Purchasing a Home

Buying a home is a lifetime accomplishment, and if you’re serious about the purchase, you need the funds to back it up.

Here’s a list of the cash needed to close the sale*

*using the example of a $200,000 home.

• Earnest money deposit: This is what’s used to put down on a house up front. Earnest money goes in an escrow account until the closing date, when it becomes part of the down payment. Earnest money is about 1-3% of the total cost of the home. Cost: $6,000
• Down payment: Usually the biggest cost of buying a home, the down payment ranges from 3.5% up to 20%, depending on the type of loan you’re qualified for. The more you put down, the lower your monthly payments will be. Cost (including the earnest money deposit): $40,000
• Closing costs: The “closing costs” is the costs associated with processing all the administrative paperwork. Closing costs include property taxes, prepaid interest, lender charges, and inspection fees. These are usually just a little lower than the down payment, although closing costs have the potential to be more expensive. These will run you about 2-4% of the cost of the home. Cost: $4,000
• Moving expenses: These aren’t normally associated with the cash needed to buy a home, but it’s a vital one. Immediately after closing you’ll want to move in, and that’s no small task. It generally costs less to move within your state than from outside the state. Cost: $2,000 – $4,000
• Emergency funds: Finally, put aside some cash in reserve. This acts as an emergency fund that you can use just in case an unexpected expense pops up. Experts say that you should consider 3 months worth of income saved and set aside. Cost: 3 months salary

So what’s the cash amount needed for a $200,000 house? Not including the emergency funds, you’re looking (at most) $48,000. Every situation is different, so be sure to take the time and calculate what works best for you.

At a glance the mortgage approval process only takes a few days. This is a “best case” scenario where there are no blemishes in your credit or setbacks in the paperwork. Of course, we’re not counting the time it takes to choose and compare lenders. That’s a whole other story.

At most, however, expect it to take several weeks. Here’s why.

Documentation

We’re sure you don’t have proof of income just sitting around the house, which is why you should take a few days to gather needed paperwork. This will save you some frustrations down the line. Missing paperwork is a common reason for an approval slowdown.

These documents support your financial status and show that you are financially responsible and able to pay back the loans. Keep in mind assets, retirement accounts, and if there are derogatory items from your credit report, you must be able to address those in a timely fashion.

Conditional Approval

Sometimes the underwriter of the loan issues what’s called a conditional approval. You’re still expected to be approved for the funds, but the lender needs to first clear up certain questions about paperwork. For instance, you might get asked to submit a Letter of Explanation (LOX) about a bank deposit. Then the process can move forward.

Appraisal

Property appraisal is another required process which lasts at least a few days. This report is used by lenders to verify the standing value of a home. Make an appointment as soon as you can, because they might not be able to inspect the property immediately.

Approval

Lenders give priority to purchases, but they still need to take the time to verify your information. A useful tip is to check your credit score beforehand to understand how lenders view you from a financial standpoint.

In a perfect world, the whole journey from beginning to end shouldn’t take long at all as long as you’re prepared. Allow yourself a little time and don’t wait until the last minute!

First-time home buyers don’t always know what to look for in purchasing their new home. We’re here to help you through it!

Look at Every Expense:

A mortgage isn’t the only cost of running a home. You should also budget for taxes, insurance, utilities, and of course, any upgrades. For instance, your home may come with an exciting brand-new hot tub – which comes with maintenance expenses on its own.

To save yourself the hassle, call the utilities companies and ask for a monthly estimate. Then sit down and decide whether you can afford the insurance and taxes as well as the mortgage. Make a list of your household’s income sources and savings along with other cash flow considerations. Staying within a budget ensures a successful and practical home-buying experience.

Does the Home Fit Your 5-Year Plan (and Beyond)?

Single family house, townhouse, condo, apartment. Each option will have pros and cons relating to your special circumstance, but don’t make the mistake of trying to fit into a house that doesn’t fit into your life.

Expecting couples, retirees, and empty nesters are all examples of people who are going through a lifestyle change. The question is, can your new house accommodate your life? Is the home in close proximity to a school district or favorite recreational areas? Understanding the home in context with your lifestyle will help you see if it’s the right fit. If you see your situation changing in the next few years and the house doesn’t quite match your 5-year plan (and beyond), keep shopping around.

Wants Vs. Needs

Don’t get these confused. You will need a backyard for the kids and a minimum of three bedrooms, but you may want a fourth bedroom and a den. These can also be called value items, or items that bring more value to your living space. Of course, the more wants you add in, the more you have to spend on your mortgage. But if you’re really disappointed that your home doesn’t have what you want, think of it this way – Do It Yourself-ers can always add and change features on your own!

Pursuing homeownership means understanding all upfront costs, including the down payment. But how much do you really need to put down?

The answer you may not have wanted: it depends.

Generally speaking, a 20% down payment on a house is standard. This number has historically proven that a person is financially responsible and serious about buying a home. However, with the rising cost of housing in recent years, more and more families simply can’t afford 20% and opt for a much lower rate.

The type of loan you apply for will help determine your down payment amount. For example, a FHA (Federal Housing Administration) mortgage requires about 3.5% down. However, these loans are more expensive because they also come with an insurance payment. If a buyer defaults on the loan or fails to repay, the FHA steps in and makes payments.

A conventional loan requires 5% down. The higher down payment means you can eventually forgo the PMI (Private Mortgage Insurance) if certain requirements are met.

A Jumbo loan has a much higher down payment ranging from 10 – 30%. These are for families seeking higher-priced houses. However, these loans come with higher interest rates.

If you are a military veteran, it’s actually possible to achieve a 0% down payment on your next home. This is made possible through the U.S. Department of Veterans Affairs. To see if you meet the requirements, contact your local veteran’s office for more information.

Don’t worry if all of these options seem out of reach. Individuals on a fixed income can take advantage of other programs offered by the U.S. Department of Agriculture. While these are dependant on location and income, all are welcome to explore the down payments they require.

In all, it really is up to you to decide what you can afford. Of course, the higher the down payment, the lower your monthly loan payments will be. Discuss and compare options with your chosen lenders for more information.

Inspections are needed because, on the surface, it may seem like you’re purchasing a flawless home. But just because a home is near-new does not mean it’s perfect.

A buyer is responsible for initiating an inspection before the closing date. The seller can either pay for the repairs outright or offer a certain amount of credit at closing.

Below you can view the types of home inspections available and the benefits of each:

Foundation and frame:  This includes cracks in the foundation, walls, ceilings, and floors as well as the structural “frame” of the home. If the property was built on a slab or on a raised surface, the house is at an increased risk of “sliding”.

Ventilation:

If the garage does not open or close properly, or if any part of the property is not properly ventilated, there’s an increased likelihood of carbon monoxide poisoning.

Roofing and insulation: 

This may mean roof or gutter damage, loose or missing tiles, or improperly installed shingles. Improper roof and attic insulation can also allow water or cold weather inside.

Plumbing:  

An examination of the faucets, showers, sinks, pipes, and signs for any visible leaks prevents future water damage. Pools, spas, and other water features will also be checked.

Electrical:

Outlets and electrical boxes should no sign of potential electric shock or fire hazards.

Critters, pests, wood-destroying organisms (WDOs):

In warmer climates, it is common to include an inspection for damages brought on by WDOs, such as termites, because they can cause significant damage to the foundation of a home.

HAVC (Heat, Air Ventilation and Cooling) Inspection:

Heating and cooling is not just for comfort. Inspect the filters, ducts, furnace, and thermostat to ensure a safe home.

Other potential issues:  Lead-based paint, asbestos, and mold are absolutely damaging to your safety.

If a general inspector detects an issue that can’t be handled by their skillset and expertise, they’re likely to have contacts who can help you out. Contact your local inspector for an unbiased assessment will determine any defects or deal breakers before the closing date.

While you hope that everything goes right when buying a home, sometimes there’s a few bumps in the road. It takes time and effort for preapproval, financing, and the home inspection. From the first escrow payment to the closing date, there could be unexpected issues. For example, a home inspection reveals more extensive repairs than originally estimated. This is where seller concessions come in.

A concession is either an extra “gift” or bonus to help reduce the closing cost associated with buying the home.

So it’s discovered that a part of the property is not up to code, the seller can agree to cover it.

There’s no physical cash involved, but there are a few different ways to structure this agreement so that both parties benefit. Like if the seller agrees to pay all closing fees if the final sales price on the property is raised above the original level.

As long as the concession ultimately offsets closing costs, there’s many scenarios that can play out, including the payment of mortgage related fees, state taxes, title fees, inspection fees, appraisal fees, the setup of the escrow account, and even insurance costs. And if both sides verbally agree on certain points but not others, be sure to get it in writing so you’re on the same page!

Note that a concession cannot cover the down payment, and there is a limit to how much can be given. This keeps the market fair and sustainable. The limit depends on the type of loan used. A traditional loan usually allows 2-9% of a property’s sales price in concessions. Financing from the FHA, USDA, and the VA allow up to 6%.

A concession can really sweeten the deal. It’s an extra incentive towards selling the house quickly; and for buyers, this is great news because it’s another way to make homeownership possible.

Buying a home is the great American dream!

Houses all across the country are seeing a steady drop in prices in recent years, and now it’s more affordable than ever to own a home.

Of course there are certain benefits to renting, especially if you don’t plan on staying in one area on a permanent basis. But for those who are more than ready to settle in, is now the right time to buy instead of rent? To help you make the decision, homeowners can enjoy the following perks:

• A customized space. A house can actually reflect your tastes once you’re allowed to knock down a wall, add a back patio, and paint every room according to your specifications. Renters don’t get to make these kinds of changes, and as a result, the house doesn’t quite feel like home.
• Create a second (or third!) income. There are so many creative ways to earn an extra dollar or two shortly after you’ve moved in. The most lucrative way is to rent out the spare bedroom, but you live in a big city or higher-populated area, rent out the space in your driveway to the locals. Even better, rent the whole house as a “Summer house” while you’re away on vacation.
• No more unexpected surprises from a landlord. No one can hike up the rent, especially since a fixed mortgage can’t go up. No one can kick you out. No one can suddenly decide to sell the home to someone else without informing you first. No more dealing with landlords! The security of being in a house that’s truly yours is incredible. And since you are in charge of any repairs that need to be made (such as a broken dishwasher or pesky termite issues) there’s no more waiting on landlords to call a specialist, either.
• Tax deductions. Come tax season, you can declare and deduct mortgage interest payments and eligible expenses such as energy-efficient improvements. Other deductions include points on home mortgage, refinancing, and property taxes.

Mortgage buyers who put less than 20% of a down payment at closing will likely pay a PMI, or Private Mortgage Insurance.

This policy protects your bank or other lender in the case you can’t pay it back and end up in foreclosure.

Unfortunately, you can’t shop around for PMI since the provider adds it automatically. But once you’ve paid down a certain amount of your mortgage, the PMI is cancelled. This is because borrowers are less likely to default on their loans, resulting in a loss for the lender, once they have a large financial investment into the property. It will likely take a few years of payments, but speak to your provider about the details, since this number depends on the loan amount, applied interest rate, and your credit score.

How much is a PMI? It’s estimated you will spend roughly $50 per month for a $100,000 loan, but it really depends. The higher the loan, the higher the cost. It will also increase if you are considered a financial risk.

Want to get your Private Mortgage Insurance cancelled even sooner? Refinancing or getting a new appraisal occurs when you believe the value has increased on your home. Since appraisals cost a few hundred dollars, it’s in your best interest to call your bank beforehand and ask if this is a tactic that will have a positive effect on your PMI so you don’t waste your time and efforts.

Keep in mind that a PMI is distinctly different than an MIP, or Mortgage Insurance Premium. While a PMI is privately given, an MIP is government-issued. It covers a buyer’s payments in the case you become disabled and are no longer able to work, or in the case of your passing away. A Private Mortgage Insurance does not cover these items.

Veterans and members of the military who have taken out government-provided VA loans do not have to pay Private Mortgage Insurance. More information about these special programs can be found at your local veterans office.

Within just three days of applying for a loan, you will get a document called a Good Faith Estimate (GFE). These pages outline the terms of the mortgage and the settlement charges.

Put into place by the Real Estate Settlement Procedures Act (RESPA), lenders must issue a Good Faith Estimate by law. If you applied for a mortgage before Oct. 3, 2015, you received a Good Faith Estimate. If you applied on or after that date, you will get a new form entitled the Loan Estimate. Different name, same type of disclosure. They prevent lenders from taking advantage of prospective homeowners with excessive fees, and they allow individuals to make more informed choices when shopping for a mortgage.

A mortgage is made up of the principal loan, interest rate, mortgage insurance (if this applies), homeowners insurance, and property taxes. A Good Faith Estimate will include the first three, but not the homeowner’s insurance or property taxes. Be sure to factor these into your finances when making a final decision.

Common fees you will see on a GFE:

• Loan processing fees
• Interest rate
• Government fees
• Third party fees (such as attorney fees and title companies)
• Closing costs

There are also other details like whether or not the rate is fixed or “floating” (adjustable). This is so you don’t get caught off guard with a rising interest later on.

Of course, these estimates are simply that – estimates. Be prepared for the final numbers to change, but not that much. A lender should already know what fees they charge, so an application fee, for instance, will always be accurate.

A GFE is not a guarantee for loan approval. It’s simply a preliminary statement by banks, mortgage companies, and financial institutions so you can know before you owe. When added  up, surprise fees are very costly and will have a great  impact on your personal finances.

Smart shoppers use them to get the best deal out of homeownership without penalty. It’s a helpful tool in comparing loans across lenders. So take advantage of these summaries and get multiple GFEs before deciding on a final providers.

Repairs are costly, especially if you’re turning a less-than-perfect living space into your long-term dream home. DIY-ers who love fixer uppers can apply for a 203k loan from the FHA (Federal Housing Administration).

Let’s say it’s costing more effort than you originally thought to make certain fixes to the house. A lender sees the home as “unlivable” or “uninhabitable”, which means you’re less likely to secure funding. Instead, a FHA 203k loan could be the answer.

The federal government offers these loans through the FHA who wanted to “turn around” damaged properties with more extensive renovations. The costs of renovating the space (labor and materials) are wrapped into the mortgage. You may consider borrowing additional funds if you need to stay in temporary housing while extensive repairs are made.

To qualify, you can choose between a more standard 203k, which is for structural repairs and remodeling, or the limited 203k, which is reserved for non-structural improvements. This means new roofing, painting, and appliances.

This special program covers:

• Decks and patios
• Bathrooms and kitchen
• Carpet and flooring
• Heating and cooling systems
• Energy-efficient improvement
• Health and safety issues
• Plumbing
• New additions
• And more

Luxuries such as a new hot tub are not considered in this list of improvements because they aren’t permanent changes. Landscaping is also not included.

Choosing contractors to complete the jobs is a large part of the process. Even if you are a licensed contractor yourself, you can’t expect to get it all done on your own within the timeframe. Once you’re qualified, you must begin repairs within 30 days of the closing date. Projects must be completed within six months.

Not all properties qualify for this type of loan. If you’re an investor or plan on doing a “fix and flip”, this is not the type of financing for you. It’s ideal that you plan on living in the home on a long-term basis once repairs are completed.

Once you feel financially prepared to take on a home mortgage, you are responsible for applying with a lender. There’s a few documents you’ll need before you get started!

Credit History

First obtain your credit history. It’s less common to find errors or discrepancies in a credit report, but it’s still possible. Discovering these issues beforehand gives you the opportunity to fix them before a lender bases your mortgage on an incorrect summary.

If you have a history of late payments or a score that’s below average, you actually reduce your chances of getting the mortgage you want. Instead, try to find little ways to boost your credit beforehand. This includes paying off credit cards and saving as much as you can.

Borrowing History and Debts

Next, gather a complete assessment of your current financial situation in terms of debt. This includes credit card debt, student loans, and car loans. Other items such as child support also count!

Business owners and other individuals who have filed for bankruptcy in the past will also need to address the cause and situation behind that.

Assets and Incomes

Regular full-time employees need W-2 forms and recent paycheck stubs. A letter of employment will also confirm you have a reliable source of income. Lenders will also ask that owners of stocks, bonds, IRAs, car titles, and brokerage statements must declare them during this process.

Business owners or self-employed contract workers must put together profit and loss statements. These are usually stated in 1099 forms.

Other Financial Statements

Your personal finances includes tax returns, residential history from the last 1-2 years, and bank account statements. Cancelled rent and utilities checks prove that you pay bills on time.

Depending on whether you choose a bank, credit union, online lender or other party, each has different requirements, so be sure to do your research and gather everything you need beforehand.

Proof of Identity

Last but not least, confirm your identity! A photo government issued ID will help you prove you are who you say you are. Your valid driver’s license, social security card, or passport will come in handy when you apply.

More on What is a good credit Score

There are a few different terms you’ll hear in relation to this concept, but they all mean the same thing.

Points, discount points, and mortgage points.

Points are considered prepaid interest on a loan. A one-time purchase of a point at closing lowers your overall interest rate on the mortgage.

If you’re worried about how they’re calculated, it’s easy to do. One point equals one percent. So for instance, if your mortgage is $200,000, one mortgage point is $4,000. Two points is $8,000 and so on. So, the larger the loan, the more expensive points are.

Since rates in this industry fluctuate daily, there’s no “set amount” for how much interest rates decrease when you buy a point. It’s safe to say that it might go down by a quarter or three-eighths of a percentage.

Buying points is optional depending on how long you plan on staying in your new home. First you must figure out if you’re able to spend that money on top of other closing fees or if you’d rather those funds go towards repairs and improvements or moving costs. Be careful about buying “too many” points because ultimately they won’t lower the principal loan amount. Those planning to be in the house for a few years won’t need too many. It doesn’t make financial sense.

However, talk to your tax professional at the end of your fiscal year. Your discount points may be tax deductible the year that you purchased them!

We should also clarify that there are two different types of mortgage points, origination and discount. Origination points are not tax deductible, they are the fee that you pay the lender for processing your loan. While these are negotiable, you may pay 1-2 origination points as a required fee.

In all, buying discount mortgage points can save you a significant amount of funds during the length of your loan. Take a look for yourself and see how your mortgage can benefit.

Closing costs are the fees associated with your home purchase that are paid at the end of a real estate transaction. They can vary widely based on where you live, the property you buy, and the type of loan you choose. Typically, home buyers pay between 2 to 5 percent of the purchase price of their home in the closing fees. As a matter of fact, on average, buyers typically pay $3,700 at closing. While closing costs are a major burden for any homebuyer and may seem inevitable, there are steps you can take to lower or avoid them altogether.

Work With the Lender

Due to the competitive market, lenders are usually willing to come down on some fees; all you have to do is ask. When you first shop around for financing, take a look at options that may give you a discount on closing fees. Larger banks tend to have loyalty programs that help to lower these costs.

Speaking of programs, military members can take advantage of the benefits from VA loans. Union members can also receive financing assistance from discounts and rebates. For more information on these programs, contact your local Veterans Affairs or union offices to speak to a representative.

Have you ever heard of a no-closing cost mortgage? It’s exactly what it sounds like. However, in exchange for no closing fees with a lender, you will be charged a higher interest rate. Before accepting this kind of deal, do some calculations on your own to see if it is financially worth it.

Work With the Seller

Once you cut down costs with the lender as much as you can, start working with the seller! Avid negotiators can get the buyer to handle the closing costs depending on the agreement you both share. Usually, a seller won’t agree to pay the entirety of the closing costs, so discuss individual fees or simply split the cost 50-50. Another option is to renegotiate the final cost of the house.

When you agree on a closing date, choose a date towards the end of the month. Paid interest is prorated, a detail that tends to be overlooked. Therefore, instead of paying an entire month’s worth of interest, you’ll only pay for a few days.

Another strategy involves talking to your bank about potential discounts and rebates. Some banks have special offers for existing customers, with two examples being: Wells Fargo’s My Mortgage Gifts Program, which rebates eligible borrowers $500 on a home purchase or $300 for a refinance, while eligible Bank of America Preferred Rewards members can save from $200 to $600 on the origination fee.

Our final tactic? Those who have less cash upfront can simply “roll” the closing costs into the total cost of the loan. It’s a great idea for families who want to save money for the future.

Closing costs and fees are charged by your mortgage lender or other financing party for their services. Whether you’re a first-time buyer or not, these are a vital factor to consider when setting aside funds for a house.

You can expect to pay 2-4% of the cost of the house in closing fees. For instance, a 150,000 house warrants about $6,000 at closing. While buyers don’t know always know what to expect, we hope this list will help you prepare!

Mortgage application or loan origination fees:

this is for the completion of the loan process. It starts when you submit your request and financial information to a lender, bank, credit union, or other institution.

Inspection fee:

just to clarify, an inspection is not always required in the sale of a house, but mortgage lenders strongly encourage it. This helps protect both parties in discovering the real condition of a property.

Appraisal fee:

assessing the value of the property in a handy report. Since lenders are not quite real estate experts, knowing the market value gives them more confidence in lending you money.

Home warranty:

the cost of the insurance policy to cover your home in the event of unexpected events. This is just in case there’s issues with appliances, electrical systems, plumbing systems, heating and cooling systems, and more.

Property taxes:

Taxes are paid twice per year. At closing, the buyer will officially become responsible for taxes. They will also reimburse the seller for taxes they’re already paid for that year.

Points:

The percentage of a loan, where one point equals one percent. Points are used to buy down your lender’s interest rate. How many points you pay depend on how much you have at closing and how long you’re planning on living in the new house.

Keep in mind this is not an all-inclusive list, and the amounts will vary from fee to fee depending on where you live. To truly get an overall view of what you’ll be paying at closing, contact your lender and ask for a detailed list.

Home inspections are one of the most highly recommended contract contingencies, and for good reason. Because purchasing a home is one of the largest investments you will make in a lifetime, an inspection can provide peace of mind.

The best thing about a home inspection is that they empower both the buyer and the seller. A home inspector can verify the overall condition of the home with a report that states whether their findings are either a safety hazard or simply minor defects. They usually take up to a few hours and cover the functionality and integrity of a living space.

A home inspection is conducted by a licensed individual by the state. Their impartial opinion describes and itemizes any repairs needed before space is deemed livable. Typically an inspector will also itemize the costs of these repairs as well.

For a seller:

An inspection prevents legal liabilities and establishes the true value of a property. If a seller chooses to afford the home inspection before it goes on the market, it can give them an opportunity to fix these repairs themselves beforehand. A higher overall cost of the home is justified when an inspection reveals no dangers or damages.

For a buyer:

An inspection not only ensures the safety of you and your loved ones, it prevents costly surprises down the road. If repairs need to be made, a buyer is given a choice to purchase as-is, renegotiate terms, or simply opt out of the agreement without any penalties.

While in Florida the most common defects include issues with roofing materials, termite damage, rotten wood, or electrical hazards, an inspector also checks for building violations or add-ons constructed without permits. Unpermitted construction means that the previous owner added rooms or closets, windows, storage sheds, or anything built beyond space’s original blueprints. These add-ons must be compliant according to the city or state standards.

Of course, there is a certain timeframe for the discovery of these issues, and all repairs must be made before the closing date. The bottom line is that a home inspection is absolutely worth every penny. Take time to trust the process and get started with your home inspection!

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