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Home Buyer Process

How Much Can I Afford?

Buying your own house is always a dream shared by many people around the world.

However, before you begin buying your own house you need to understand how much you can afford, start shopping for a mortgage, then making an offer, and ultimately closing on your new home.

Before deciding to buy your own house, you need to understand first your financial status so that you can budget your money properly.

A better understanding of your income also allows you to know how much down payment you’ll need and what current interest rates are for different types of loans.

Credit Report Matters

Before you start your loan, you must know first your credit status.

A credit report is necessary since it will determine what interest rate you will be offered.

To secure a lower interest for your housing loan you need to have a high credit score

If your credit score is low, no need to worry just take the necessary steps to improve your score.

20 Percent Down Payment

Based on actual studies, the majority of mortgage companies want 20 percent of the purchase price as a down payment for financing.

If by chance you cannot afford a 20 percent down payment, the first recourse is to pay a higher interest rate.

Some companies also ask their clients to put up an escrow account. An escrow account is an account held in the borrower’s name to pay obligations such as property taxes and insurance premiums.

Shop for a Mortgage

Before you decide to pick a lender, make sure you do comprehensive mortgage shopping to identify the best deal available.

A good lender is willing to explain the pre-approval, approval, and closing processes clearly. Be sure your lender explains all fees, up-front costs, taxes, insurance, and other costs of owning a home.

Once you select a lender the next step is to pick the right loan for your financial status.

The type of loan is very important since it will determine your monthly payment amounts, the length of the loan, and other terms of the mortgage.

Loan Interest 101

The amount of interest a buyer needs to pay to the lender usually depends on the interest rate and how it will be applied for the duration of the loan.

  • Fixed-rate loans are mortgages with an interest rate that will not change over the life of the loan. The interest rate is fixed in advance to a set rate, usually in increments of 1/4 or 1/8 percent.
  • Interest-only loans are loans where the borrower pays only the interest on the principal balance, typically for a five or ten-year interest-only period.
  • Adjustable-rate mortgage (ARM) is a mortgage interest rate that changes periodically based on a selected index that reflects changes in inflation and cost of credit. The interest rate and your payments are adjusted up or down as there are changes in the index.

Types of loan available to home buyers

  1. Conventional loan—A type of loan made available by a bank, savings and loan association, or other financial institution that is without governmental underwriting (such as the Federal Housing Administration (FHA) insurance or a Department of Veterans Affairs (VA) guarantee.) To determine how much loan, you can avail the lender usually examines your debt-to-income ratio, credit history, and credit score. This type of loan is usually s can be an adjustable-rate mortgage (ARM) or a fixed-rate loan.
  2. FHA loan—Compared to a conventional loan this loan is less stringent since it just needs two years of a steady income and your new mortgage must be 30 percent of your gross income. If you have filed for bankruptcy, your discharge must be at least two years old. If you have gone through foreclosure, it must be four years old. FHA loans tend to be fixed-rate loans. As the name implies this loan is also insured by the Federal Housing Administration.
  3. VA loan—This type of loan is only available to veterans, National Guard, the reserve, and some surviving spouses who can apply. A loan guaranteed by the Department of Veterans Affairs the common requirement for this type of loan is steady income and at least two years of military service. Compared to other types of loans, this loan offers fixed-rate loans.
  4. Purchase money loan—Commonly known as a seller-financed loan where the buyer makes payments directly to the seller until the loan balance is satisfied. This type of loan is risky for a seller because the seller may not recover the balance from the buyer and runs the risk of foreclosure. The loan is equally risky for the buyer because the seller holds the title to the property and can potentially sell the property to another person without the knowledge of the buyer.
  5. Construction loans–A type of loan that is usually short-term, variable-rate loans priced at a spread to the prime rate or some other short-term interest rate. The contractor/builder and the lender establish a draw schedule based on stages of construction and interest is charged on the amount of money disbursed to date. This loan is nice because you only need one application and one closing.

Pre-qualify for a mortgage

Before applying for a mortgage, you need to qualify for a mortgage loan; for example, adequate income to support the continuing loan obligations and creditworthiness to demonstrate persistence in meeting credit obligations.

Why pre-qualifying for a mortgage is important?

  • The lender will consider your income to determine the amount of the loan. Lenders look at your debt to income ratio to determine the amount of loan you will qualify for. In other words, the balances on your credit and other loans will reduce the amount of the mortgage loan you will qualify for. Your credit score determines the amount of interest and type of loan you can qualify for.
  • The down payment is equally important. This is the amount of money you have to reduce the amount you need to borrow or increase the value of the house you can purchase. Some of your down payments can be applied to your loan to decrease your loan interest; this is called buying down points.

Pre-approval letters also matter

Before you put an offer on a home, a seller will generally want to see a pre-approval letter. This letter tells the seller and their agent how much of a loan you qualify for, excluding the amount you have available for a down payment or have to bring to the closing table. Most realtors like to see a preapproval letter before they will agree to represent a buyer and begin showing them homes. Based on your income, expenses, and credit, a lender will provide you with a pre-approval letter for the loan amount and type of loan that they are willing to lend to you based on those factors.

Where can I get pre-approved for a mortgage loan?

  • Your current bank or credit union. They typically have in-house loan officers and underwriters who review all of the information and decide if you qualify.
  • A mortgage lending company that specializes in residential home sales. They can look for a wide variety of loan products and lenders that best suit your need.

Get Pre-Qualified

Before applying for a mortgage, you need to qualify for a mortgage loan; for example, adequate income to support the continuing loan obligations and creditworthiness to demonstrate persistence in meeting credit obligations.

Why pre-qualify for a mortgage is important?

  • The lender will consider your income to determine the amount of the loan. Lenders look at your debt to income ratio to determine the amount of loan you will qualify for. In other words, the balances on your credit and other loans will reduce the amount of the mortgage loan you will qualify for. Your credit score determines the amount of interest and type of loan you can qualify for.
  • The down payment is equally important. This is the amount of money you have to reduce the amount you need to borrow or increase the value of the house you can purchase. Some of your down payments can be applied to your loan to decrease your loan interest; this is called buying down points.

Pre-approval letters also matter

Before you put an offer on a home, a seller will generally want to see a pre-approval letter. This letter tells the seller and their agent how much of a loan you qualify for, excluding the amount you have available for a down payment or have to bring to the closing table. Most realtors like to see a preapproval letter before they will agree to represent a buyer and begin showing them homes.

Based on your income, expenses, and credit, a lender will provide you with a pre-approval letter for the loan amount and type of loan that they are willing to lend to you based on those factors.

Where can I get pre-approved for a mortgage loan?

  • Your current bank or credit union. They typically have in-house loan officers and underwriters who review all of the information and decide if you qualify.
  • A mortgage lending company that specializes in residential home sales. They can look for a wide variety of loan products and lenders that best suit your need.

Home Shopping

After you pre-qualified for a home mortgage, the next step is to start looking for your dream home. In shopping for a home, you have to choices either you do it yourself or you hire someone else. While you can do the home shopping yourself you should seek the help of professional real estate agents.

Why a real estate agent is helpful in-home shopping?

  • Understand what price you have to pay—The agent will tell you the right price of the property you will be buying.
  • Find affordable mortgage lenders—The agent will also take time to seek a mortgage lender that is affordable and can offer better service.
  • Get the home inspected—The agent will also have the first crack of the home you are looking for and will tell you to feedback either bad or good on the property.
  • Get title insurance and surveys—The agent will also take care of the insurance and surveys of the property.
  • Handle the requests of all the parties involved in the transaction—The agent will also take care of all the requests of all the parties involved in the transaction.
  • Respond to problems along the way—Moreover, the agent will also handle all the problems as you shop for your dream house.

Tips on finding a good real estate agent

To get a great deal on your dream house you need to pick a good and trustworthy real estate agent.

Listed below are some tips on how to find a good real estate agent.

  • Your agent should be there to look out for your best interests.
  • Choose someone you feel comfortable with and who explains the home buying process in a way you fully understand.
  • Ask friends or family for agent recommendations.
  • Interview several agents before selecting someone to represent you.
  • Select someone who is licensed in the state you are buying in and familiar with the areas you want to live in.

How agents get paid

A buyer’s agent usually is paid through the commission fees the seller pays his or her agent. These fees are split by the seller’s agent and buyer’s agent at closing. Typically, a buyer’s agent will have the buyer sign a contract, which is an agreement between the buyer and the buyer’s agent. The agreement states whether it is exclusive or non-exclusive.

Now that you know the intricacies of home shopping, it’s time to know on the next page how we can make an offer for your dream house.

Inspection

After the offer, the next crucial part of any house purchase is the inspection phase. Usually, the one who will do the house examination is the home inspector.

The role of the home inspector is to examine the physical structure and systems of a house from the roof to the foundation.

Traditionally the house inspector will report the condition of the following vital parts of the house:

  • Heating system
  • Central air conditioning system
  • Interior plumbing and electrical systems
  • Roof, attic, and visible insulation
  • Walls, ceilings, floors, windows, and doors
  • Foundation, basement, and structural components

The house inspection is important since it is usually needed if you are applying for an FHA or VA loan.

In most instances, it is the buyer who will ask for an inspection to determine the real physical status of the house.

Based on the result of an inspection, the buyer could make the following moves back out of a sale, negotiate a lower sales price or ask the seller for repairs before closing: choices that a buyer without an inspection report would not have been possible.

Important key points to remember in house inspection:

  1. If the inspection was part of the purchase contract, then the contractual responses will be triggered.
  2. If you have an FHA loan, the house must pass FHA standards before your final loan will be approved and you can purchase the property.
  3. If the seller had made warranties in the contract, the seller may be willing to negotiate a rebate off the sales price for the repairs or make the repairs before closing.
  4. As a buyer, you should contact some contractors and find out how much the repairs will cost. If the seller is unwilling to make repairs before closing, then you may want to cancel the sales contract.

After the inspection phase, the next important step is the insurance of the house.

Insurance

Before buying the property, the buyer must know first-hand if the house is insured or not.

On this page, we will know why insurance is important in buying a house.

Different types of insurance

Homeowner’s Insurance

Also commonly called hazard insurance and often abbreviated in the real estate industry as HOI, it is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, lossof its use (additional living expenses), or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or the hands of the homeowner within the policy territory. If you have a mortgage loan, then the mortgage holder is also made an insured on the policy to ensure its investment is protected in the event of serious or total damage.

Private mortgage insurance

Generally referred to as PMI, this is an insurance policy that a the lender will require a buyer to have if the loan is more than 80 percent of their new home’s value. In other words, if your down payment is less than twenty percent, your lender will generally require you to obtain this insurance.

As the borrower, you can request cancellation of PMI when you pay down your mortgage to less than 80 percent of the the original purchase price or appraised value of your home at the time the loan was obtained. You also need a good payment history, meaning that you have not been 30 days late with your mortgage payment within a year of your request, or 60 days late within two years.

Warranties by Deed

A new home warranty is generally provided to a buyer by a builder and offers warranties on limited
coverage on workmanship and materials relating to various components of the home, such as windows, heating, ventilation, and air conditioning (HVAC), plumbing, and electrical systems for specific periods (typically a year).

A seller’s warranty provides added assurance that any repairs to major appliances, plumbing, and other home systems will be covered by the seller within a specified period after the home is purchased. A seller may also provide a warranty as to the validity of the title, they can convey to the buyer. It is important that your real estate agent or real estate attorney do due diligence and perform a thorough title search to ensure that you are being conveyed good title when you purchase your home.

However, since the seller may be hard to locate or lack the resources when a problem arises, a seller’s warranty should be secured by holding back some of the seller’s sales proceeds for the warranty period.

A general warranty deed is where the seller warrants the title of the property against any other third parties. A special warranty deed is where the seller warrants the title of the property to the buyer against anyone claiming an interest under the seller (heirs, assigns).

A quitclaim deed is a deed where the seller provides no warranties and makes no statement as to title to the extent that they state they are transferring whatever interest, they have to the buyer. This is usually used when spouses are conveying their interests after divorce or in the case of a foreclosure sale.

After knowing the intricacies of house insurance, it is now time to close the deal and get your keys to the house.