Am I Ready to Buy a Home?

How do you know if you’re ready to buy? You should start your new home buying adventure by logging onto our website. It’s packed with plenty of tips, hacks and insight. Here are some things you should consider when thinking about shopping for your new home, whether it’s your first or last:

1. Do you have steady income?

2. Do you have funds available for a down payment and closing costs?

3. Can you handle repairs, both minor and major, to a home?

4. Can you provide the following:

     ☑ Verification of income.

     ☑ Bank statements showing sufficient funds to   close.

    ☑ Two years of employment history.

Buying VS Renting

Homeowner Benefits

The increase in equity belongs to you. When you rent, the increase in equity belongs to your landlord. Which would you rather be?

1. Each monthly payment you make toward the mortgage is like a savings account.
2. When you pay down your loan, the difference between the loan balance and the current market value adds to your financial wealth.
3. The interest you pay each month is tax deductible. When you rent, it’s a monthly expense with no tax benefits. At least not for you!

Renters Benefits

1. You have more flexibility. Younger buyers tend to move more often . If you sign a 12 month lease you have the option to extend that lease or find another place to rent.
2. Mostly, your landlord is responsible for maintenance and repairs.
3. You may have access to extra amenities at no charge such as a workout facility or swimming pool.

What Your Lender Will Look For

Getting ready to finance a home means knowing what the lender will look for during the approval process. In general, here is what you can expect:

1. Lenders will ask for at least a two-year employment history.
2. Most loan programs will require a down payment in addition to funds needed to cover closing costs. Lenders also like to see some cash left over after closing, referred to as cash reserves.
3. How is your credit? If you’ve been making your monthly payments on time, you should have no problem qualifying based upon your credit history

Overview

You might be surprised to know that you don’t need a down payment of 20% of the sales price. In fact, you may be eligible for a zero down payment loan. Mortgage loans today are fully amortized, which means each monthly payment goes toward to pay down the loan balance and the loan will be paid off at a predetermined date.

Mortgage loans are either considered conventional or government-backed. A conventional loan is one where the lender accepts the risk of issuing a loan while a government-backed mortgage is one where the government compensates the lender for all or part of the loss due to default. Let’s take a look at these two categories.

Loan Types

Conventional 

Most conventional loans today are approved using guidelines established by Fannie Mae and Freddie Mac and make up nearly two-thirds of all mortgage loans approved today. Conventional loans provide a wide range of loan terms ranging from 10 to 30 years in both fixed and adjustable rates.

Conventional loans require a down payment of at least 5.0% of the sales price of the home but will require a private mortgage insurance policy covering the difference between the mortgage balance and the market value of the home. No private mortgage insurance is required when the mortgage is at 80% of the sales price of the home.

Conventional loans can be used to finance a single family home to a 2-4 unit property for either a primary residence, vacation home or investment property.

FHA

FHA loans were introduced by the Federal Housing Administration back in 1934 and today are the most popular option for first time buyers seeking to buy and finance a home with as little cash as possible. The minimum down payment required for an FHA loan is 3.5% of the sales price. There are no restrictions such as location, veteran status or monthly income. An FHA loan compensates the lender at 100% of the loss due to default.

VA

The Department of Veterans’ Affairs introduced the VA loan in 1944. This program is available to veterans of the armed forces, active duty personnel with at least 181 days of service, National Guard and Armed Forces Reserve members with at least six years of service and unremarried surviving spouses of those who died while in service or as a result of a service related injury. VA loans do not require a down payment while also limiting the types of closing costs the veteran is allowed to pay. The guarantee applies to 25% of the loss to the lender in the instance of default, which is rare for VA loans.

USDA

The United States Department of Agriculture is another zero down payment option. A USDA loan is designed to finance owner-occupied purchases in rural and semi-rural areas. A home must be located in an approved region to become eligible for a USDA loan. Household must not exceed 115% of the median household income for the area. The guarantee applies to 100% of any loss.

Government loan options include loan terms ranging from 10 to 30 years in both fixed, adjustable and hybrid options. Contact your Majestic loan officer for more details.

Which is the better option of the three? If you’re VA eligible and want the lowest cost mortgage, the VA home loan is usually a good choice. The USDA loan also requires less money down but does have to be located in a specific area. Your Majestic loan officer can help determine if a property you’re interested in qualifies. Finally, if you’re not VA eligible and the property is not in an approved zone, the FHA mortgage is an excellent option. 

Rate types 

Fixed Rate Mortgage 

A fixed rate provides stability over the life of the loan as the interest rate will never change. A fixed rate is easier to budget for each month and is especially helpful regarding long term financial goals. Fixed rates may be slightly higher when compared to an adjustable rate.

Adjustable Rate Mortgage

An adjustable rate, sometimes referred to as a variable rate, can change throughout the life of the loan based upon a predetermined index, margin and interest rate caps. Most adjustable rate loans today come in the form of a hybrid, where the interest rate is fixed for an initial period before changing into a rate that can adjust once per year. 

Mortgage Terms

Short-Term

Another factor that determines a monthly payment is the term of the loan. Terms for home loans can range anywhere from 10 to 40 years primarily in five year increments in 10, 15, 20, 25, 30 and 40 years. Shorter term loans such as a 10 and 15 year term will have higher monthly payments but less interest is paid to the lender over the course of the loan. 

Long-term

Longer terms provide the lowest monthly payment but adds more interest to the loan during the loan term. Longer terms such as 25, 30 or 40 year terms provide payment flexibility and increases buying power due to the lower monthly payments. 

How do I Get Pre-Qualified 

A pre-qualification is your first step when exploring mortgage options. A pre-qualification is really a simple, easy process and can be done over the phone with your loan officer. During this brief conversation, you’ll be asked:

1. How long have you been at your job and what do you do?
2. What is your gross monthly income?
3. How much money do you have available to close on your new home?
4. How is your credit?
5. Other questions the loan officer may have

The loan officer will then take your information and using current market rates provide a general amount you may qualify for. After this conversation, your loan officer will prepare a letter stating you have spoken with a lender and are pre-qualified for a home loan. 

Pre-Qualification vs. Pre-Approval

So what’s the difference between a pre-qualification and a pre-approval? Simply put, the degree of verification. It used to be that a pre-qualification letter issued after a conversation or meeting with a loan officer was enough needed in order to start shopping for a home. Yet while a pre-qualification lets the buyers know a price range they can start shopping for, sellers want to know that your lender has not only provided you with a price range but that your income, credit and assets have been reviewed and approved by your mortgage company.

When presenting an offer to buy a home, sellers want to see a pre-approval letter, not a pre-qualification letter. If there are two competing offers on a home and one offer has an accompanying pre-approval letter and the other does not, the nod will go to the offer with a pre-approval attached.

Get a Lower Rate

Shopping for a mortgage is less about the rate as much as it is about comparing the monthly savings on the new loan with the amount of costs associated with the new mortgage. If you can save $100 per month and your closing costs are $3,000 per month, which means it will take you 30 months to recover your investment. As long as you intend to keep the property for at least that long then a refinance can be worthwhile. 

What is a Pre-Approval? 

A pre-approval is a process that verifies the information gathered during the prequalification. Your loan officer will ask that you provide copies of your most recent pay check stubs covering a 30 day period as well as your last two years of W2 forms. If you’re self-employed, you’ll need to provide your last two years of personal and business federal income tax returns.

Your loan officer will also ask for copies of bank and investment statements from the accounts to be used for a down payment, closing, costs and cash reserves. A credit report will also be pulled to verify a responsible credit history. Once this information is reviewed, your loan officer will provide you with a pre-approval letter stating that you have applied for a mortgage, your income, credit and assets have been reviewed and all you need to do is find a property. 

What Documents Do You Need to be Pre-Approved? 

Because a pre-approval verifies via third party your income, assets and credit standing, you will be asked to provide copies of certain documents when you submit your loan application. You will need to provide:

1. Your most recent pay check stubs covering a 30-day period.
2. Your last two years of W2 forms.
3. If self-employed, your last two years of personal and federal income tax
4. returns along with a year-to-date profit loss statement.
5. Bank and investment statements for the accounts to be used for your purchase.
6. Authorization to pull a credit report and credit scores.

How Your Pre-Approval Amount is Determined?

Your pre-approval amount is determined by comparing your total monthly credit obligations, including a new mortgage, with your gross monthly income. This includes an auto loan payment, credit card and student loan payments and other credit accounts that appear on your credit report.

To make sure you have enough funds available to close, lenders will review your bank statements showing you have enough funds to close plus some extra left over referred to as cash reserves.

Your credit report will be reviewed along with credit scores. After income, assets and credit is reviewed, the lender will use current market rates to arrive at a monthly payment and qualifying loan amount. 

Don't Try and Do This On Your Own

Now that you know how much you can qualify for and the price range of the homes that fit your budget, it’s time for the exciting part…searching for just the right home! But now, you need some professional assistance. You need a real estate agent. Yes, you can begin your search online, if you haven’t already, but a real estate agent is a must.

Some buyers who have obtained their pre-approval letter on their own without the aid of an agent think that an agent is an unnecessary option. But that couldn’t be further from the truth. Real estate agents are full time professionals who are out in the market every single day helping buyers find just the right property at just the right price. Buying a home is a big financial commitment so you need to enlist as much help as possible and none can be better than a professional real estate agent.

Your agent represents you, not the seller. The agent will be able to tell you about neighborhoods that are on the rise and ones that you might avoid. An agent can save you thousands of dollars just by making the right offer. An agent negotiates with the sellers on not just the price, but to make any needed repairs to the home or help pay for your closing costs as well. It never hurts to have an agent in your corner.

When you first meet with an agent, be prepared to have your pre-approval letter at your side. Real estate agents will certainly be courteous and answer any questions you have but they also want to see you’re serious about buying. The pre-approval letter does just that.

Your agents will ask about things which are important to you:

•  Do you want a home close to work? What about the local school district?
•  Are good schools important to you?
•  How long do you think you’ll own your home? 
• Are there any areas you’ve already picked out?

This interview process will maybe take an hour or so. Both you and your agent need to feel comfortable with one another to make sure you’ll make a great team! 

Not too High, but Not Too Low, Either

This is where your agent really shines. When determining how much you want to offer of a particular house, your agent will research similar homes in the are that have recently sold and compare those prices with your individual price range. Your agent's job is to find you best house at the lowest possible price. But at the same time the seller's agennt ins trying to get the highest price.

Things to consider when making your offer

How long has the home been on the market?

If a property has been listed for a longer period of time compared to other home sales in the area it could mean the property is priced too high relatice to its location, or the home has some underlying issues.

How is the market?

Do homes sell rather quickly? Is it a popular neighborhood. If so, you might be caught up in a bidding war. Be careful here and listen to your agent. When making a competing offer sometimes your heart rules over your head. Stay within budget. If you don't you might need to get a new preapproval letter.

Property Inspection

Be prepared to go back and forth a few times before a finale sales price is reached. Remember, everyone's agent has different goals. Once an offer is finally accepted, your next step is to order a property inspection.

An inspection is performed by a licensed property inspector who will physically inspect the home from top to bottom looking for any structural isddues, broken or cracked windows. Do the faucets leak? How is the hot water heater? Do the light switches work? The isnpector will go down a list of nearly 300 different isuues. 

Minor issues such as a light bulb that needs replacing isn't a problem. Noticeable cracks above door jambs are and could indicate some serious foundation problems. Others, such as a deck that needs some attention or there are some carpet stains can cause you to renegotiate the sales price or have the sellers fix whatever needs fixing. If there are issues that cannot be resolved, your agent will make sure there is working in your contract that allows you to cancel the offer. 

Once the home passes a final inspection, it's time to prepare for your closing.

The Most Important Thing to Do is Not Make Any Changes 

Once the home passes inspection, it’s time for your lender to order the appraisal on the property. While the appraisal is being performed, your loan officer or loan processor will ask for any additional information needed at this time. Don’t be surprised if you’re asked to provide some of the same things you’ve already submitted; documents in a loan file need to be no more than 30 days old.

Your lender will also order other third party services need, such as opening up escrow and scheduling a closing date. Title insurance and related title services will be ordered. Once the loan is fully documented then it goes to the underwriter who will make sure the loan meets all the lending guidelines.

The underwriter may have some questions during the approval process but don’t be alarmed. These questions often come in the form of loan

conditions, which means the loan is approved based upon receipt and review of some additional items. Usually these conditions are minor ones and only required to keep the loan in compliance. But when these questions are presented, make sure you respond in a timely manner. 

A Simple Checklist 

✔ Don’t make any changes in your employment or financial profile.

✔ Don’t switch jobs.

✔ Don’t make any large purchases such as an automobile

✔ Don’t open up new credit accounts that might tell an underwriter you’ve taken on new debt. 

You're Almost There!

The day before you're scheduled to sign your loan papers, you will receive what is called a closing disclosure, which itemizes all the various charges, fees and credits related to your transaction. These costs will also have been provided to you early on in the form of a cost estimate which lists potential charges you will see at your settlement. If there are any questions, speak with your loan officer. You can expect a final closing amount slightly different than originally disclosed, but this is normal. Any new charges you weren't made aware of initially aren't your responsibility.

Prior to closing

You and your agent will visit the property one more time for a final walk-through. During your walk-through, you'll notice any needed repaire that have been completed. Did the sellers perform the requested actions listed in the sales contract? This is your last opportunity to make sure the sellers agreed to the letter the terms of your contract. 

At your closing

Your settlement agent will provide a stack of closing documents for your review, signature and ititials. Read through your documents carefully and if ther eany questions, now's the time to ask. Once you've signed all your paperwork, you will provide the necessary funds typically in the form of a cashier's check or bank wire. 

The settlement agent returns the signed documents to the mortgage company who will then review all the paperwork, making sure the settlement agent followed the lender’s instructions to the letter. Once the lender has made this determination, the settlement agent is provided a “funding number” which is essentially a code that unlocks the mortgage funds from the lender’s bank.

Your Loan is Closed and You are a Homeowner!