Buying Process

Build a Plan of Action and Get Ready

Before you can build a plan of action, take the time to lay the groundwork for your decision-making process.

First, ask yourself how much can you afford to pay for a home. If you’re not sure on the price range, find a lender and get preapproved. Preapproval will let you know how much you can afford so that you can look for homes in your price range. Getting pre-approved helps you to alleviate some of the anxieties that come with home buying. You know exactly what you qualify for and at what rate, you know how large your monthly mortgage payments will be, and you know how much you will have for a down payment. Once you are pre-approved, you avoid the frustration of finding homes that you think are perfect, but are not in your price range.

Second, ask yourself where you want to live and what is the best location for you and/or your family                         Hot, Normal, and Cold Markets

This is an extremely competitive market, one that is advantageous to the seller. Sometimes, homes will sell as soon as they are listed or even before homes are listed. Typically, during a hot market, multiple offers will be made on each home and more often than not, homes will sell for more than their asking price. It is even more crucial to be prepared and to be ready as a buyer when the market is hot. It can be easy to get caught up in the bid for a home, but if you are prepared (pre-approved, solid in price range, realistic about your needs), it is easier to remain focused on your housing needs and price range.

Normal Market -

In a normal market, there is fairly a large number of homes available and an average number of buyers. This market does not necessarily favor the buyer or the seller. A seller may not have as many offers on their home, but he or she may not be desperate to sell either. Again, it is the buyer’s responsibility to be prepared. During a normal market, the chances to negotiate are higher than in a hot market. As a buyer, you can expect to make offers at lower than the asking price and negotiate a price at least somewhat less than what the sellers are asking.

Cold Market -

In a cold market, houses may be listed for more than a year and the prices of houses listed may drop considerably. This market is advantageous to the buyer. As a buyer, you have the time to make an offer that works to your best interest. It is not uncommon to low-ball and to find that sellers are accommodating to meet your needs. Keep in mind that even though this market is a great time for buyers, you do not want to lose your dream home by being unrealistic. Your goal is to get your dream home at the best possible price.
Importance of Inspection

Beforehand, make sure the report will be done by a professional organization, such as a local trade organization or a national trade organization such as ASHI (American Society of Home Inspection). Not only should you never skip an inspection, but also you should go along with the inspector during inspection. This gives you a chance to ask questions about the property and get answers that are not biased. In addition, the oral comments are typically more revealing and detailed than what you will find on the written report. Once the inspection is complete, review the inspection report carefully.

You have to demand an inspection when you present your offer. It must be written in as a contingency; if you do not approve the inspection report, then you don’t buy. Most real estate contracts automatically provide an inspection contingency.
Your Savings and Down Payment

When preparing to buy a home, the first thing many Homebuyers do is look at “homes for sale” ads in newspapers, magazines and listings on the internet. Some potential buyers read “how-to” articles like this one. The next thing you should do – before you call on an ad, before you talk to a Realtor, before you shop for interest rates – is look at your savings.

Why?

Because determining how much money you have available for down payment and closing costs affects almost every aspect of buying a home – including how you write your purchase offer, the loan programs you qualify for, and shopping for interest rates.

Mortgage Programs

If you only have enough available for a minimum down payment, your choices of loan program will be limited to only a few types of mortgages. If someone is giving you a gift for all or part of the down payment, your options are also limited. If you have enough for the down payment, but need the lender or seller to cover all or part of your closing costs, this further limits your options. If you borrow all or a portion of the down payment from your 401K or retirement plan, different loan programs have different rules on how you qualify.

Of course, if you have enough for a large down payment, then you have lots of choices.

Your loan choices include such varied programs as conventional fixed rate loans, adjustable rate mortgages, buydowns, VA, FHA, graduated payment mortgages and all the varieties of each.

Shopping Rates

A very important reason you need to have at least some idea of your down payment is for shopping interest rates. Some loan programs charge a slightly higher interest rate for minimal down payments. Plus, the interest rates for different loan programs are not the same. For example, conventional, VA, and FHA all offer fixed rate loans. However, the rates vary from one program to another.

If you shop lenders by phone, the loan officer will be able to tell which programs fit and quote you rates accordingly. However, if you are shopping on the internet, you have to have some idea of your loan program on your own.

Writing Your Offer

Another reason you need to have a clue about your down payment is because it affects how you write your offer to purchase a home. Not only are you required to put your down payment information in the offer, but different loan programs have different rules which also affect how you write your offer. This is especially important when dealing with FHA and VA loans.

If you are asking the seller to pay all or part of your closing costs, you have to be certain your loan program allows what you are asking. For smaller down payments, lenders allow the seller to pay less closing costs than for larger down payments. Some loan programs will allow a seller to pay certain types of costs, but not others.

Finally, your down payment also affects your ability to qualify for a loan. When you make a small down payment, lenders are fairly strict about having you conform to their underwriting guidelines. For larger down payments, they will tend to make allowances or exceptions to the rules.

Conclusion

As you can see, the down payment affects every choice you make when you buy a home. Although you should look at ads, familiarize yourself with neighborhoods, learn about prices, and read as much as you can – when you get ready to take action – the first thing you should do is figure out how much money you have available for the purchase.

Closing Costs When Buying or Refinancing a Home

Non-Recurring Closing Costs Associated with the Lender.

Loan Origination Fee – The loan origination fee is often referred to as “points.” One point is equal to one percent of the mortgage loan. As a rule, if you are willing to pay more in points, you will get a lower interest rate. On a VA or FHA loan, the loan origination fee is one point. Anything in addition to one point is called “discount points.”

Loan Discount – On a government loan, the loan origination fee is normally listed as one point or one percent of the loan. Any points in addition to the loan origination fee are called “discount points.” On a conventional loan, discount points are usually lumped in with the loan origination fee.

Appraisal Fee – Since your property serves as collateral for the mortgage, lenders want to be reasonably certain of the value and they require an appraisal. The appraisal looks to determine if the price you are paying for the home is justified by recent sales of comparable properties. The appraisal fee varies, depending on the value of the home and the difficulty involved in justifying value. Unique and more expensive homes usually have a higher appraisal fee. Appraisal fees on VA loans are higher than on conventional loans.

Credit Report – As part of the underwriting review, your mortgage lender will want to review your credit history. The credit report can be as little as seven dollars, but normally runs between $21 and $60, depending upon the type of credit report required by your lender. Free Credit Score!

Lender’s Inspection Fee – You normally find this on new construction and is associated with what is called a 442 inspection. Since the property is not finished when the initial appraisal is completed, the 442 inspection verifies that construction is complete with carpeting and flooring installed.

Mortgage Broker Fee – About seventy percent of loans are originated through mortgage brokers and they will sometimes list your points in this area instead of under Loan Origination Fee. They may also add in any broker processing fees in this area. The purpose is so that you clearly understand how much is being charged by the wholesale lender and how much is charged by the broker. Wholesale lenders offer lower costs/rates to mortgage brokers than you can obtain directly, so you are not paying “extra” by going through a mortgage broker.

Tax Service Fee – During the life of your loan you will be making property tax payments, either on your own or through your impound account with the lender. Since property tax liens can sometimes take precedence over a first mortgage, it is in your lender’s interest to pay an independent service to monitor property tax payments. This fee usually runs between $70 and $80.

Flood Certification Fee – Your lender must determine whether or not your property is located in a federally designated flood zone. This is a fee usually charged by an independent service to make that determination.

Flood Monitoring – From time to time flood zones are re-mapped. Some lenders charge this fee to maintain monitoring on whether this re-mapping affects your property.

Other Lender Fees

We put these in a separate category because they vary so much from lender to lender and cannot be associated directly with a cost of the loan. These fees generate income for the lenders and are used to offset the fixed costs of loan origination. The Processing Fee above can also be considered to be in this category, but since it is listed higher on the Good Faith Estimate Form we did not also include it here. You will normally find some combination of these fees on your Good Faith Estimate and the total usually varies between $400 and $700.

Document Preparation – Before computers made it fairly easy for lenders to draw their own loan documents, they used to hire specialized document preparation firms for this function. This was the fee charged by those companies. Nowadays, lenders draw their own documents. This fee is charged on almost all loans and is usually in the neighborhood of $200.

Underwriting Fee – Once again, it is difficult to determine the exact cost of underwriting a loan since the underwriter is usually a paid staff member. This fee is usually in the neighborhood of $300 to $350.

Administration Fee – If an Administration Fee is charged, you will probably find there is no Underwriting Fee. This is not always the case.

Appraisal Review Fee – Even though you will probably not see this fee on your Good Faith Estimate, it is charged occasionally. Some lenders routinely review appraisals as a quality control procedure, especially on higher valued properties. The fee can vary from $75 to $150.

Warehousing Fee – This is rarely charged and begins to border on the ridiculous. However, some lenders have a warehouse line of credit and add this as a charge to the borrower.

Items Required to be Paid in Advance

Pre-paid Interest – Mortgage loans are usually due on the first of each month. Since loans can close on any day, a certain amount of interest must be paid at closing to get the interest paid up to the first. For example, if you close on the twentieth, you will pay ten days of pre-paid interest.

Homeowner’s Insurance – This is the insurance you pay to cover possible damages to your home and other items. If you buy a home, you will normally pay the first year’s insurance when you close the transaction. If you are buying a condominium, your Homeowners’ Association Fees normally cover this insurance.

VA Funding Fee – On VA loans, the Veterans Administration charges a fee for guaranteeing your loan. If you have not used your VA eligibility in the past, this is two percent of the loan balance. If you have used your VA eligibility before, it is three percent of the loan. If you are refinancing from a VA loan to a VA loan, it is three-quarters of a percent of the loan amount. Instead of actually paying this as an out-of-pocket expense, most veterans choose to finance it, so it gets added to the loan balance. This is why the loan balance on VA loans can be higher than the actual purchase amount.

Up Front Mortgage Insurance Premium (UFMIP) – This is charged on FHA purchases of single family residences (SFR’s) or Planned Unit Developments (PUDs) and is 2.25% of the loan balance. Like the VA Funding Fee it is normally added to the balance of the loan. Unlike a VA loan, the homebuyer must also pay a monthly mortgage insurance fee, too. This is why many lenders do not recommend FHA loans if the homebuyer can qualify for a conventional loan. However, condominium purchases do not require the UFMIP.

Mortgage Insurance – Though it is rare nowadays, some first-time homebuyer programs still require the first year mortgage insurance premium to be paid in advance. Most mortgage insurance (when required) is simply paid monthly along with your mortgage payment. Mortgage insurance covers the lender and covers a portion of the losses in those cases where borrowers default on their loans.

Reserves Deposited with Lender

If you make a minimum down payment, you may be required to deposit funds into an impound account. Funds in this account are your funds, and the lender uses them to make the payments on your Homeowner’s insurance, property taxes, and mortgage insurance (whichever is applicable). Each month, in addition to your mortgage payment, you provide additional funds which are deposited into your impound account.

The lender’s goal is to always have sufficient funds to pay your bills as they come due. Sometimes impound accounts are not required, but borrowers request one voluntarily. A few lenders even offer to reduce your loan origination fee if you obtain an impound account. However, if you are disciplined about paying your bills and an impound account is not required, you can probably earn a better rate of return by putting the funds into a savings account. Impound accounts are sometimes referred to as escrow accounts.

Homeowners Insurance Impounds – your lender will divide your annual premium by twelve to come up with an estimated monthly amount for you to pay into your impound account. Since a lender is allowed to keep two months of reserves in your account, you will have to deposit two months into the impound account to start it up.

Property Tax Impounds – How much you will have to deposit towards taxes to start up your impound account varies according to when you close your real estate transaction. For example, you may close in November and property taxes are due in December. Your deposit would be higher than for someone closing in May.

Mortgage Insurance Impounds – When required, most lenders allow this to simply be paid monthly. However, you may be required to put two months worth of mortgage insurance as an initial deposit into your impound account.

Non-Recurring Closing Costs not associated with the Lender

Closing/Escrow/Settlement Fee – Methods of closing a real estate transaction vary from state to state, as do the fees. For purchases, a general rule of thumb that usually works in calculating this closing cost is $200 plus $2 for every thousand dollars in price. For refinances there is usually a flat fee around $400 to $500.

Title Insurance – Title Insurance assures the homeowner that they have clear title to the property. The lender also requires it to insure that their new mortgage loan will be in first position. The costs vary depending on whether you are purchasing a home or refinancing a home, so we will not provide a range here.

Notary Fees – Most sets of loan documents have two or three forms that must be notarized. Usually your settlement or escrow agent will arrange for you to sign these forms at their office and charge a notary fee in the neighborhood of $40.

Recording Fees – Certain documents get recorded with your local county recorder. Fees vary regionally, but probably run between $40 and $75.

Pest Inspection – also referred to as a Termite Inspection. This inspection tests not only for pest infestations, but also other items such as wood rot and water damage. The inspection usually runs around $75. If repairs are required, the amount to cover those repairs can vary. The seller will usually pay for the most serious repairs, but this is a negotiable item. Usually (not always) the pest inspection fee is paid by the seller of the home and is not normally reflected on the Good Faith Estimate.

Home Inspection – Since it is the Homebuyer’s choice to obtain a home inspection or not, this cost is not usually reflected on a Good Faith Estimate. However, it is recommended. Keep in mind that the home inspector has a certain set of standards he uses when inspecting a home, and those standards may be higher than required by local building codes. An example is that an inspector may note there is no spark arrestor on a chimney but the local building code may not require it. This sometimes leads to conflicts between buyer and seller.

Home Warranty – This is also an optional item and not normally included on the Good Faith Estimate. A Home Warranty usually covers such items as the major appliances, should they break down within a specific time. Often this is paid by the seller.

Refinancing Associated Costs (but not charged by the new Lender)

Interest – When you close the transaction on your refinance, there will most likely be some outstanding interest due on the old loan. For example, if you close on August twentieth (and you made your last payment), you will have twenty days interest due on the old loan and ten days prepaid interest on the new loan. Your first payment on the new loan would not be until October 1st since you have already paid all of August’s interest when you closed the refinance transaction (since interest is paid in arrears, a September payment would have paid August’s interest, which has already been paid in closing).

Reconveyance Fee – this fee is charged by your existing lender when they “reconvey” their collateral interest in your property back to you through recording of a Reconveyance. This fee can vary from $75 to $125.

Demand Fee – your existing lender may charge a fee for calculating payoff figures. If they do, this fee may run in the neighborhood of $60.

Sub-Escrow fee – though it sounds like an escrow fee, this fee is actually charged by the Title Company (and I’ve never been able to figure out exactly what it is for). Assume it is an income-generating fee similar to some of the lender fees mentioned above. Title representatives who want to explain this fee can send us an email.

Loan Tie-in Fee – though it sounds like a lender fee, this cost is actually charged by the Escrow Company (like the sub-escrow fee, I’ve never been able to understand this fee, either). Escrow officers who want to explain this fee can also send an email.

Homeowner’s Association Transfer Fee – If you are buying a condominium or a home with a Homeowner’s Association, the association often charges a fee to transfer all of their ownership documents to you.

Asking the Seller to Pay Closing Costs – Rules and Advice.
It has become common to ask the seller to pay some or all of the closing costs when you purchase a home. Essentially, this is financing your closing costs since you will probably pay a little bit more for the property than you would if you were paying your own costs.

Keep in mind a few simple rules. On conventional loans you can only ask the seller to pay non-recurring costs, not prepaids or items to be paid in advance. If you are putting ten percent down or more, the most the seller can contribute is six percent of the purchase price. If you are putting less down, the most the seller can contribute is three percent.

On VA loans, you can ask the seller to pay everything. This is called a “VA No-No,” meaning the buyer is making no down payment and paying no closing costs.

On FHA loans, the seller can pay almost any cost, but the buyer has to have a minimum three percent investment in the home/closing costs.

Most refinances include the closing costs and prepaids in the new loan amount, requiring little or no out-of-pocket expenses to close the deal.

If you didn’t get bored as you read through this, now you know everything…a lot, anyway…about closing costs.
Items You Need for When Applying For a Loan

It used to be that lenders mailed out verifications to employers, banks, mortgage companies, and so on, in order to verify the data supplied by borrowers. Nowadays, the interest is often in speed and getting answers quickly, so “alternate documentation” has become more widely used. Alternate documentation means that underwriting answers can be obtained with information supplied directly from the borrower instead of waiting around for verifications to come back in the mail.

The following is required for most standardized loans as part of alternate documentation processing. Items may differ according to whether your loan is a conforming (Fannie Mae or Freddie Mac), non-conforming (jumbo) loan, government loan, or a portfolio loan.

Verifications are still mailed out, but usually as part of quality control procedures.

These are the things you need to supply to your lender to get a quick approval using alternate documentation

Income Items

• W2 forms for the last two years
• Pay stubs covering a 30 day period
• Federal tax returns (1040′s) for the last two years, if:
  • you are self-employed
  • earn more than 25% of your income from commissions or bonuses
  • own rental property
  • or are in a career where you are likely to take non-reimbursed business expenses

   

• Year-to-Date Profit and Loss Statement (for self employed)
• Corporate or partnership tax returns (if applicable)
• Pension Award letter (for retired individuals)
• Social Security Award letters (for those on Social Security)

Asset Items

• Bank statements for previous two months (sometimes three) on all accounts. All pages.
• Statements for two months on all stocks, mutual funds, bonds, etc, etc.
• Copy of latest 401K statement (or other retirement assets)
• Explanations for any large deposits and source of those funds
• Copy of HUD1 Settlement Statement on recent sales of homes
• Copy of Estimated HUD1 Settlement Statement if a previous home is for sale, but not yet closed
• Gift letter (if some of the funds come as a gift from a family member)
• Gifts can also require:
  • Verification of donor’s ability to make the gift (bank statement)
  • Copy of the check used to make the gift
  • Copy of the deposit receipt showing the funds deposited into bank account or escrow

   

Credit Items  

• Landlord’s name, address, and phone number (for verification of rental)
• Explanations for any of the following items which may appear on your credit report:
  • Late payments
  • Credit inquiries in the last 90 days
  • Charge-offs
  • Collections
  • Judgments
  • Liens

   

• Copy of bankruptcy papers if you have filed bankruptcy within the last seven years

Other 

• Copy of purchase agreement (if you have already made an offer)
• To document receipt of child support (if you desire to show it as income)
  • Copy of Divorce Settlement (to show the amount)
  • Copies of twelve months canceled checks to document actual receipt of fund

   

FHA Loans 

• Copy of Social Security Card (or other documentation of social security number)
• Copy of Driver’s license

VA Loans 

• Copy of DD214

Refinances 

• Copy of Note on existing loan
• Copy of HUD1 Settlement Statement on existing loan
• Name, address, phone number, loan number of existing loan/lender