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Home Buyers Education Center
There has never been a better time to start owning a home. The housing market has seen steady recovery from the recent recession, and mortgage rates are still low. This is a great opportunity to take advantage and consider buying your home.
The home-buying process can be intimidating, and many first time homebuyers do not know where to begin. Even with the wealth of information out there, it can be confusing and overwhelming to read through all the materials. Taking out a mortgage is one of the biggest and most important commitments you will ever make in your lifetime. This is why Sun West Mortgage Company has created this easy-to-follow guide to help you understand the home-buying process. We will attempt to cover all the basics so you feel more comfortable and more confident in buying your first home. We hope that this guide will help simplify the process and help you take that first step in considering homeownership or help you get more acquainted with the process if you are already considering a home purchase.
If you have a question at any time, please don’t hesitate to call us at (787) SUN-WEST, and one of our helpful mortgage experts will be happy to answer your questions.
Feel more relaxed? Great, let’s get started…..
Start by Reviewing Your Credit Reports
One of the most important steps that you can take in order to successfully acquire your first home is to review your credit scores, also known as FICO (Fair Isaac Company) scores. Credit scores are designed to measure the risk of default by taking into account various factors in a person’s financial history. Although the exact formula for calculating credit scores is kept a secret, FICO has disclosed that it is based on payment history (35%), amount owed (30%), length of credit history (15%), type of credit being used (10%), and recent credit inquiries (10%).
While you might be anxious to obtain that mortgage for your dream home, being hasty in the process may actually prove to be more disadvantageous to you. Since your FICO scores are one of the main things lenders look at when deciding what rate and type of mortgage you can get, you should start by reviewing your credit report before applying for a mortgage. Remember, even a small difference in the mortgage interest can cost you several thousand dollars over the life of the loan.
- Start by Requesting Your Credit Reports. When you apply for your mortgage, a lender will start with requesting a check on your credit scores and credit history through each of the three major credit reporting bureaus: Experian, Equifax, and TransUnion. Before you submit your mortgage application to a lender, it is a good idea to do a credit check yourself in order to have a fair idea of your credit scores. A personal credit score check by a consumer is known as a soft inquiry, and will not affect your credit score. A credit score check by a lender for the purpose of granting you a loan, on the other hand, is a hard inquiry, and will affect your credit score. Such hard inquiries may stay on your credit history for up to 2 years. Each of the credit reporting bureaus provides you a free copy of your credit report once a year. You can access your report at AnnualCreditReport.com, or by calling 1-877-322-8228.
- Make Sure Everything Checks Out. Each of the three major credit bureaus will likely report different scores, all of which are expected to be in close range of each other. The difference in the scores may be attributed to how each reporting agency stores your information and how often the data is cycled. Since each bureau uses the same FICO rating system, your score should be similar, and if you find too much of a discrepancy, then it probably means that the information is inconsistent across the three bureaus. Make sure to identify and dispute any inaccuracies with the respective credit bureau within 30 days of receiving your report. Make sure to verify all the accounts under your name before you dispute the misreported information, such as late payments, incorrect accounts, and any address or name discrepancies.
- Keep Your Credit Utilization Low. Keeping your total credit utilization among your credit cards between 10 to 30 percent is a good way to achieve a high level of credit worthiness. Once you have ensured that your utilization among your credit cards is between 10 to 30 percent, give it one to two months of reporting cycle(s) before applying for your mortgage so this percentage will have adequate time to reflect on your credit reports. Credit utilization is among one of the major factors affecting your credit scores because a good range will show the creditor(s) that you are making use of your available credit, but at the same time being responsible and keeping it manageable.
Examine Your Financial Situation
After you have verified that your credit report is in good condition, you should take a closer look at your overall financial situation so you can get a better idea of the loan amount and loan type that you should choose for your home. Lenders generally prefer a Debt-to-Income (DTI) ratio of 43 percent or less, which means that your total debt payments each month should not exceed 43 percent of your total income.
- Start by looking at your monthly financial obligations, such as car payments, total monthly credit card payments, payments on personal or student loans, and any child support or alimony. These are the standard expense items that lenders will look at in assessing your financial situation and to calculate your DTI. However, as a responsible borrower, you should also consider non-standard, recurring monthly expenses such as money paid towards food and gas, entertainment and leisure, utility bills, car and health insurance, and personal services, such as dry cleaning. You may also want to consider how much taxes you need to pay each year.
- Consider what your monthly expenses will be like after you buy your home. After buying your home, you will have to pay your mortgage payments (principal and interest), property taxes, homeowners insurance, and home owners association (HOA) dues if your new community requires it.
The goal of looking at your monthly expenses is to evaluate the loan amount you should apply for. From a lender’s perspective, they want to know their risk of borrower default by looking at your DTI ratio. From your perspective, you want to know if your current income is able to support your monthly expenses and your mortgage payments without being financially constrained. You should consider questions like: Would you still have enough free income to meet any unexpected emergencies without having to miss a mortgage payment, or would you still be able to save enough for a rainy day, your retirement, or your child’s college education after buying a home?
Compare Your Mortgage Options
Now that you have a better idea on how much you can afford each month, you should compare and calculate the amount of loan to apply for. The monthly mortgage payments you will have to make depend on your loan amount, interest rate, loan term, and the loan type (fixed vs. adjustable). Because a loan payment involves a more complicated amortization formula that the banks use to determine your mortgage payments each month, please use our calculators to figure out how much you will have to pay each month for the different types of mortgage options. After you input a loan amount, interest rate, and select a loan term, you will find out your monthly mortgage payments each month. The amortization formula is an industry standard, so you should get the same payment results irrespective of which calculator you are using.
Choosing a Loan that is Right for You
Sun West Mortgage Company Mortgage offers a full range of mortgage options to ensure each of our customers gets the best choices when it comes to financing their home. Everyone’s financial situation and goal is different, and we understand that better than anyone else when it comes to mortgage choices. Please visit our products page for a list of mortgage options available to you.
Shopping for Your New Home
Consider Working with a Real Estate Agent when Buying Your Home
A real estate agent will be valuable when it comes to buying your home. This is especially true for first time homebuyers. A real estate agent can help educate, guide, and provide you with valuable and detailed information pertaining to your home search that isn’t easily accessible by the general public. They offer expertise in the home buying process, such as knowledge of the specific market in your area and the negotiation skills that can prove to be useful when you’re just inches away from closing the deal and are facing stiff competition or dealing with a stern seller. Your real estate agent would also be there to advise on strategy during the offer process. Finally, for first time homebuyers, your real estate agent will make sure that all the paperwork is properly prepared before you close the deal. Your real estate agent will be an invaluable asset to you as a home buyer, so consider partnering up with one when buying your home.
Initial Costs Associated with Buying Your Home
Be prepared to have enough money on hand to pay for the initial deposit, down payment, and closing costs on your new home
Earnest Deposit: When you are ready to make an offer, sellers usually will require the buyers to put down a deposit of earnest money towards the house. Putting down an earnest deposit shows the seller that you are a serious buyer and will be committed to buying the home. The deposit can vary anywhere from between $1,000 to up to 3 percent of the purchase price, depending on the competition in the market. As a prospective buyer, you will have an advantage if you are willing to make an offer with a bigger deposit when competing with other buyers.
Earnest deposit money may be held in a trust account with the third party, such as an escrow company. Do not ever pay your deposit directly to the seller, because should something go wrong, you might have trouble getting the deposit back. Make sure that your rights are covered in the purchase agreement and that it clearly states how the deposit is refunded if you decide to back out of the deal. What happens to your deposit if your offer gets accepted but your loan does not go through with your lender? Most standard purchase agreements allow a full refund of your deposit if this happens, but you must opt for this contingency in your purchase agreement. Some of the other contingencies you should consider include passing the appraisal valuation and home inspection which allow you to get your deposit back in case the property appraises less than the sales price or if there are repairs which the seller refuses to perform.
Down Payment: For many people, the down payment on a mortgage represents one of the biggest obstacles to buying a home. Most banks will usually require a down payment between 5 percent and 20 percent of the sale price. Many Federal Housing Administration (FHA) loan programs will require as little as 3.5 percent in down payment while VA programs require zero down payment for veterans. Keep in mind that if you put down anything less than 20 percent, you will be required to pay a monthly mortgage insurance premium.
A down payment isn’t just your upfront, good faith money required for taking out a mortgage, but it also affects the following:
- Maximum Price of the Home You Will be Able to Afford. A smaller down payment will usually mean you will need to choose a less expensive home.
- Interest Rate. A smaller down payment may not help you get a lower interest rate.
- Closing Costs. Certain loan programs with a lower down payment requirement may have higher closing costs.
- Loan Choices. A lower down payment may limit your loan choices because certain programs require you to make a higher down payment.
- Your Ability to Qualify for a Loan. A lower down payment with a higher Loan-to-Value (LTV) ratio can make it more difficult for you to qualify for a loan.
If you are looking for mortgage with a lower down payment requirement, you may want to consider an FHA loan. Sun West Mortgage Company is a fully approved FHA lender and offers a full line of FHA mortgage products. FHA loans are insured by the federal government with the aim of helping more people easily qualify for a mortgage. For homebuyers who are unable to come up with money to put towards a down payment, there are also a number of Down Payment Assistance (DPA) programs being offered by both public and private institutions for those who qualify. Please click here for more information on how these programs work.
Closing Costs: Closing costs are expenses that every home buyer and seller will encounter. These may be costs associated with home inspection and appraisal, various insurance fees, different taxes, and lender-based fees for preparing, processing, and funding your loan. Lenders are required by law to disclose a preliminary estimate of total cost, called the Loan Estimate (LE), to you within three business days of submitting your mortgage application. Many home buyers experience a road block in their home buying process because they fail to realize the amount of the closing costs in obtaining a mortgage. Expect to pay anywhere between 2 percent to 7 percent of the purchase price in closing costs. You may also consider negotiating with the seller to pay a part of your closing costs. Similarly, there may be options available from the lender with credit toward closing costs in exchange for a higher interest rate.
Get Pre-Qualified or Pre-Approved
Before you start shopping, get pre-qualified or pre-approved with a lender. Pre-qualification is an easy part of the home buying process and you usually can do this by calling your lender, submitting a pre-qualification form online, or by visiting a loan officer in person. In this initial step, you simply provide information such as your income, your current debt, your assets, your expected credit score, your down payment amount, and your desired loan amount. A pre-qualification is not a commitment by either the lender or the borrower, but the lender will provide to you a pre-qualification letter, giving you and the seller an initial opinion of the loan amount you are able to qualify for. Your goal with a pre-qualification is to establish an initial idea of the type of home you can afford which helps you shop for a home you are most likely to be approved for.
While a pre-qualification is a good way to help set a realistic price range of the homes you should consider, borrowers looking for extra assurance that they will be approved for a certain loan amount should consider a pre-approval. The pre-approval involves a more formal process and is a step toward the mortgage application process. With a pre-approval, the lender will more adequately review and verify your financial situation. based on your credit score and documentation related to your income, assets, and debt submitted by you. Note that you are not required to provide any documents prior to receiving a Loan Estimate. You may however voluntarily provide documentation and request a pre-approval. Once you are pre-approved, your lender will issue you a conditional pre-approval letter.
With either type of letters, you will be able to shop for your home and make an offer, but a pre-approval will tend to improve the overall strength of your offer. By showing that you have already gone through initial underwriting, a pre-approval will allow you to present yourself as a stronger and more serious buyer.
Depending on your purpose, you may wish to consider one option over the other. For example, you may choose a pre-qualification if you are considering buying a home and would like to have an idea of the price range of homes to look for or how much down payment to prepare. If you are certain that your home shopping will lead to making an offer for a purchase, it would be a good idea to skip the pre-qualification process and opt for a pre-approval early, since you will eventually be required to submit all the necessary paperwork. Sun West Mortgage Company offers both pre-qualification and pre-approval for the convenience of our customers.
Doing Your Homework and Looking for the Right Home
As a first time homebuyer, you may feel highly excited about going house-hunting, and this is understandable. In the midst of excitement, many homebuyers sometimes end up buying homes which may not be ideal for themselves or their family. Before you go out and drive around to look at properties, you should do your homework and prepare a checklist of the features you are looking for in your home, such as the number of rooms, size of the garage, and living spaces, etc.
With the internet, you have a wealth of information at your fingertips, accessible with a click of the mouse. While your realtor continues to be the best source of information with access to Multiple Listing Service (MLS), online listings will allow you to see most of the details about a property at your leisure. Spend some time researching the property online before visiting. Besides what the property looks like and the features it has, you may wish to include these items as part of your research before going out to look at properties:
- Structures Around the Subject Property. Is the home in a physically-safe area? Is there a history of landslides in the area when it rains, or does it flood easily around your property?
- Neighborhood and Community. Consider parks, cultural and shopping centers, public facilities, commuting options, schools if you have any kids, and how safe it is.
- Home Price Appreciation in the Area. Since building home equity is a primary goal of many homebuyers, it is important to look at the trends of property values in the area surrounding your property. See how well the area is populated and the demographics that make up the area.
- Property and Local Taxes. Check with the local county recorder and civic centers on the current property tax rate for the area, and find out if you will have to pay any additional special taxes if you live there. You can also find out about local utility rates, such as water.
Making Your Offer
Once you have found the home of your choice, you are now ready to make an offer. When making an offer to buy a home, you will be formally submitting your intention, through a purchase contract, to buy the home with your specified price against the seller’s listed price. The purchase contract, prepared by your realtor, will state the property address, your offering price, any important contingencies before the purchase, and the party responsible for specific closing costs, etc. Once an offer is submitted, you can either expect an acceptance of the offer “As Is” by the seller, a counter offer from the seller to which you can accept or return with your counter offer, or a rejection of your offer by the seller. The offer process is an art in itself, because it involves timing, determining the right offering price, and making the right stipulations in the contract. A realtor can offer the right advice, along with helping you prepare the detailed paperwork and making sure it’s done correctly.
Submit Your Application and Get Approved
Once you have found your perfect dream home and an offer has been accepted by the seller, you are ready to make the move to acquire financing. It’s time to submit your mortgage application. Unless you have already proceeded with a pre-approval and submitted all necessary documentation, this is the time to do so by completing your mortgage application. At Sun West Mortgage Company Mortgage, we make the application process fast and easy and we have one of the fastest closing times. Our loan experts will be ready to answer your questions and help you with every step. For a checklist of the types of documents you are required to submit, please visit here. Call us at (787) SUN-WEST, and one of our helpful mortgage experts will be happy to help you submit your application.
Your Loan Estimate (LE)
Within three business days of submitting your mortgage application, your lender is required by law to send you a Loan Estimate (LE). Required by Real Estate Settlement Procedures Act (RESPA), this document is designed to protect you from arbitrary increases in the projected fees associated with your loan. The estimate includes a list of charges associated with your loan and allows you to compare the cost of your loan with other lenders. The LE summarizes the main costs of your mortgage and states the Annual Percentage Rate (APR), finance charges, loan amount and how much you will be paying over the full term of your loan. It provides you important information such as the estimated interest rate, monthly payment, estimated costs of taxes and insurance, and total closing costs. The LE is only a preliminary estimate, and during the process from application to closing, some fees may change but cannot increase beyond the tolerances specified by RESPA.
On a purchase transaction, agreements are generally written with the seller’s choice of escrow and title service provider. This effectively means that expenses on title, escrow, and county recording will be the same irrespective of the lender you choose. The most important expenses that you must not forget to compare among various lenders, apart from the interest rate, are the origination charges listed in Section A of the LE, cost or credit of interest rate listed in Section A or J respectively of the LE, and third party services such as credit report fee, appraisal fee, and flood certificate fee in Section B of the LE for which the service provider is chosen by the lender.
For a sample of the Loan Estimate and section-wise explanation, please view the CFPB’s Loan Estimate Explainer tool. http://www.consumerfinance.gov/owning-a-home/loan-estimate/
The Home Inspection
The home inspection is an important step to complete when you are planning to buy a new or pre-occupied home. You are making a major purchase, and you want to make sure that there are no problems with the property before you sign on the dotted line. A home inspection helps reveal any existing or potential problems that you may encounter before closing the escrow and will save you the trouble of going through legal and arbitration procedures should you find problems. During the offer process, many homebuyers will stipulate passing the home inspection as a contingency before buying the home. A buyer may also require the seller to make any necessary repairs as part of the agreement before closing the deal.
Being on-site at the subject property and looking at things yourself, such as examining for mold growth or leaks in the faucet is not enough. Many defects are not visible to the untrained eye and can only be discovered by a licensed inspector. A home inspection is usually paid for by the buyer upfront. You may wish to get a recommendation for a good inspector from your real estate agent or find one through online research.
A Few Things to Look for When Choosing a Home Inspector
- Make sure your inspector is a licensed professional. You may also wish to look up a prospective inspector with the American Society of Home Inspectors (ASHI) or International Association of Certified Home Inspectors (InterNACHI). Being a member of these professional guilds requires participating in ongoing education and getting updated on industry standards.
- Try to choose a licensed inspector with at least three years of field experience. Simply having textbook knowledge will not be enough, because an experienced inspector will not only know what problems to look for, but how to look for it. For example, an inexperienced inspector may find mold growth and see that it needs to be removed, but an experienced inspector may see mold growth as a sign of a more fundamental problem, such as leaks in the plumbing of the house or inadequate ventilation that may be trapping moisture, which in turn, might also cause other problems, such as dry rot that should also be examined.
It is important to note that most home inspectors are general inspectors, and they look for visual or physical clues when assessing the property. Home inspectors generally do not and cannot check for deeper structural issues that require a specialist. The home inspection typically will not include inspecting for termites, property contamination, structural/engineering issues beneath the home, septic/irrigation systems, or issues that are beyond direct visual or physical access. If the house you wish to buy is old and you suspect there are deeper safety or structural issues, then you may wish to consider hiring a specialist to do further assessment.
After the inspection, the inspector will make a detailed report of the findings and spend some time with you to go over the results. The inspector will not be making a decision of whether or not you should buy the house, but will simply provide you with his or her professional opinion so that you can decide for yourself.
What to Do if the Home Inspection Revealed Problems
If your purchase contract requires the property to pass inspection as a contingency, you may either walk away from buying the property or negotiate with the seller to either lower the price or have the repairs done prior to the sale. The seller may also opt to give you a credit to do the repairs after the sale if your lender allows it.
The Property Appraisal
A property appraisal plays an important role in the home buying process for both the lender and the borrower. Before giving you a loan, lenders are required to initiate an appraisal for your selected property. The appraisal is done as a measure to protect both you and the lender by ensuring that the asking price of the specific property falls reasonably within range of the current market value, and that the price is competitive and fair. The appraised value of your selected property is an important variable used by the lender to help determine your Loan-to-Value (LTV) ratio, which in turn will be used to determine what kind of financing you are able to qualify for.
What is involved in a Property Appraisal?
An appraisal is done by a licensed and fully independent appraiser who is not affiliated with either the lender or the borrower and will not be determining the value in favor of either party. Before visiting the property, the appraiser will have done all of the necessary research and collected all the data on the surrounding homes, such as the recent sale price of properties with similar characteristics. The appraiser then makes an in-person visit to the subject property for a detailed examination, such as looking at the structural condition of the home, the physical surrounding (views, features, objects, etc.), square footage and features of the house (number of rooms, baths, living areas, backyard, pool, amenities, etc.), any upgrades (quality of flooring, wall tiles, appliance types, etc.), and property improvements to the original build (second-story additions, remodeling, structural upgrades, etc.).
The appraiser will use all of the data that he or she has collected to make a comparative analysis with recent sale prices of similar homes in the area, including looking at the average time to sell and the overall real estate market condition in the area. The appraiser will also include the number of foreclosures, short sales, and the number of Real Estate Owned (REO) properties in the area as part of his or her analysis. The data that the appraiser has collected may also be analyzed by computer-assisted modeling software to produce a more refined number based on statistical sampling and evaluation. In addition to the comparison approach, the appraiser may also utilize the cost approach, where the appraiser will estimate the current costs required to build the subject property and comparing the result to current market prices.
What Happens if the Appraised Value of My Selected Property Comes in Too Low?
A mortgage lender will use the lower of the appraised value or purchase price to determine the LTV on your loan. If the appraised value comes in less than the purchase price, it usually means that you will have to come up with additional down payment to cover the difference between the appraised value and selling price if the seller is not willing to negotiate. It is generally not recommended that you pay above the appraised value for a home, but if you find that you must have the property, consider some strategies you can use to make the deal work:
- Talk to the Seller and Negotiate a Lower Price. The seller also understands that your lender will likely adhere to the appraised value to make their decision, and he or she will realize that the next buyer that makes an offer will likely encounter similar appraisal results.
- Review the Appraisal and Request a Second Opinion. Sometimes, it is possible that the appraiser overlooked comparable properties which were sold at a higher price than the ones used in the appraisal. If you think that this may be the case, contact your lender and request a review.
The Home Escrow Process
The escrow in the home buying process is perhaps the part that remains the least understood. An escrow, or the “close of escrow” involves the completion of directing the necessary funds and the transferring of deed from one party to another once all necessary conditions have been met. In other words, the escrow is part of the home buying process where the rights of ownership and funds change hands and all transactions are recorded by your title company and updated with financial and government agencies.
The use of escrow is necessary as a means to protect the financial and legal interests of the parties involved by ensuring that the transfer of funds and documents occur only when all of the escrow provisions and legal compliance have been met. The escrow company acts as a custodian of funds and records with the legal obligation to make sure that they change ownership at the right time.
The escrow company is normally chosen by the seller but is still negotiable under the purchase agreement. Unless the buyer makes a request, the seller usually will have already pre-determined the escrow company to be used.
When both the seller and the buyer have fully executed the purchase agreement, the agreement will be sent to the escrow holder. The contact information for the seller, buyer, and the lender is submitted to the escrow officer and a file number is assigned to be used as a reference to all transactions and communications until the escrow closes. Before the escrow closes, instructions initiated by each party will be verified by the escrow officer and they will only be performed once all necessary conditions have been resolved and fulfilled. Some of the most common types of tasks performed by the escrow company include deeds and title search, verifying liens, and preparing the final closing statement. The escrow company will also make the necessary disbursement of funds, make necessary recordings, and ensure that all instructions are in compliance with government regulations.
As a buyer, you should carefully read and understand your escrow instructions before you sign anything. Don’t be afraid to ask your escrow officer questions if you do not understand something. Your escrow officer must be provided with the name of your lending institution in order to communicate on the progress of your loan. Your escrow officer will also require you determine how you want to vest your title. You should take title vesting options seriously and thoroughly research, and even consult a legal or tax professional before you make your decision.
Once all conditions have been satisfied and the lender has prepared your closing documents, the escrow officer will assign a notary public to meet with you to sign your closing package. The notary public or the closing agent will walk you through and explain the various documents, which will include the mortgage note, the Deed of Trust, and the Closing Disclosure (CD). You must verify that all items on your CD make sense and that there are no unexpected changes to itemized amounts. Also, make sure to read everything carefully before you sign and retain a copy of everything you sign and receive.
Your Closing Disclosure
The Closing Disclosure (CD) is one of the important documents you should expect to receive shortly before your loan closes and contains the actual terms and costs of the transaction. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs).
The lender is required to give you the Closing Disclosure at least three business days before you close on the mortgage loan. This three-day window allows you time to compare your final terms and costs to those estimated in the Loan Estimate that you previously received from the lender. The three days also gives you time to ask your lender any questions before you go to the closing table.
For a sample of the Closing Disclosure and section-wise explanation, please view the CFPB’s Closing Disclosure Explainer tool. http://www.consumerfinance.gov/owning-a-home/closing-disclosure/
Ready to Buy Your Home? Make Us Your Preferred Lender
We hope that this homebuyer’s guide has been useful in helping you become more acquainted and comfortable with the entire home buying process. Besides learning how to buy a home, this guide should also prepare you to ask the right questions during the process. As a homebuyer, you have both the right and responsibility to know what you are committing to. After all, buying a home is also a valuable educational experience that relates to many aspects of your financial life.
In addition to taking all the right steps in the home buying process, it is equally important to choose an experienced loan officer and lender. At Sun West Mortgage Company, our loan officers are experts in mortgages and will be able to provide you with answers to all your mortgage related questions. Our loan officers are here to listen, to discuss your financial goals, and to learn about you and your family’s lifestyle. Our loan officers will then help you choose a loan option that best suits you. After speaking with one of our expert mortgage advisors, you will feel even more prepared and confident about the home buying process. We want to be your mortgage company and help you achieve your American Dream. Give us a call today at (787) SUN-WEST, and let us help you achieve your dream today!