Before Buying a Home

Check your finances before you buy

A little time spent shoring up your credit, crafting your budget and organizing financial documents will go far in smoothing the way to a home purchase. Work on your home-buying project before you even start shopping for homes. Keep in mind that most buyers take eight weeks to actually shop for a home, according to a survey by the National Association of REALTORS®. Your financial prep work should start well ahead of those eight weeks.

A good first step:

Take advantage of the free credit reports everyone is entitled to see. Many web sites offer "free" credit reports but there’s a catch. They require you to sign up for a free trial of a credit-monitoring service that will cost money if you fail to cancel during the free trial period.

The official site where you can get free, no-strings-attached credit reports annually from the Equifax, Experian and TransUnion credit bureaus is http://www.annualcreditreport.com/. You can receive one free credit report from each of these three agencies every year.

Financial Documents

What you’ll need to apply for a loan

A lender will need your financial documents when you apply for a loan. Including:

Copies of your income tax returns

W-2 wage statements

Paycheck stubs

Bank and investment account statements

Recent credit card statements

Other documents you might need are divorce decrees and proof of child support payments.

Having these documents handy will help you figure out your down payment, monthly mortgage, plus property taxes and insurance.

There is a difference between the maximum payment a borrower can qualify for -- which can sometimes be surprisingly high -- and the amount you can comfortably afford.

First-Time Homebuyers

A good REALTOR® can help you figure out the bottom line.

First-time buyers in particular often don't know how they can afford a mortgage that’s higher than their rent because they can deduct the cost of the mortgage on their tax returns.

There are many aspects to a real estate purchase. Including:

Deposits, up-front costs (inspections)

Settlement costs

Purchase price and financial reserves (for repairs and other expenses after moving in).

Buyers should be sure how they will find the money to cover each expense (savings, gift, mortgage, etc.).

Sellers may want to ask for proof that the buyer can afford the home. Most buyers will require mortgage financing to buy a home, so most will elect to include a mortgage contingency in the Agreement. In short, the contingency states that the buyer won’t have to move forward with the purchase if an application for mortgage financing is denied.

Home Loans

How to get a loan

Most of the time you can get a housing loan from a bank, savings and loan or a credit union but you can also get one from:

An insurance company

Mortgage banker

Finance lender

Mortgage loan broker

Pension fund

An investment trust.

Lenders charge various fees and offer different interest rates so it pays to shop around. Your REALTOR® will be able to recommend lenders in your area.

Applying For a Loan

What a lender needs to get you a loan

When you apply for a home loan, the lender:

Checks your credit rating

Reviews your past employment

Income history and debt.

The lender also gets information about the property that will be security for the loan. This includes an appraisal or estimate of the fair market value of the home. This involves a review of the preliminary report prepared by the title insurance company to determine what liens, easements and other conditions will be superior to its loan as well as a review of any taxes, assessments and zoning regulations that affect the property.

Most buyers will have a “pre-qualification” or “pre-approval” letter from a lender that indicates how much the buyer can afford to pay for a house. Although this does not guarantee that the buyer will eventually be approved for financing, it’s helpful for a buyer to know what they can afford.

PRE-QUALIFICATION is when the lender looks at a buyer’s finances to see what kind of a mortgage they can afford. It is based on the documentation the buyer provides and it usually doesn’t cost anything.

PRE-APPROVAL is more detailed and takes place when the buyers are closer to making an offer on a house. For a pre-approval:

The lender will verify the buyers’ earnings and finances — often by obtaining a credit report. This will determine whether the buyer gets a loan

If the buyer is pre-approved, the lender provides a letter stating the maximum amount the buyer can borrow.

 

Pre-approval may make the buyers look “stronger” in the eyes of a seller and improve the chances of making a deal. Some lenders will charge:

For a loan application

Document preparation

Appraisal and other fees to consider or close the sale.

You should discuss these fees with your lender before you apply. In exchange for cash from the lender, you agree to pay interest and to make payments over a period of time. In most instances, the property you purchase will be security for repayment of the loan.

What Type of Loan is Right for You?

A breakdown of loans

Occasionally, you can "assume" a loan or take over a loan that the seller has been paying off. You should be careful in assuming any loan. Most loans have an “acceleration” or “due on sale” clause. This means that the lender can demand that the seller's loan be paid in full when the property is sold. If you wish to assume a loan, you should have your agent or attorney review all of the seller's loan documents and make approval by the lender a condition to your offer.

Most home loans that are available offer one of two interest rate structures.

A fixed rate loan offers a set interest rate, so that your monthly payment never changes. Some fixed rate loans are federally insured or guaranteed, such as a Veteran's loan or an FHA loan. These loans usually have a lower interest rate and require smaller down payments.

An adjustable rate mortgage loan, sometimes called an ARM, is a mortgage loan that can adjust the interest rate as the market’s rates change. The ARM's interest rate is tied to an index that reflects changes in the market rates of interest. Some indexes used are the Cost-of-Funds Index published by the Office of Thrift Supervision and the Federal Reserve Discount Rate. These loans usually have interest rates that are lower than the fixed rate loan interest. ARMs can be complicated. Make sure that you understand all of the terms of these loans before you agree to accept one.

Mortgage loans are available under many terms:

The “traditional” loan is 30 years.

Other loans are available for 15 years, 20 years or even 40 years.

Keep in mind that a monthly payment can vary greatly depending on the term of the loan — the longer the term, the lower the payment. The term of the loan can also affect the interest rate and the buyer’s ability to qualify for the loan.