won't work.
Another good way to categorize is: things that can't be changed, things that can be changed at great expense, and things that can be changed relatively easily sometime down the road. If the first house needs paint and floor covering, and the second house is perfect except that the commute is way too long, you need to think about what can more easily be changed. Also keep in mind that granite and other upgrades can easily be installed at a later date, whereas adding more bedrooms and bathrooms can be very expensive and making your back yard larger probably won't happen at any cost.
A Realtor can easily filter listings using your criteria so you don't have to spend your time looking at houses that don't meet your needs. You can even be set up on an automatic email notification so you’re automatically notified when something new comes on the market that you might be interested in.
Making an Offer
You have spent a lot of time looking at houses and with the help of your Realtor, have found the house that suits you best. Now it is time to make an offer. Your Realtor will help you with this but the final decision is yours. In some markets time is not on your side and more desirable properties will get multiple offers.
Sellers, of course, want to get a fair price for their home. How much you offer is not the only thing that determines the strength of your offer. How much earnest money is brought to the table will likely be a consideration. A letter of preapproval from the lender will make an offer stronger.
Remember that a strong offer can become a weak offer if it has too many contingencies. An offer being contingent on financing or a home inspection is not at all out of the ordinary but an offer being contingent on the sale of another home may not even be considered.
Your offer should be very specific about which items are included in the sale. Do not assume the seller is going to leave something, only to find it gone at closing. Get it in writing.
The negotiation process can be emotional for both the buyer and the seller. Often times there are counter offers and a lot of waiting. Having the experience of a real estate professional on your side can make this difficult process a lot less stressful.
After Acceptance of the Offer
When there is financing, it is very normal for there to be 30 to 45 days between acceptance of an offer and closing of the sale. There are some important things that need to be done during this time.
Hire a home inspector. A professional home inspector will make sure the house is in satisfactory condition and all offers should be contingent on a home inspection. The home inspection will normally need to be completed within 10 days. It is not at all unusual for the buyer to be there during the home inspection.
You can also take this window of opportunity to review zoning and make sure the property is suitable for your intentions. Neighborhood covenants may also be restrictive and should be reviewed.
Find out about any easements on the property. Check property boundaries to make sure that they are clearly marked. You may elect to have the property surveyed.
During this period of time, do not do anything that would change your financial situation. Do not make any large purchases or encore additional debt. Do not make any changes in employment
Do not make any deposits in your bank account with money that you can't account for. This may look like a gift or a loan, either one of which could look unfavorable.
This level of prudence needs to be maintained all the way until closing and the loan is recorded.
The Home Inspection
It is always advisable for a buyer to have a licensed home inspector inspect a home before they buy it. Here I am not going to get into what a home inspector does or why it is important, what I want to discuss here is the timeline of the home inspection. It is important to be aware of this timeline because it can easily delay closing.
An offer will normally be written contingent on a home inspection and the home inspection is dome after the offer is accepted and the deal is signed around. Right away, the buyer needs to order the home inspection.
If the contract is signed with the default values, the buyer has 10 days to have the inspection done, review the results and notify the seller. At this time the buyer can let the seller know that they are satisfied with the inspection results and the inspection contingency is satisfied. If the seller's broker receives nothing by 9:00 pm on the 10th calendar day beginning with the day after mutual acceptance, than the inspection contingency is satisfied and all parties are still under contract.
The buyer may also inform the seller that the inspection was unsatisfactory and they no longer want to buy the house. The buyer is not required to show the seller the inspection report. If the buyer chooses to terminate the contract based on the inspection contingency, they aren't required to even give a reason.
The buyer may stipulate repairs for the seller to have done or they may require another concession like a price reduction. When the inspection response comes back to the seller conditional upon repairs and or concessions the seller can agree to all of the conditions, some of the conditions or none of the conditions. The seller has 5 business days to make this response. Day one is the first business day after receiving the inspection response and the deadline is 9:00 pm on the 5th business day.
The seller can refuse to perform the work but they can't just walk away from the deal at this time. The seller is still under contract even if he refuses to do any of the work. When the buyer gets the sellers response to and the seller agrees to everything, the buyer does not need to do anything, they are still under contract.
If the seller agrees to just some or none of the buyer's demands, the buyer has the option of agreeing to what the seller has offered back or walk away from the deal. The buyer has 3 business days to respond. At this point there is no more inspection timeline. The buyer has the option to accept the terms as they are or walk.
If buyer, seller and agents are reasonable, proactive and responsive this whole process can take less than 10 days. If the allotted time is used for each step, and it is affected by a weekend and maybe a holiday, this dance can easily take over 20 days. Normally a lender will not even want to order an appraisal until the inspection contingency is satisfied. It may take a week to 10 days to get an appraiser out to the property. Even though a home inspection is one of the first things to happen after a deal is signed around, it can easily be the cause of a delayed closing and the need for a contract extension.
Truth-in-Lending/Real Estate Protection Act Integrated Disclosure Rule (TRID) is a new mortgage act that was implemented in 2015. It will affect all home purchases that include a mortgage as well as refinances. The purpose of the act is to protect the barrower and insure that they understand all the terms and costs of their loan.
This is a direct result of the irresponsible lending practices that were commonplace during the real estate boom early this century. At that time lenders offered loans with complicated terms, adjustments and penalties. Barrowers would get loans not understanding all the terms or what all the fees were for. Some borrowers would not understand that their interest rate would adjust up or that their loan balance would actually increase in size. It was not uncommon for a barrower to get to the closing table and find that there interest rate was a quarter percent higher or that the loan fees had gone up $10,000.
In 2010 the Dodd-Frank law was passed. This is a law designed to hold lenders accountable and protect barrowers. The new TRID is a result of this law. The TRID act has been completed for over 2 years and was originally slated to be implemented 3 months earlier. The delay took it from the middle of the buzziest time of year for home sales to a much slower time of year. If it was implemented when it was originally scheduled, it would have caused a lot of problems for the real estate mortgage industry.
The two main new documents that are a result of TRID are the Loan Estimate and the Closing Disclosure. These documents replaced the Good Faith Estimate and the HUD-1. The Loan Estimate is required to be delivered to the barrower within 3 days of loan application.
The Closing Disclosure is required to be delivered to the barrower 3 days before they sign closing papers. This document is prepared by the loan officer, reviewed by the underwriter, goes back to the loan officer and finally to the barrower for their 3 day review. The HUD1 was often prepared just before signing and didn't give the buyer any time to review it before signing. It was a little difficult to understand anyway. The preparation and review of the closing disclosure will add about 6 days to the closing time. Any last minute changes will cause the process to start over.
These forms are easier to understand than the forms that they replaced and the lending process is more transparent. The only real drawback is that is going to take a lot more time for a loan to close. What we are talking about here is a 10 day increase in closing times and even longer in many cases. This can cause a lot of problems when multiple sales need to close simultaneously. This is a very common situation when a seller needs the proceeds from the sale of their home to close on the home that they are buying. If their sale is delayed, it will cause their purchase to be delayed. If their purchase is delayed, they may not have a place to live for a while.
Another concern is interest rate locks. This is where a borrower pays a fee to lock the interest rate to insure that the rate does not go up by the time they close. Standard locks are for 30, 45 and 60 days. The longer locks have higher fees. Lock extensions can be even more expensive. The barrower's choices end up being; paying for a long rate lock, delaying locking in a rate until closer to closing or risking incurring additional costs for a lock extension.
Right now the new TRID is causing some challenges with both lenders and escrow agents. Soon they will learn how to best work with the new rules and head off problems that are likely to arise.
written by:Todd Hays