Homebuyer Education

Mortgage lenders want to make loans to people who will make their payments on time.  They want to avoid making loans to consumers who pay late, or not at all.  To help them determine if you are a good risk to lend to, lenders will review your credit score and your payment history. In addition to on-time payments, your credit score is also determined by how long you’ve had credit, types of credit you paid back and how much credit you have.   

Your credit score will influence the interest rate and a low credit score may cause an application to be denied altogether.  It is very important for you to know what is included on your credit report and that it’s correct. You are entitled to a free copy of your credit report once a year and you can order it from www.annualcreditreport.com.  There are also a variety of services that will provide you with information about your credit score at little or no cost.  Credit scores change when you use your credit or pay down your debt.  The right moves can improve your score in as little as 60-90 days.  Managing your credit score effectively will pay off with lower costs, fees and interest over your lifetime. Don’t wait to start improving your scores.

Choosing the right home can be the most exciting and fun part of the homebuying process.  The right size and style, the right neighborhood, the right school system and the right price are all decisions that will affect your future for years to come.  Online shopping and virtual home tours have changed the way house hunting works, but a good real estate agent is still a valuable ally as you evaluate your choices.

Your mortgage lender will order and have an appraisal completed by a licensed, third-party appraiser on your property. The appraisal is an estimate of the value of the home by comparing it to various other properties in the area and a number of other factors including amenities and upgrades to the property.

Your lender will also require a title review. This is where the title company completes a search about the previous owners of the property and makes sure there are no outstanding liens or debts against the property. A house that needs a little work won’t concern the lender, but major damages and broken or missing mechanical systems may require special approval.  Condominiums, multi-family, mixed-use, rural property or unconventional construction (such as log homes and geodesic domes) may have additional approval requirements.

No two households are alike and two borrowers with identical income might have very different spending patterns and approaches to spending.   A lender will review your financial situation to determine the likelihood of nonpayment based on your budget and the affordability of the home.

The lender will start by determining the length and stability of your employment or other sources of regular income.  The easiest and best way is to give your lender permission to verify income directly from its source.  You may also be asked to provide documentation such as pay-stubs and tax forms.  If your income profile includes overtime, a 2^nd job or self-employment, the lender will take extra measures to be sure that income is consistent and not declining.  Other sources of income such as pension and Social Security benefits will also have to be verified by the lender.

The lender will calculate your proposed monthly housing payment, including taxes and insurance.  Added to that amount will be monthly obligations for auto and consumer loans, credit card payments, student loans and other regular expenses such as child support.  The lender will total these expenses and compare them to your gross monthly income.

A good rule-of-thumb is to limit your monthly housing expense and other bills to no more than 40% of your gross monthly income.  Some highly-qualified borrowers may be able to go a little higher.  Many people can qualify for more than they wish to pay each month.  An experienced Mortgage Loan Officer will assist you in determining these calculations to come up with a budget that both you and the lender are comfortable will meet your needs and allow you to pay on-time each month.

Years ago, a 20 percent down payment was the norm for home financing and some people think it still is.  In reality, many people buy homes today with as little as 3-5% down and in some cases zero down payment is required.  The down payment required for your loan will depend on your circumstances and the loan program(s) you qualify for.  An experienced Mortgage Loan Officer will assist you in reviewing the options available.

If you choose a low down-payment loan program, your loan will likely require Mortgage Insurance.  This is NOT homeowner’s insurance. It protects the lender from loss in the case you do not make payment.  Some Mortgage Insurance policies can be cancelled once the borrower has sufficient equity, while some are required through the life of the loan.  Consult with your Mortgage Loan Officer to determine the best choice for your circumstances. 

When it comes to closing costs, your lender may charge you a fee for the work involved in lending you money for the mortgage.  Other parties will charge you for services as well, including the Appraiser, the Title Company and the local municipality.  You will have to pay the first year’s homeowner’s insurance in advance and pre-fund your tax and insurance escrow account.  Your Mortgage Loan Officer will provide you with an estimate of these charges within three days of your application.  Closing costs can be considerable, so don’t fail to include them in planning how much money you will need to buy a home.

The lender will evaluate the amount and source of funds that you have available (your assets).  Again, the easiest and best way is to give the lender permission to get information directly from your credit union.  Different rules apply for the use of money you’ve saved, money you’ve received as a gift and (in some cases) money you’ve borrowed.  You will be asked to provide information about the source and timing of any large deposits to your accounts.

There are a wide range of home loan programs available for you to choose from.  The wide variety of choices means there’s a solution for nearly every need, but it can be confusing to find the right path.

Mortgage loans are usually made for terms between 10 – 30 years.  A shorter term results in a higher payment but lower interest charges over the course of the loan.

A fixed-rate loan means the principal and interest payments will not change over the term of the loan.  However your monthly payment may go up or down as a result of changes to tax and insurance obligations.

An adjustable-rate mortgage or ARM means that the interest rate you pay may go up or down periodically in reaction to economic conditions.  Initial pricing on ARM loans is generally more attractive than fixed-rate options.  An ARM loan may be the right choice if you anticipate shorter-duration ownership or if you think interest rates are headed down in the future.

Conventional loans are made to conform to the rules established by Fannie Mae and Freddie Mac.  Neither of these entities make loans themselves – instead they set the approval standards and encourage consistency from one lender to another across the country. 

Conventional loans with less than 20 percent down payment typically require Private Mortgage Insurance (PMI).

FHA insured loans are intended to promote home ownership for people with less than perfect credit or limited down payment resources.  The program is funded by Mortgage Insurance Premiums which are typically added to your loan balance and monthly payment.

VA insured loans allow eligible active duty military, veterans and their spouses to purchase a home with zero down payment.  The VA home benefit program is funded by a modest fee that is added to the borrower’s loan balance at closing.

Jumbo loans are available for circumstances where the loan amount exceeds the standard loan limit.  These loans typically mirror Conventional approval guidelines with variations of the interest rate and down payment requirements.

Combo Loans are actually two separate loans – a first mortgage up to 80% of value along with a second mortgage for the remaining funds needed to purchase a home.  This combination is intended to avoid the need for PMI, but higher costs and fees for the second loan may offset any savings. Combo loans may be available in some markets and not in others.

Interest-Only, Negative Amortization, Balloon loans and other gimmick loans have mostly fallen from favor and in some cases been eliminated by new regulations.  Be wary and rely upon trusted advisors before agreeing to any deal that sounds too good to be true.

Loan Officer

Loan Officers play a crucial role in the home buying process. Your loan officer will help you establish a budget and determine how much of a mortgage you can qualify for based on your particular financial situation. They will work with you throughout the process to gather the necessary documents needed, answer any questions you have about loan types and terms, order appraisals and more. Loan Officers are licensed by the Nationwide Multistate Licensing System & Registry (NMLS).

Real Estate Agent

A Real Estate Agent can save you time and assist you in finding your new home by: selecting homes that are within your price range and match your requirements for size, location, etc., schedule appointments for you to see homes, give you current prices for houses like the ones you are considering, give you up-to-date information about taxes, school districts and conditions in the area, and handle negotiations with the price and terms of your offer.  Before meeting with a real estate agent or viewing any houses, we also recommend doing some research on your own. This allows you to become familiar with nearby school districts, traffic routes and other local resources to ensure you are looking for a location that meets all of your needs.  Real estate agents are licensed and follow a strict code of conduct.

Appraiser

The appraiser’s job is to provide your lender with an estimate of the fair market value of the property, and advise you of any issues that would affect marketability.  The appraiser will do this by comparing the subject property to recent sales of comparable homes.  The appraiser may or may not visit the property for a site inspection.  Lenders take great pride to make sure that appraisals are fair and un-biased.

Home Inspector

While the appraiser’s focus is on value, the home inspector’s role is to assess the condition of the property.  Most purchase contracts allow a short time window for a home inspection and recourse for the buyer should unexpected problems be found.  A home inspection is not required but strongly recommended for all purchase transactions.  Choose your home inspector carefully and seek recommendations from multiple sources.  Home inspectors are regulated in some states but not others.  Both the scope and quality of home inspection reports vary considerably. 

Settlement Agent

The settlement agent, attorney or title company will perform a variety of functions to finalize the transaction.  They will search the land records and legal files to be sure that the seller conveys title to the property that is not encumbered by liens or other defects.  They will provide title insurance policies to both the lender and the buyer.  They will prepare and witness/notarize the execution of documents for transfer of ownership and for the mortgage loan. 

Loan Servicer

The servicer is the company that manages the maintenance of your loan after you close. They take payments, keep track of homeowners insurance and manage your taxes each year. When your lender offers retained servicing, they don’t sell the servicing of your loan which means you always know who to call, where to send payments or where to call if you have questions year after year.

The time it takes to buy a home will vary based on your specific situation. An online home loan application has simplified the application process by allowing borrowers to apply anytime, anywhere with an internet connection in as little as 15 minutes. In most cases, a home buyer is able to complete the entire process from contract to closing within 45 to 60 days. There is a time frame limit on the information provided, so after 120 days you may need to provide new or updated documents.

If you’re in the market for a new home, you’ll have fewer problems and delays qualifying for your loan if you follow these helpful DO’s and DON’Ts to prepare for the application and speed the approval …

1. DO keep originals of all pay-stubs, bank statements and other important financial documentation. Keep originals of all pay-stubs, bank statements and other important financial documentation. Documents that verify your income and assets must be current and we may request the latest versions of these documents just before closing.

2. DO have a copy of your employment history for the past two years, including contact information.

3. DO have your residence history for the past two years available, such as your rental agreements or your mortgage account number.

4. DO have a copy of your Social Security Card.

5. DO have a copy of your divorce decree, if applicable.

6. DO have copies of your Federal Income Taxes for the past two years.

7. DO provide all documentation for the sale of your current home. (e.g.: sales contract, closing statement, employer relocation/buyout program).

8. DO notify your Loan Officer if you plan to receive gift funds for closing costs.

9. DO notify your Loan Officer of any employment changes. (e.g.: change of employer, recent raise/promotion, transfer, change of pay status, such as salary to commission scale, etc.)

X   DO NOT change jobs/employer without inquiring about the impact this change would have on the approval of your mortgage loan.

X   DO NOT make major purchases during or prior to closing (e.g.: new car, furniture, appliances, electronics) as this may impact your qualification ratios. Please talk with your Loan Officer to have him/her calculate what your ratios would be with any additional debts.

X   DO NOT obtain and/or deposit unusually large sums of money without notifying your Loan Officer. Investor guidelines require documentation as to the source of these funds (e.g.: copy of bonus check, copy of tax refund, copy of insurance settlement, gift letter with copy of check and deposit slips, etc.)

X   DO NOT close/open or transfer any asset accounts without inquiring about the proper documentation required for your loan file. (i.e.: If you transfer all the funds in your stock account to your savings account, documentation is required.)

X   DO NOT open or increase any liabilities, including credit cards, signature loans, etc., during the loan process. Please check with your Loan Officer for any documentation that will be required and what impact this would have on your qualification ratios.

For most people, this is just a matter of organizing documents they already have on hand. Taking a little time to get your papers in order for the Loan Officer will make the application process easy and the approval process swift. A little time spent now means a lot of time – and even money – saved later, so follow these tips to take the headache out of homebuying.

Our goal for homebuyer education is to make sure you have accurate and helpful information. Up to this point, we’ve kept the information pretty basic, but many of you are really looking for a bit more and we want you to know we’ve got that covered too.

In addition to our overview, we want to point you to expert homebuyer course materials you need. Some home loan products require specific certificates of completion to be eligible. Others are teaching you all about the process for your own peace of mind. After all, this is the biggest purchase you will likely ever make.

While our team of experts will hold your hand through the entire process answering all your questions, we have recommendations for additional education platforms you might be interested in. Simply give us a call and ask for our homebuyer course guide for easy to reference links to all the homebuyer courses available. You’ll find out how much time they take, how much they cost, what requirements they fill and what each class will teach. This will be a great help to make sure you are participating in the right kind of homebuyer education before you put too much time into it. Give us a call today to begin.