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Buying your first home can seem like a daunting task. You need lots of money, you need great credit, you need…STOP! Buying a home is a complex process, but it might be easier than you think. I’m glad you are here, let’s make your home buying dream a reality.
Maybe you never bought a home or maybe you haven’t owned a home in the past three years. Both of these instances are qualified as First Time Buyers for the purposes of down payment assistance. Put everything you’ve heard before to the side and go through this with a clean slate. Here we will cover everything you need to know to make that big purchase easy.
The home purchase process involves getting pre-approved, finding the property, making an offer, inspecting the home, securing financing, and closing on the purchase. You see, it’s already more manageable than you thought. Let’s break down each process.
Finances
Before you talk to a mortgage lender about getting a pre-approval, let’s review your finances. You need to know exactly how much you are spending every month all inclusive. This will let you know how much you can actually allocate to a mortgage payment.
To qualify for a home, you’ll need good credit and a history of paying your bills on time. Check your credit now, you can get a FREE copy of your credit report once per year from each of the major credit bureaus: Equifax, Experian, and TransUnion from AnnualCreditReport.com. See the Credit Repair page on this website if you need additional help.
Your debt in comparison to how much money you make will also play a part on your pre-approval. This is your debt-to-income (DTI) ratio, the percentage of your monthly gross income that goes toward paying your debts. A good DTI ratio to get approved for a mortgage is under 36%. A higher ratio could mean you’ll pay more interest or be denied a loan. The DTI is as important as your credit score and job stability.
To calculate your DTI, divide your total monthly payments by your total monthly income before taxes. Let’s say your housing costs, car payment, student loan and credit card payments add up to $1,500 a month and your income is $5,000 a month:
$1,500/$5,000 = 0.30, or 30%
Let’s get your finances in order. To lower your DTI ratio, Pay off as much of your current debt as possible. Keep your credit card balances under 30%. Don’t think of buying a new car just yet or co-sign for someone else as that will count as your debt.
Once you have all these things in order, remember that you will need to have money saved up for the good faith deposit, inspection, appraisal, down payment, and closing cost. Limit your expenses and have a monthly money saving goal. You probably heard this advice before: if you want to save money stop eating out so much! Put on a piece of paper your goal to purchase a home and every time you want something that you don’t need, put it next to your goal and ask yourself what is more important. See the Down Payment programs page on this website. Yes, there are always programs available!
Do The Basic Math
First, Let’s do a quick calculation to get an estimate of how much you might be able to afford based on your income alone. Most financial advisors usually recommend spending no more than 25% to 28% of your monthly income on housing. Add up your total household income and multiply it by .28.
For example, say you bring home $5,000 a month:
$5,000 x .28 = $1,400
The maximum amount you may be able to afford is a $1,400 monthly mortgage payment.
As a rule, your mortgage and other debts shouldn’t exceed 36% of your total monthly income. So, again, if your household income is $5,000 and you pay $600 a month in expenses:
$5,000 x .36 = $1,800 – $600 = $1,200
Now you’re looking at a monthly payment closer to $1,200 than $1,400.
Pre-approval
The very first step in the home buying process is to obtain a financial pre-approval. A mortgage lender will be able to take your financial information and determine what amount you will be able to borrow. Be ready to provide the following:
- Tax Returns (last 2 years)
- Income
- W-2 Wage (Copies of W-2 forms and 2 payroll stubs)
- Self employed and Independent contractors (year-to-date profit and loss statement and two years of records, including the Form 1099s)
- Assets (2 months bank statements for every account) (2 months of IRA and investment account statements)
- Identification (Social security card, ID or DL, Green card or PRC)
- Debt (All monthly debt payments)
- Other (Rents, Divorce, Bankruptcy, School transcript, Down payment gift letter, etc.)
Different financial institutions offer a variety of loan programs, but are never all inclusive. Speak to a mortgage lender about their product availability and the options that are best for your type of investment. You should also discuss your options for any assistance program for which you may qualify and the next steps. It’s important to ask your potential lenders some questions to make sure they are a good fit for you.
Don’t understand something your lender says? Stop and ask for clarification. This is your home buying journey, and you deserve to understand the process every step of the way. A pre-approval is only valid for 30-90 days, so while you can start talking to lenders, you’ll want to wait on getting that pre-approval letter when you’re ready to buy.
Having your pre-approval letter in hand before we start searching will save us time and make sure we don’t miss out on the perfect home opportunity.
Home Search
Once you’ve got your finances in order, the fun of looking for the perfect home begins! Before we hop into the home search, I like to advise my clients to create a “Needs” list and a “Wants” list. This will help us to really focus on the things that are most important in your future home.
The Perfect Home Finder Program allows us to do a search specifically created for you for non-listed homes for sale outside of the MLS (ask me how this works). This is ideal in a seller’s market where the buyers compete against each other.
I will set you up on an automatic search through the Multiple Listing Service (MLS), which is the database that Realtors use to list and search for homes. The moment a home that fits your search criteria is listed for sale, it will be sent to your email inbox or text. If we ever need to adjust the search criteria, just let me know and I can make any change you need.
I’m a full time real estate professional. When ever you are ready to see a home, I’m ready. Make sure to let me know which homes piqued your interest and we will set up some showings.
Making An Offer
Before making an offer I will provide a Comparative Market Analysis (CMA) of the recent sales in the area. We will use this as a guide to determine how much money you want to offer for the house, along with any conditions or concessions. I will then present the offer to the seller’s agent or the seller. The seller will either accept the offer or issue a counter offer. You will have the option to accept the counter or issue another counter. Every counter offer terminates the previous offer, it is up to you to decide if you have reached a deal or call it quits.
The offer has been accepted
CONGRATULATIONS! We are officially under contract—now what? There are deadlines to meet with a sense of urgency. Follow these next steps to ensure a smooth and timely closing.
- Schedule Inspections (The due diligence period begins immediately).
- Escrow Deposit (The escrow deposit is usually due within 3 days of contract acceptance).
- Obtain Insurance (get insurance quotes to make sure the home is insurable before the end of the due diligence period).
- Loan Application (complete and sign your loan application immediately).
Inspecting The Home
During the inspection period, the buyer should hire a professional to inspect the condition of the home. The inspection will uncover any issues in the home that would have otherwise been unknown.
The standard home inspector’s report will cover the condition of the home’s HVAC central air conditioning system; interior plumbing and electrical systems; the roof, attic and visible insulations; walls, ceilings, floors, windows and doors; the foundation, and structural components. You will receive a written report of the inspection. You may be present for the inspection if you would like to ask the inspector any questions.
Common Inspections You May Need:
- Four-Point Inspection may be required by your homeowner’s insurance if the home is more than 30 years old.
- Wind Mitigation report might also be requested by the insurance.
- Wood Destroying Organism (WDO) Inspection (Required for VA loans). Ask your lender if your loan requires any certain inspections.
Additional Inspections You May Need:
- Lead-Based Paint Inspection if the home was built prior to 1978, a lead-based paint inspection is recommended.
- Well water Testing
- Mold Inspection
- Foundation or Structural Inspection
- Radon Testing
- Chimney Inspection
- Asbestos Inspection
- Sewer or Septic System Inspection
- Landscaping/Soil Analysis
- Pool & Spa Inspection
Securing Financing
You have a few days from the date of contract execution to begin the mortgage loan application. During the 30-45 days before closing, the lender will be finalizing your mortgage. You will need to provide them the updated financial information you provided for the pre-approval, plus any other documents required by underwriting.
It is very important not to make any major job changes, major purchases, or open new credit cards or lines of credit as any of these activities could alter your qualification for the loan.
Home Insurance
It is best to secure insurance during the due diligence period. Your lender will require you to obtain a homeowner’s insurance policy. You will need to get the lender this information before closing. Feel free to contact me for insurance agent recommendations. Some lenders work with home insurance companies and will provide you quotes.
Appraisal
Appraisals must be conducted by a licensed, third-party appraiser who has no connection to the buyer, seller or lender. Once any problems during the inspection are solved, the appraisal will be ordered by the lender once you pay for it.
The goal of the appraisal is to verify the value of the property unbiased and free of any influence from a party that could benefit and to protect you from overpaying. Some contracts are written contingent upon whether the appraisal comes in at or above the purchase price. If the appraisal comes back below, we will be back to the negotiating table.
Depending on your type of financing, your lender may require certain criteria for the home appraisal.
- FHA Appraisals – require repairs to peeling paint, water damage, holes in the roof, foundation issues and more to be completed before you can move forward with the loan process. The value on FHA appraisals sticks with the home for 120 days.
- VA Appraisals – require repairs to peeling paint, clean drinking water, a working sewage system, functioning electrical and water systems, pest inspection and appropriate living areas.
After the appraisal is completed and any appraisal deficiencies are resolved, the appraiser will assign a monetary value to the property and send it to your lender.
Closing
Closing basically involves signing a ream of paperwork on closing day. Okay, maybe not a ream but the difference between the first signature and the last will be substantial. In the final stages of your purchase the title company will order a survey and a title search.
- SURVEY: Unless the seller already has a recent & acceptable survey of the property, the buyer is required to pay for the survey (this will be in your closing costs). The title company or I will order this for you. The survey is a sketch showing a map of the property lines/boundaries among other things. The survey will show if there are any encroachments on the property.
- TITLE: The title company will conduct a title search to ensure the property is legitimate and find if there are any outstanding mortgage liens, judgements, restrictions, easements, leases, unpaid taxes, or any other restrictions that would impact your ownership associated with the property. Once the title is found to be valid, the title company will issue a title insurance policy which protects lenders or owners against claims or legal fees that may arise over the ownership of the property. This will also be a part of your closing costs.
Clear to close are the magic words! It means the mortgage underwriter has officially approved all documentation required to fund the loan. All that remains is the actual closing process.
When the title company gives you the closing date and time, it’s time to contact the utility companies. Schedule the services for the date of the closing and remember to call them if there are any delays. See the resources page on this website to find the utilities.
The information here is extensive, and it is still not all inclusive. Keep in mind that this is the process of the real estate purchase in the state of Florida. If you are in a different state, send me a message and I will connect you with a great agent in your area.
Closing Fees
On average closing fees for a property purchased with a loan range between 2% to 5%. Shop around or negotiate the lender fees by and ask the lender questions provided in the Buyer’s Guide. Below are a list of fees that you may encounter during the buying process:
- Home inspection fee – You can expect to pay around $300 to $500 for a home inspection, but the exact figure will depend on the size of the home.
- Credit report fee – Credit report fees range from $30 to $50 per report, although some lenders cover the cost themselves.
- Document preparation fee – Document prep fees are typically $50 to $100 but may vary by lender.
- Loan origination fee – The loan origination fee is the primary way lenders make money, it is typically .05%-1%.
- Condo questionnaire – A condo questionnaire is a form sent to a condo development by a lender when a potential borrower applies for a mortgage. The questionnaire allows the lender to determine if the condo meets its requirements for a loan. This can vary between $100 and $500.
- Appraisal fee – Appraisal fees will vary depending on where you live and the size of your home, but you can expect to pay anywhere between $300 and $1,000.
- Title fees – The lenders may require you to purchase lender’s title insurance, which protects the amount they lend. Another fee you will incur is the owner’s title insurance, meant to protect your financial investment in the property.
- Taxes – Property taxes are usually paid in advance, so the buyer may need to reimburse the seller. Your future taxes will be based on your purchase price.
Ongoing Fees
Private mortgage insurance – Is mandatory for people using an FHA loan or put down less than 20% on a conventional loan. Mortgage insurance protects the lender. Depending on the type of loan, this fee can last for the duration of the loan (FHA 30 years if you put down less than 10%) or for a conventional loan borrowers can request that monthly mortgage insurance payments be eliminated once the loan-to-value ratio drops below 80%.
HOA/Condo fees – condos and town houses, require you to join a homeowners’ association, which helps pay for upkeep on common areas and buildings. These fees vary greatly from a few dollars per month to several hundreds per month.
Payment Changes
Your mortgage payment is the sum of PITI an acronym for principal, interest, taxes, and insurance. Mortgage payments in the early years of the loan are applied more to interest than principal. They are structured so the amount of principal repaid starts out low, and increases in subsequent years.
Escrow
When you experience a change in your mortgage monthly payments it is due to an Escrow overage or shortage. Overages are a lot more common. Taxes are calculated on a per-year basis, but you can include them as part of your monthly mortgage repayments. Because property taxes are assessed annually by local government any increase to your taxes will affect your total mortgage payment. Insurance rate increases can also cause your total mortgage payment to change. It is good practice to shop around for homeowners insurance annually.
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