| 1.) Prequalify!
Before shopping for a home, it is important to know exactly how much you are able to spend. By obtaining a pre-qualification from a knowledgeable Mortgage professional like James Warren, you will be able to approach the seller with an offer with full confidence that you have the funds available to close the deal.
Several factors are considered when approving a new mortgage loan such as stability of income, credit, debts, and assets. These factors are weighed when determining how much you qualify for, how much, if any, down-payment is necessary, and the terms of the loan. These, in turn, affect how much payment you can afford, and ultimately, the amount that you can borrow for a home. The only way to know for sure is by getting pre-qualified by a mortgage professional such as James Warren.
2.) Contact a real estate agent
A real estate agent is not required for a purchase, but their knowledge and assistance can be invaluable. Give them a copy of your mortgage loan pre-qualification and ask him or her to show you houses in the range that you are pre-qualified for in the communities that you would like to live in.
A real estate agent can be an excellent source of inside information on the benefits of the communities in his or her area. This is especially important if you are re-locating to a new city.
The best way to contact a real estate agent is by asking friends and family about real estate agents they may have used. Like anything else, there are good and bad real estate agents. Keep in mind that you are "hiring" a real estate agent for the job of finding a home. Don't be afraid to approach it from an employer's point of view by interviewing several candidates before selecting the right real estate agent for the job. If you are unable to get any good referrals you may want to contact James Warren for a list of real estate agents that he is comfortable working with.
If you have a real estate agent, it is still important to keep an eye out for local listings and homes For Sale By Owner. Occasionally a real estate agent may overlook certain homes simply because they would prefer to sell their own listings. Sometimes, they may simply not have access or be aware of a certain home that is available for sale.
Keep in mind that if you do wish to purchase a home directly from an owner/seller, you still want to utilize your real estate agent to make any offers.
For the most part, you should count on spending 2 to 4 weeks looking at homes with your real estate agent. This will give you enough time to look at plenty of homes and make your decision. If you take longer than a month, you risk the chance of not only losing a home that you would have liked to have made an offer on, but your mortgage pre-qualification as well.
3.) Make an Offer
When you find a home that you want to purchase, the next thing you do is make an offer on the home. If you have a real estate agent, you will do this through them. If not, you will make the offer directly to the seller. You will need a standard residential sales contract. A real estate agent will provide this for you. If you do not have a real estate agent, a mortgage broker like James Warren will usually have a generic purchase contract available for you to use.
You will also need to select a real estate attorney. An attorney may or may not be necessary at this point, (most sales contracts are fairly standard) but will be required later in the process. However, you may decide that you want an attorney to review the contract. Usually your mortgage professional or real estate agent can suggest a real estate attorney if you don't know one. The real estate attorney fees are generally part of your mortgage loan closing costs.
The sales contract will most likely contain some contingencies or riders attached to the contract. Examples of some contingencies are:
Subject to your obtaining financing for a specified rate and term
Subject to the selling your current home
Subject to a satisfactory (to you) home inspection.
Your real estate agent or attorney may include other items depending on the complexity of the transaction. Most residential home purchases are quite simple however. James Warren should be able to help you with anything you are unsure of if you have chosen not to use a real estate agent.
The offer to purchase a home will be accompanied by an earnest money deposit. This indicates to the seller that you are making a serious offer. The earnest money deposit is normally in the form of a check made out to the real estate agent or the title company that will close the deal(not the seller unless there is no real estate agent involved. Speak to an attorney about your state's laws). It is deposited into an escrow account and will be applied to your down payment. If you are utilizing a zero down mortgage program, the money will go to pre-paid expenses like home-owner's insurance and/or an escrow account. Any money left over from that would be returned to you at closing.
If the sale is not finalized for any reason beyond your control (ie. due to one of the contingencies), the earnest money will be returned to you. It is important to remember that "I changed my mind" and "I found a better deal" are not satisfactory contingencies that will get your earnest money back!
Earnest money deposits may vary according to the seller's wishes and the price of the home. Usually it is between $500 and $1000.
Subsequent offers and counter-offers may take place until all terms are agreed upon by both parties. This is the time to ask for things like 3% seller paid closing costs. This will reduce the amount that you have to bring to the closing table. Once the purchase price and terms are agreed upon, it is very difficult to change.
4.) Get a Home Inspection
Once the purchase terms have been agreed upon and the purchase contract is signed, have the home inspected by a professional, bonded inspector.
NOTE: The buyer normally pays for the home inspection. A home inspection will generally run somewhere between $200 and $500. You may be able to get this paid for by the seller by specifying it in the purchase contract when you make your offer.
The home inspection usually takes place within 5 days after signing the contract. If there are any major flaws in the home, they can be dealt with before you go any further. If these issues cannot be dealt with to your satisfaction, your contract should allow you to back out at this time.
5.) Get your loan started
If you followed the steps above, you have already received a pre-qualification for your mortgage. At this point, you need to contact the lender or broker that provided that pre-qualification and get them a copy of the purchase agreement, the real estate agent's contact information if you have one, the real estate attorney's contact information if you have one, and your homeowner's insurance information. Some of these may have already been done if you have been in constant contact with your mortgage professional.
To apply for a mortgage loan, you will need many of the following documents. If you have been pre-qualified, your mortgage professional may already have many of the things in this list. Depending on your loan program, some of these items may not apply. Your mortgage professional will be able to tell you exactly which additional documents they need to complete your loan:
- Social Security cards & drivers licenses
- Residence addresses for the past 2 - 5 years
- Your landlord's name and address
- Names and addresses of each employer (past 2 - 5 years)
- Your most recent pay stubs
- Two years signed tax returns & W2's
- Names, addresses, account numbers, and balances of all checking, savings, credit cards, and installment loans
- Two most recent bank statements on all accounts
- Information on any stocks or bonds you own
- Details of all real estate owned
- Copy of fully executed sales contract, riders, and listing sheet for your current home (if applicable)
- Divorce decree & child support agreements
- Application fee
6.) Getting the loan done
Your mortgage broker or lender will provide you with a "Good Faith Estimate" and a "Truth in Lending" statement (TIL) along with many additional documents. These documents combined are often referred to "RESPA" disclosures since they all pertain to the Real Estate Settlement Procedures Act. These documents include the costs for: points, appraisal, title search, title insurance, survey, recording of deeds, the lender's attorney fees and all other closing costs and pre-paids to be paid in the transaction. Some of these items may or may not be charged as every transaction is unique. Unless the loan amount is small, the total closing costs usually range from 3-5% of the loan amount.
The RESPA disclosures also include the terms of your loan such as interest rate, principal loan amount, whether or not the loan is fixed or an ARM, and whether or not there is a pre-payment penalty. Each type of loan is unique and has its merits. What is important is that you know what type of loan you are getting, what the costs are, and that all of the information on the documents is correct. If you have any questions about these documents, contact your mortgage professional.
7.) Getting Final Approval
At this time, there are several other items that may need to be done before the lender gives final approval to the mortgage. Most of these will be obtained by your mortgage professional without any intervention from you.
Title Search - This is usually required by the lender. It should be stated in the sales contract that the seller provide you with clear title (one without any liens against it). This is usually included in the total closing costs. This fee should be listed on the Good Faith Estimate.
Lender's Title Insurance - The lender will also require this for their own protection. It's an insurance policy that covers any problems with the title even though the title company stated it was clear.
Buyer's Title Insurance - This covers you, the buyer, in the event that the title is not clear. This is usually optional, but recommended.
Private Mortgage Insurance (PMI) - Again, this is something that most lenders require if your down payment is less than 20% of the purchase price. It is a protection for the lender in the event that you default on the loan and the full amount of the loan cannot be recovered by foreclosing on the home and selling it.
Homeowner's Insurance - This is an insurance policy that covers the cost of repairing or rebuilding your home in the event of a natural disaster. Obviously, this is beneficial to both you and the lender. It is also required. This is something that you will shop around for on your own. Start with your auto insurance company. Your mortgage professional or real estate agent may also have some suggestions.
With the exception of the homeowner's insurance, all of the above costs plus any additional ones such as the appraisal, survey, recording of deeds and the bank's attorney fees will be included in the RESPA documents provided by your mortgage professional. The entire cost to you, the buyer, will usually be in the range of 3%-5%. (The actual amount may be higher or lower than these limits.) The amount that you will have to pay depends on the lender's policies, the amount of your down payment, the term and the amount of the mortgage, and whether or not the seller is paying any of the closing costs. This amount does not include and additional discount points used to "buy down" the note rate.
The bottom of the Good Faith Estimate shows how much you are expected to bring to closing. If you do not have the amount of funds required to close, it is important that you contact your mortgage professional immediately. When you first receive these disclosures, there is generally time to make any necessary changes to the loan program and still get the loan closed before the purchase contract expires.
Note: The Good Faith Estimate is exactly what it says it is; an estimate. The general rule is that the Good Faith Estimate should not vary by more than 2% on the total closing costs. Many of the items on the Good Faith Estimate simply cannot be known exactly until very close to the closing date.
So, how much will this cost?
Let's take an example of a $100,000 home:
Suppose your loan program requires a 5% down payment on the house.
Your total closing costs end up being right at 3% ($3000)
8.) Closing the Deal!
Once your mortgage is cleared for final approval by the lender, your mortgage professional will provide you with a commitment letter.
All of the parties will need to agree on a closing date and time. Your mortgage professional will schedule the closing with the real estate agent, title company or settlement attorney, the seller and you. Each party will be required to bring a few documents to the closing, here is a list of some of the items that the three parties will need to bring.
The lender: They will generally email or overnight a package with all of the final RESPA disclosures, the mortgage note, final loan application, and documents for any escrow accounts required for the buyer. Many of these may have already been signed by you, but the lender will require a new set at closing. They will also be responsible for wiring the funds to the settlement office's account.
The seller: They will bring the property deed, final utility bills, final tax bills, any documents required to clear the title, and keys to the house.
The buyer: They will need to bring a cashier's check for the remainder of the down payment plus the balance due for any other payments (you will be informed of the amount by your mortgage professional), and any documents required by the lender such as a picture ID and a social security card. You may need your checkbook for small dollar amounts, and if you have one, you should have your real estate attorney present.
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