Tuesday, January 12, 2021 / by Randy Durham
Do you want to be a homeowner? A good rule is that you will be staying in the same place for at least five years, you will have enough money for maintenance that happens down the road, you have enough money for a down payment, closing costs, and other fees that come up during closing. You also have to factor in things like property taxes and Private Mortgage insurance. Another question. Do you hate maintenance? When you rent and you have a leak in your roof you can pick up the phone and call your landlord. The landlord sends out a professional roofer to fix the leak and he foots the bill. Your landlord will usually cover structural maintenance. As a homeowner, you are responsible for the cost of professional maintenance. You may have to get your hands dirty with some DIY fixes. Your landlord also pays your property taxes. There are several advantages to renting vs buying. If you plan on staying in one place for at least five years and have enough savings to cover the costs of purchasing a home and a down payment, then consider buying a home instead of renting.
Get Prequalified: If you are a first-time homebuyer then chances are high that you will require some type of financing. The process lenders refer to as prequalification is often quick and painless and can be done with a quick phone call or even online. However, this does not guarantee that you can get a loan. The lender goes off estimates and they don’t actually pull your credit. This means they will give you an estimate and not the actual amount of what you can borrow. The worst-case scenario is that a lender will tell you that you are not eligible for any type of loan. Most of the time this is due to something called your debt to income ratio, which means how much debt you have in comparison to your monthly income is too high for you to repay a mortgage, and your risk of defaulting is higher. If this is the case, many lenders will work with you on credit repair and counsel you on the best steps that you can take to be eligible for a loan in the future.
Get Pre-Approved: This is the most important step if you are a first-time homebuyer. Many people get prequalification and preapproval confused. The easiest way to distinguish these two is that one is serious and one is not. Prequalification is not serious and only goes off of estimates that you provide, including a verbal credit score. So if you tell them your score is 850 and you have no debt of course they will say you can get a loan. Preapproval is when you formally apply for a mortgage. The lender actually pulls your credit and gives them a complete financial picture to determine how much you can actually borrow. They will ask for several documents including any formal ID like a driver's license passport or social security card, income tax forms, summaries of your assets (if you have any), bank statements, retirement accounts, recent check stubs, and proof of employment. If you are currently renting they will also ask for a history of your rental payments for the last twelve months. Most of the time you have to have at least two years of steady employment before you can be approved for a loan. The loan underwriting process will also determine what types of loans you are eligible to borrow, including any government-backed loans. The lender will also factor in something called a loan-to-value ratio, which is an important factor that determines the loan types you qualify for and depends on the amount of money you have saved to add to the loan. After this process is over and you feel like you were under the biggest microscope you’ve ever seen in your life, your lender will send you your golden ticket. The golden ticket is your preapproval letter and will give you the best leverage when you make an offer on your first home. The letter also gives you the most accurate price range to stay in when you begin working with your agent. Your lender will also go over rates and other specifics. The preapproval letter you receive will be good for 60 to 90 days and sometimes up to one year. If your preapproval letter expires, don’t worry. You can ask for another one from the lender who did the underwriting. They may ask you for some updated statements to see if anything has changed, but this process is not as meticulous as your initial pre-approval. Remember: many agents will not show you any homes until you have this preapproval letter, especially in a quick market with a limited amount of houses that are currently for sale. Not only does look at homes you may not be able to afford waste your time, but there is also a huge chance your offer may not be accepted if you don’t have a preapproval letter.
Types of Loans:
There are several types of loans that your lender will determine that you are eligible for. The most popular types of loans for first-time homebuyers are called Government-Backed Loans. These loans are referred to as FHA, VA, USDA, and state-specific loans like THDA or Georgia Dream in our local area. Government-backed loans are a good option for buyers who do not qualify for a conventional loan.
1. FHA loans are the most popular type of loans for homebuyers. FHA loans are backed by the Federal Housing Administration. They do not originate loans. However, they are a good option for people with a lower credit score or they don’t have the standard 20% for a down payment you need for most conventional. Most people you know probably don’t have thirty thousand dollars in their back pocket to buy a house that costs 150 grand. This is why FHA loans are the most popular loans if you are a first-time homebuyer.
2. VA loans: if you are a military veteran, you can get a loan with no money down as long as you have something called a certificate of eligibility. While FHA will allow you to borrow with a lower credit score, you typically need to have a score of at least 620 to be eligible for this type of loan. That’s not always the case, but the lenders that are willing to let you borrow money decreases the lower your credit score becomes.
3. USDA loans: Yes, the people that inspect your meat. USDA loans were designed to stimulate homeownership in rural areas. You cannot buy a home with this type of loan if you are planning on living within an area's city limits. USDA has strict rules regarding income levels and your score has to be at least 640 to qualify. Like VA loans, USDA loans allow you to buy with no money down.
4. State-specific programs: THDA and Georgia DREAM are the most popular in the Greater Chattanooga Area. These loans have income limits and price limits on the price of homes you can buy but are a great choice if you have limited funds for a downpayment.
Shop For Your Home and Make An Offer: This is everybody’s favorite part. If you are working with an agent, they will help you find properties that are the best fit for you. Tour the neighborhood to get an idea of the traffic flow and research local schools. Do as much research on the area as possible. Get a copy of the Homeowners Association if necessary to know any deed restrictions, extra fees, and rules. If this is your first home, pay the most attention to the structural issues of the house and location instead of cosmetic finishes. Your offer should include any contingencies you want to address. These include financing and appraisal.
Earnest Money: After your offer is accepted you will need to submit a copy of your contract, which agents refer to as a purchase and sale agreement. They will also need to see proof of something called your Earnest Money deposit. Earnest money is something called a good faith deposit. Typically the amount of earnest money is 1 to 3 percent of the amount of the home you want to buy. That is not always the case and technically it doesn’t have to be cash, it can be anything of tangible value. It could even a boat. The bottom line is that the current owner of the home you want to buy must agree to the amount of earnest money and its format in writing. Earnest money will protect the owner of the home you want to buy in case you back out of the contract. This typically happens after something called the inspection period. If you change your mind before the inspection period ends, your earnest money will be refunded. Your earnest money will be deposited into something called an escrow account at your agent’s brokerage as soon as it is received and it will stay there until closing.
Inspection: This is the most fun part of the process for the listing agent. Just kidding. You have the right to inspect the house and the land it sits on. You also have the right to choose your home inspector. Do your research and choose a bonded and insured inspector that is certified by the American Society of Home Inspectors. You can ask your agent for a good reference, but note the agents do not get any kickbacks for referring you to the inspector. Agents will recommend them because they have worked well with them in the past. Stick with an inspector that doesn't have any interest in making home repairs. Once the inspection is scheduled, make it your priority to be present at the home during the process. Have the inspector take any pictures of problem areas, and see how they draw up their report. After the inspection, parties can negotiate repairs. Sometimes, the contract will fall through if all parties cannot come to a reasonable agreement. This period can be stressful because if the contract falls through, you have to restart the home search process.
Appraisal: Your lender wants to ensure the fair market value of the home is sufficient enough to cover the loan amount. They will not underwrite a loan higher than the value of the appraisal. The lender will use a standard form that documents the home's age, construction quality, condition of the roof and foundation, number of rooms, and several other factors. The appraiser will also analyze housing trends, neighborhood demographics, photos and floor plans of the home, and comparable properties that have recently sold to determine an estimated value of the home. If the appraisal comes in lower than the purchase price, the buying and selling parties will have to negotiate on how to move forward. There are several ways to accomplish this. A seller may reduce the asking price, you can submit a reconsideration of value to the lender, or a second appraisal may be ordered.
Finalize Move-in Details: Planning is essential for a smooth transition into your new home. Notify your landlord if you haven't already. Get quotes from homeowners insurance providers. Be sure to update your address for any bills. Contact your local utility providers to arrange for new services after you move into your new house. Hire a reputable moving company and being packing belongings.
Closing Table: Your real estate agent and your lender will guide you through the closing process and help you review documents and explain any questions you have about what you are signing. You will need updated paystubs just before closing to show your employment status has not changed since you applied for your loan. You will receive a closing disclosure form that outlines loan details and fees three business days before closing. Use this form to compare to your initial loan estimate to verify you are not being charged unexpected fees. You will conduct a final walk-through of the home twenty-four hours before closing to make sure any repairs negotiated were made and to ensure the home is vacant. At the closing table, you will sign paperwork to finalize the loan and transfer the deed from the seller's name to yours. You will bring a cashier's check or wire funds to the title company. The keys to your new home will be exchanged and you can now enjoy the perks of being a homeowner.
If you are interested in getting preapproved so you can shop for your dream home, contact us and we will be happy to answer any questions before you get started.