The home-buying journey is long and has numerous moving parts. At some point, you have probably been given homebuying advice from a friend or family member that is either untrue or only partially true. For example, some people believe that getting pre-approved for a mortgage will hurt your credit score and that interest rates are the only thing to consider when deciding on your loan. Although these are partially true, there’s much more to the story. Luckily, you don’t have to play the telephone game— instead, you have access to actual professionals, such as loan officers, who can clarify the entire process. Employed by mortgage lenders, a loan officer is licensed to evaluate, authorize, and recommend approval of loan applications. And guess what? Loan officers are aware of the countless misconceptions about the home-buying process. To help dispel some of these misconceptions and provide education in many overlooked areas, here are 11 home-buying tips that your loan officer wants you to know.
Preparing for the Home-Buying Process Starting the home-buying process is an exciting experience. However, don’t start shopping for a home immediately. Getting attached to your dream home could set you up for disappointment if you don’t have your finances in order. Before you start looking for a home, partner with a Loan Officer. They will be able to determine which loan program is best for you and help you understand your purchasing power. This can take a day or two, so getting it done before anything else will prepare you to make an on-the-spot offer.
Many elements are involved in your financial profile, such as debt-to income ratios, credit score, and savings. Although there are plenty of guides that help you prepare to buy your first home, here are four home-buying tips for the preparation stage:
1. FUNDING FROM ALTERNATIVE SOURCES CAN BE RISKY.
Unless you obtain a Veterans Affairs (VA) or United States Department of Agriculture (USDA) loan, most mortgages require a down payment. For first-time homebuyers, a 5 percent down payment is standard (unless it is a jumbo loan, which requires 10-20 percent).
In an ideal scenario, these down payment funds would be readily available in your savings account. However, that’s not always the case. When seeking out alternative funding, many homebuyers might attempt to pull from a retirement account. However, there are quite a few caveats that come with this option:
• There could be sizable fees when withdrawing, depending on the type of retirement account.
• Every retirement plan has set terms and conditions, and some plans don’t allow for withdrawals.
• Other plans only allow withdrawal for specific reasons, such as medical emergencies or hardships.
If you choose to investigate this option, you should consult with your advisor for details on withdrawal.
But the drawbacks aren’t just in fees. You are also pulling from funds intended to support you in retirement. Instead, consider one or a few ways to grow your bank account:
• Make a habit of transferring a certain amount from checking to savings every month for more interest accrual, keeping that money in savings unless necessary.
• Track spending and eliminate unnecessary expenses.
Refinance any current loans. In a survey from the National Association of Realtors, 51 percent of surveyed non-homeowners reported that student loan debt is delaying their home purchase. Refinancing your loans allows you to save money and lower your debtto-income ratio.
Track spending and eliminate unnecessary expenses.
2. PRACTICING GOOD CREDIT HABITS IS A VIRTUE WHEN BUYING A HOME.
Your credit score is one of the most critical factors in determining your loan eligibility because it tells the lender how big of a risk you are. Those with higher scores are considered more likely to repay the loan than those with low, poor, or good credit scores.
If you’re not sure what your credit score is, check with Credit Karma*. This program provides you with a more accurate credit score than your credit card provider, which bases the estimate on the repayment history of the card, not other accounts that impact your score.
Or you can request your credit score once a year from the three big credit agencies: Experian, Equifax, and TransUnion. *The information provided in this guide is for illustrative purposes only. No legal advice is provided.
Practicing good credit habits means:
• Avoiding too many credit pulls.
• Avoiding new lines of credit.
• Paying off card balances on time.
• Keeping lines of credit open (even if no longer used).
• Staying below 30 percent utilization.
• Not deferring loans unless you have to.
To this last point, if any loans are deferred, the Loan Officer will have to take 1-5 percent of the balance and use that as your monthly payment, which affects your debt-to-income (DTI) ratio. If not deferred, the actual monthly payment is often less than that 1-5 percent, potentially improving your DTI. However, deferred mortgages must be paid in full either before closing or at closing on a refinance.
3. DOCUMENT PREPARATION TAKES MORE CARE THAN YOU THINK.
It’s wise to get pre-approved for a loan. Doing so tells sellers that you are serious about the process, which is especially beneficial in competitive real estate markets.
Pre-approval requires a hard credit check and review of all your financial information by an underwriter. The relevant documents to prove income include:
• Your two most recent pay stubs.
• Two years of your most recent W-2 or 1099 forms.
• Your two most recent bank statements.
During this step, borrowers can run into a few issues, including incomplete financial information or delivery of unreadable material. For example, some borrowers will send screenshots, which often provide a blurry picture of the document. Instead of screenshots, download PDFs or scan all of your documents to ensure they are presentable with no rough edges.
4. PURCHASING COSTS INCLUDE MORE THAN JUST THE DOWN PAYMENT.
Many homebuyers enter the process thinking that “purchasing costs” and “down payment” are interchangeable terms. Although the down payment will be the more significant cost, purchasing costs include closing costs, which can be between 2-5 percent of the loan amount.
Closing costs include the:
• Appraisal fee
• Credit report fee
• Prepaids and escrows, which include property taxes and insurance
• Title fees, which include recording fees, settlement fees, and transfer taxes (in some states)
• Origination fee
• Tax service fee
• Flood certificate fee
A home inspection is another optional closing cost, but this is usually discussed between the buyer and realtor and does not include the lender. To get a better idea of whether you can afford these costs, use a payment calculator. Keep in mind that you will need additional savings after these costs to account for a few months of mortgage payments and any unexpected expenses after you move in.
Selecting the Right Home and Loan Got your finances in order? Great! Let’s move on to properties, loan programs, inspection, and who to partner with for the next homebuying tips.
5. PROPERTY TYPE DETERMINES MANY FINANCIAL FACTORS.
The type of home you choose can change many things for you and your lender. The property can affect the down payment, interest rate, and loan program. If you’re interested in different types of properties, this will also require multiple pre-approvals.
Here are three of the most common types of properties that can cause lending issues:
Manufactured homes have strict terms, and many lenders cannot provide lending guarantees unless the property meets certain requirements.
Commercial-residential properties have a small amount of commercial use, such as apartments above a coffee shop. This often affects the availability of loan programs.
Condos and planned unit developments (PUDs) come with more risk to the borrower, in part due to homeowner’s associations (HOAs), which can put a lien on these properties. Other factors—such as the number of units—can change down payments, rates, and loan programs. Buyers need to understand what they are agreeing to with the purchase. In some cases, the HOA costs can be more than the mortgage.
6. DOUBLE- AND TRIPLE-CHECK THE HOME’S CONDITION.
Whenever you check out a piece of property, always bring your listing agent to identify any issues with the property. Certain things may be hidden from buyers, such as flood zones, the age of the roof, and the expected life of a home.
Although this information is available to the lender once the appraisal comes back, making adjustments before the appraisal can save time in closing delays. For example, a staircase without a railing would need to be fixed by the seller before the inspection. Although it seems minor, a hazard like this can stop an inspection from passing
Bottom line: Stay in contact with your lender and stick with one type of property (two at most) to better anticipate loans, down payments, and pre-approvals.
7. LOOP IN YOUR LENDER WHENEVER YOU ARE INTERESTED IN A PROPERTY.
Give your loan officer a list of properties you plan to visit so they can research them and see if they can lend based on taxes, HOA fees, and other factors. Doing this also helps them ensure that you qualify for a refreshed pre-approval letter before you check out the properties.
Before attending an open house, let your lender know so they can monitor their email and phone in case a bidding war takes place. This also gives them a chance to have the file in front of them in case a purchase and sale contract is ready when they return to the office. The better prepared they are, the better chance you have of getting under contract on the property.
In an ideal scenario, letting your lender know about properties of interest will allow them to:
– Conduct an inquiry in which they answer your questions and provide a mortgage match.
– Fill out the appropriate forms and upload your financial documents.
– Provide an anticipated FICO score, which you can also pull from Credit Karma. This isn’t a hard credit pull, but rather soft pulls from two bureaus.
– Determine how much you can put down. This gives the lender a better idea of what program best meets your needs. Most programs with lower down payments have income limits that vary by town, so determining where you want to live is crucial.
8. DON’T USE THE SAME REAL ESTATE AGENT OR LAWYER AS THE SELLER.
This is a clear conflict of interest, and it happens more often than one might think. Even if a real estate agent or lawyer claims to be impartial, a situation will eventually arise in which they will lean in the direction of one party.
If you go to an open house without an agent and the seller’s agent is present, don’t choose them as your agent, even if they encourage you. In this case, the seller and agent already have a binding contract. In other words, the agent’s interests are with the seller.
There is a common misconception that buyers have to pay for a real estate agent. In reality, agents are paid out of a seller’s proceeds. Many buyers won’t use an agent because they are trying for a cheaper process. However, real estate agents are essential for negotiating and getting an accepted offer.
Home-Buying Tips During and After Closing
Once you are ready to purchase your dream home, there are a few final steps to take to close. At this point in the process, deciding on the right loan and choosing mortgage insurance tend to cause the biggest delays.
9. TAKE THIS ADVICE FOR GOVERNMENT, JUMBO, CONVENTIONAL LOANS.
Based on your credit score, income level, and property location, your lender will select the best mortgage for your circumstances. Here are the most common types of loans to consider:
- A Conventional Mortgage: abides by the lending rules outlined by Fannie Mae and Freddie Mac. First-time homebuyers can put down as little as 3 percent if they purchase mortgage insurance and only if they fall below the income limit. Borrowers will need a credit score of 620 or above, a low debt-to-income ratio, and secure employment.
- Government-backed Loans: have stricter regulations for the type and quality of the home, but also have flexible underwriting requirements and lower down payments. These loans include Federal Housing Administration (FHA), USDA, and VA loans.
- Jumbo Loans: are for financing homes worth more than the conventional loan limit, which changes every year. In 2022, the conforming loan limit is $647,250 for most areas. This process can take longer than other loans because it has to go through a second underwriter.
- An Adjustable-Rate Mortgage (ARM): has a fixed rate for the first few years of the loan. After that established period ends, the rate fluctuates at set intervals. This is a great option for buyers who plan to sell the home after a few years. Otherwise, this is a risky choice. ARMs also need to go through a second underwriter because they are a riskier product.
10. FOLLOW THESE TIPS FOR THE PURCHASE AND SALE AGREEMENT.
The purchase and sale (P&S) agreement is the contract that governs the transaction. The buyer must decide who should go on the P&S before signing the contract. It is not uncommon for a buyer to include another person—such as a spouse—on the title. If this doesn’t happen before the contract is signed, all parties involved must sign an addendum if the buyers on the contract do not match the title.
Bottom line: Decide who you want on the title before drafting the P&S. If you are unsure who should be on the title, reach out to the attorney. Lenders aren’t always aware of potential legal complications.
Another aspect of the P&S agreement that tends to throw a wrench in the process is a gift of equity. Many people think that a gift of equity is the difference between the appraised price and the price the seller has set for the buyer. In many cases, this can negatively affect the seller because they believe they will be paid an appraised price and not the purchase price.
Here are two scenarios to help illustrate this point. In the first scenario:
• Mom’s house is worth $500K.
• She sells it to her child for $400K.
• Her child puts 5 percent down and needs to bring a $20K down payment, plus closing costs.
• Mom gets net proceeds of $400K at closing.
In the second scenario:
• Mom’s house is worth $500K.
• She sells it to her child for $500K, with a gift of equity of $100K.
• The child now has $100K toward the down payment, making it 20 percent down.
• The child does not need to physically bring any down payment to closing, just the closing costs.
• Mom gets net proceeds of $400K.
11. CONSIDER MORTGAGE INSURANCE, EVEN IF YOU HAVE HEARD DIFFERENTLY.
Mortgage insurance is required if the down payment is less than 20 percent. In the past, putting down 20 percent was accepted as the norm. However, if you go into a home purchase with this mentality, you are more likely to shrink the available housing pool. Plus, you will have less money for closing costs and additional savings after the transaction.
Mortgage insurance is considered a useless monthly cost, so most people want to avoid it. But this isn’t true—it is insuring the mortgage, which helps in the event you cannot pay your mortgage. Plus, the small monthly amount that goes toward mortgage insurance can accrue interest in a savings or investment account. That money can be spent on repairs and furniture costs or used as a reserve.
Because the mortgage is insured, it makes the loan less risky. Therefore, the interest rate tends to be a little lower when mortgage insurance is involved.
Get More Mortgage Hacks and Home-Buying Tips from
Landmark Mortgage & Associates, Inc in Lakeland FL.
As you can see, the home-buying process has many steps you might not learn about through research.
To get a complete picture, you need to work with a professional loan officer who can help you navigate the process, use money wisely, get the best loan for your situation, and land the home you have always wanted.
Ready to learn more? Start a partnership today!