Purchasing a home is one of the most significant financial decisions most people will ever make. Whether you are a first-time buyer of an experienced real estate investor, the decision to buy a home needs careful consideration. Our Buyer’s Timeline will help explain the process from FICO scores to HUD Reports, and give you some pointers along the path to your new home.
Before you start shopping for your dream home, get in-touch with your financial health. Credit checks are readily available and factor heavily into your buying power. Once you have your credit report in-hand, correct any problems you might see, close any idle accounts and watch your credit rating improve.
Q: What is my credit rating? Your credit rating is based on a combined score generated from three credit bureaus who look at your credit history, amount of credit available, and recent inquiries to determine what’s called your FICO score.
Q: How do I check my credit rating? For a small fee, you can get your score and review your credit report by going online to www.myfico.com or contacting one of the following credit bureaus directly.
Mortgage lenders are chiefly concerned with your ability to repay the mortgage. To determine if you qualify for a loan, they will consider your credit history, your monthly gross income and how much cash you’ve been able to accumulate for a down payment. So how much house can you afford? To know that you need to understand a concept called “debt-to-income ratios.”
The standard debt-to-income ratio is your housing expense, or front-end ratio, and your total debt-to-income, or back-end ratio.
The housing expense, or front-end ratio, shows how much of your gross (pre-tax) monthly income would go toward the mortgage payment. As a general guideline, your monthly mortgage payment (including principal, interest, real estate taxes, and homeowners insurance) should not exceed 28 percent of your gross monthly income. To calculate your maximum housing expense, multiply your annual salary by 0.28, then divide by 12 months. The answer is your maximum housing expense.
maximum housing expense = annual salary x 0.28 / 12 months
The total debt-to-income, or back-end ratio, shows how much of your gross income would go toward all of your debt obligations including mortgage, car loans, child support and alimony, credit card bills, student loans, and condominium fees, etc. In general, your total monthly debt obligation should not exceed 36 percent of your gross income. To calculate your debt-to-income ratio, multiply your annual salary by 0.36, then divide by 12 months. The answer is your maximum allowable debt-to-income ratio.
maximum allowable debt-to-income ratio = annual salary x 0.36 / 12 months
Take a home buyer who makes $40,000 a year. The maximum amount for monthly mortgage-related payments at 28 percent of gross income would be $933. ($40,000 x 0.28 = $11,200 — $11,200 / 12 months = $933.33.) Furthermore, the lender says the total debt payments each month should not exceed 36 percent, which comes to $1,200. ($40,000 times 0.36 equals $14,400, and $14,400 divided by 12 months equals $1,200.) The following chart shows your maximum monthly payment and maximum allowable debt load based on your gross annual income (remember, gross income is pre-tax income):
|Gross Income||28% of Monthly||36% of Monthly|
- Conventional Loan:
Housing costs: 28 percent of monthly gross income.
Housing plus debt costs: 36 percent of monthly gross income.
- FHA & Rural Development Loans:
Housing costs: 29 percent of monthly gross income.
Housing plus debt costs: 41 percent of monthly gross income.
Taxes and Insurance
Lenders include the cost of real estate/property taxes and home owner’s insurance when calculating how much house you can afford in a monthly mortgage payment. Your Northwest Realty agent can tell you the current property tax rate for the area in which you are looking to buy. You must insure your new property to obtain a mortgage. Your insurance agent can estimate your homeowner’s insurance for your area and price range. Be sure to inquire about special requirements for hazard insurance, such as mandatory coverage for floods or other natural disasters. Also, if you have less than a 20 percent down payment, you will also be required to obtain mortgage insurance or take out a second loan, called a piggyback loan, to bring the first mortgage down to 80 percent of the purchase price. Both alternatives will raise your monthly payment.
Did you know Northwestern Bank can help you determine your buying power online? Northwestern Bank’s Mortgage Center steps you through a series of questions about your income and monthly obligation online. In a matter of minutes you have your pre-approval letter in-hand! This FREE service helps fine-tune your search so you don’t spend time looking at homes you can’t afford. And because sellers know you already have a loan virtually in your pocket, you have an edge when negotiating a home purchase.
Pre-qualification acts as a dry-run of the loan application process. The mortgage lender will use details you provide about your credit, income, assets and debts to arrive at an estimate of how much mortgage you can afford. The whole process may take only minutes, or a few hours at most, and is usually free. While a pre-qual is non-binding to the lender (because the information you provide has not been verified), it does serve as a good indication to potential sellers of your general creditworthiness. Pre-approval takes pre-qualification one step further. The lender will contact your employer, your bank and others to verify your income, assets, debts and credit history, and then issue you a letter stating that your mortgage is approved for a certain amount within a certain time. You may be charged a small fee to cover the cost of your credit reports and your application, often refunded at closing.
Q: What’s the benefit of getting pre-qualified or pre-approved? Pre-qualified and pre-approved buyers are 1) more attractive to sellers because they don’t have to worry that they’ll accept your offer only to have your loan turned down; and 2) you’ll save time when you do find a home, because the lender will have already completed the necessary qualifying and underwriting steps.
Q: How do I find the right mortgage lender for me? We’ve put together a list of ten questions. Compare notes between lenders. The results will lead you to the mortgage lender that’s right for you.
- What is the interest rate on this mortgage?
To determine exactly what you’ll pay over the term of the loan, you need to know the rate. Rates change quickly, and if your credit is less than perfect, you may not be offered the lender’s lowest figure. To effectively compare different lenders’ programs, ask for the annual percentage rate (APR) of the mortgage interest, which is generally higher than the initial quoted rate because it includes some fees. But beware, the APR found in advertisements can be misleading. Mortgage lenders don’t always include all the fees they charge in the calculation that determines APR, so customers who use that figure to shop rather than an itemized breakdown of rates, points and fees may end up comparing apples to oranges.
- How many discount and origination points will I pay?
Lenders may charge prepaid mortgage interest points to lower your interest rate or other points that have no benefit to you at all. Find out how many you’ll be expected to pay.
- What are the closing costs?
Mortgages come with fees for various services provided by lenders and other parties involved in the transaction. You need to know what those fees will be as early as possible. Lenders are required to provide a written good faith estimate of closing costs within three days of receiving a loan application.
- When can I lock the interest rate and what will it cost me to do so?
Your interest rate might fluctuate between the time you apply and closing. To prevent it from going up, you may want to lock the rate, and even points, for a specified period. Ask your lender if lock fees apply.
- Is there a prepayment penalty on this loan?
There may be a prepayment penalty on your loan. Some penalties are 1 percent of the loan amount, others are equal to six months’ interest, some apply only when you refinance or reduce the principal balance by more than 20 percent, and some kick in if you sell your home. Find out the duration of any penalty period and how the penalty is calculated. Some lenders offer lower interest rates to buyers who accept prepayment penalties.
- What is the minimum downpayment required for this loan?
The rate and terms of your loan will be based on a down payment figure, typically 0 to 20 percent of the sale price. If you can put more money down, you may be able to lower your rate and improve your terms; if you come up short, you may be required to pay mortgage insurance premiums.
- What are the qualifying guidelines for this loan?
These requirements relate to your income, employment, assets, liabilities and credit history. First-time home buyer programs, VA loans and other government-sponsored mortgage programs typically offer easier qualifying guidelines than conventional loans.
- What documents will I have to provide?
Most lenders will require proof of income and assets before approving your loan, and may require other documents as well. Buyers with excellent credit may qualify for a no-documentation or “no-doc” loan, but they can expect to pay a hefty down payment and higher interest rate.
- How long will it take to process my loan application?
The answer will depend on a number of variables. When the loan business is brisk, underwriters get backed up, verification takes longer, appraisals move slower and other bottlenecks develop along the loan pipeline. Lenders may say one week, but two to three weeks is probably more realistic during the peak season. You’ll need their best guess to determine how long to lock in your loan.
- What might delay approval of my loan?
If you provide the lender with complete, accurate information, the loan process should run smoothly. If the underwriter discovers credit problems, however, there could be delays. Make sure you notify your lender if you change jobs, increase or decrease your salary, incur additional debt or change marital status between the time you submit an application and the time the loan is funded.
IMPORTANT: Should your financial circumstances change before closing, make sure to contact your lender, as your prequalification or preapproval may no longer be valid.
Interview several Northwest Realty agents and choose someone you feel comfortable with, someone you see eye-to-eye with on the issues that matter most to you. Once you decide who will represent you, feel free to check their credentials with their agency.
Once you’ve got those preparations out of the way, it’s time to find the home of your dreams.
Step 1: Shop Online!
Check out Northwest Realty’s Area Listings to get a sneak peek and lots of information about the home in your target area and price range.
Step 2: Take A Drive
Get to know the neighborhoods you are interested in. Drive around and get a feel for what it would be like to live in the area. Start getting a sense of the homes available in those neighborhoods.
Step 3: Narrow Your Search
Select a few homes that interest you the most and have your Northwest Realty agent make appointments to visit them. During your house tours, your agent will be able to point out the possible issues as well as the selling points of each property.
Step 4: Time To Buy
Once you’ve picked out the house you want to buy, our agents can help you make an offer that the seller will accept. A good agent will investigate the potential costs of maintenance and repairs on the house. An agent can also help you draft your offer in a way that offers you maximum legal protection.
When you’ve found the house and are ready to make a written offer to buy, your Northwest Realty agent will help write a contract that states your offering price, contingencies, concessions, and any other details you want covered.
Q: How much should I offer? First, treat the asking price as only a rough estimate of what the seller would like to receive, and recognize that different sellers price houses differently. Some sellers deliberately overprice, others ask for pretty close to what they hope to get, and a few underprice their houses in the hope of attracting a flood of potential buyers who will compete and overbid. The seller has no obligation to sell to you or anyone at the advertised price. Second, consider what you are pre-approved for, or what you are able to afford on a monthly basis. Use our mortgage calculator to estimate monthly payment scenarios. A house in your price range, but in need of remodeling, may put you in a financial bind. Third, discuss current trends in your area, and review comparable house sales with your realtor. With your agent’s help and guidance, you will come to an offering price that feels reasonable and comfortable.
Q: What should I include in an offer? Along with your offered purchase price, include any contingencies, items you would like included in the purchase price, and a deadline for their acceptance or rejection of the offer. Your Northwest Realty agent will help you step-by-step through writing this contract.
Q: What is a contingency? Contingencies are events that must happen within a certain amount of time (such as 30 days) or else the deal is off. For example, you may want to make your offer contingent on you securing a mortgage, the house passing certain physical inspections, or your ability to sell your existing house first. Be aware, however, that the more contingencies you place in an offer, the less likely the seller is to accept it. In the hottest markets, sometimes the successful bidder will have taken a calculated risk and made an offer with no contingencies.
Q: What is a counteroffer? After your initial offer, the seller may counter. Most counteroffers propose changes in these areas: 1) price – the seller wants more money than offered; 2) closing date or occupancy date – the seller needs more time to move out; 3) contingency on buyer’s sale of current house – the seller doesn’t want to wait for you to sell your house; 4)inspection contingency — the seller wants the buyer to schedule the inspections more quickly, or not at all.
Q: What if I don’t agree with the seller’s counteroffer? When the seller counters, you can accept the seller’s counteroffer, reject it, or present a counter counteroffer. This back and forth will go on until you come to an agreement and accept all the terms of the other’s offer, or fail to counteroffer in writing within the time allowed.
Once your offer has been accepted and your earnest money (deposit) has been placed in escrow, you are typically given a set amount of time to take care of the following items.
- Inspect Property
It is recommended that you have the property inspected for damage or problems. For our recommended list of inspectors, click here.
- Appraise Property
Your lender will send an appraiser out to determine the market value of the home. Typically, the home must appraise for the purchase price or more.
- Obtain Financing
Firm up your mortgage loan details with your lender.
- Conduct Title Search
The abstract or title company will research the complete history of the property to verify any liens or encumbrances on the property that need to be cleared prior to or at closing.
- Secure Insurance
Contact your insurance agent to establish a homeowner’s policy on the new property. Provide proof of insurance to your lender before closing. Not doing so can delay your close date.
- Consider Home Warranty
This optional warranty can be offered with a listing as part of the purchase price, or it can also be purchased. Ask your agent for details.
- Review Closing Documents
Before closing, you will receive closing documents for review. Check to be sure names, addresses, social security number, birthday and dollar amounts are correct. Let your agent and lender know of any errors.
At the successful conclusion of each of these steps, you will either remove the corresponding contingency or request a renegotiation of the terms of the contract (often the price) based on what you have learned. An objective, experienced agent can help you make an informed decision on how to present your new offer to the seller.
Q: What is Escrow? When your offer is accepted by the seller, your earnest money (deposit) is temporarily held in escrow (a holding account) by a third party (usually a realtor or title company). Once the sale is official, your earnest money is disbursed to the seller and the escrow account is closed.
Q: What kind of inspections should I expect? You have the right to a wide variety of property inspections to determine the property’s condition and the cost of any impending repairs or upgrades. Inspections may include roof, termite/pest, chimney/fireplace, property boundary survey, well or septic. You are entitled to copies of all inspection reports.
Most sale contracts entitle you to a walk-through inspection of the property 24 hours before closing. This is to ensure that the seller has vacated the property and left it in the condition specified in the sales contract. If there are any major problems, you can ask to delay the closing or request that the seller deposit money into an escrow account to cover the necessary repairs.
On closing day, be prepared to sign a good number of documents concerning: 1) the terms and conditions of your lender, and 2) the agreement between you and the seller transferring ownership of the property. Your loan officer will briefly explain the purpose of each document as you sign.
Once you’ve reviewed and signed all closing documents and the check has been handed over, the house keys are yours and you will have successfully bought your new home! Congratulations!