BUYING YOUR HOME
Having a highly qualified Mortgage Planning Specialist in your corner is vital as you embark on the home buying journey. Your consultant will ask you questions to help you identify your short term and long term goals. They will give you qualified advise and guidance on what the best course of action could be as a next step. Then they will help you craft a long term plan that’s in line with your goals, objectives, and dreams.
To start things off, these key and foundational questions should be asked out of the gate when thinking about your next steps towards home ownership:
WHAT AM I REALLY TRYING TO ACCOMPLISH WITH MY HOUSING SITUATION?
What goals and outcomes are you trying to achieve for you and your family?
IS IT BETTER TO BUY A HOME RIGHT NOW OR RENT A HOME?
What happens for you if you buy your home now vs. continuing to rent? Oftentimes, buying a home sets you up to meet other financial goals and dreams. You’ll be listened to and guidance will be given when working with a Mortgage Planner.
Working together with you, we will address how a new mortgage will impact your life. As your consultant, some things I would want to address with you are:
- Making sure what you are doing fits into your short-term and long-term budget.
- Reviewing which mortgage and home buying strategy will result in less overall financial risk.
- How making a new financial decision impacts other areas of your life.
Now, lets cover these key factors in preparation of your home purchasing experience:
- Credit score
- Debt & income
- Down payment & closing costs
- Housing market
- The Process
Please don’t hesitate to call/text us at 925-216-9735 or contact us with any questions.
Credit Score
KNOW YOUR CREDIT SCORE AND GET YOUR CREDIT READY
Your credit scores are the primary factor that determine how much your loan will cost and what your payment will be. They can also be a factor in determining what loans you can qualify for. It’s really important to try to get your score as high as you can before you buy a house.
You can still buy a home with a credit score as low as 500 FICO, however, this will make your loan more expensive and most likely it will be an FHA loan with mortgage insurance.
THINGS TO ASSESS REGARDING YOUR CREDIT AND CREDIT SCORES
- Your credit score is a reflection of how you use and manage credit.
- Not paying bills on time, maxing out credit cards, having leans or judgments, and having unpaid medical or other bills all have a negative impact on your credit score.
- Keeping card balances low relative to credit limits, always paying bills on time, clearing up disputes and unpaid bills will help you to maintain excellent credit.
- Having excellent credit is a mindset and it’s something that you want to be important to you. Having good financial habits and a desire to keep yourself in good financial health will help you to maintain your credit. It will make buying a house and your life much easier.
HOW TO RESTORE DAMAGED CREDIT
Sometimes our lives do not go as planned because things happen beyond our control. There may come a day when you will need to start over in life. Everyone has periods of turbulence in their lives and stuff happens. You can rebuild your credit after a major financial event quickly if you know what to do. If you find yourself in financial turmoil, try to mitigate the damage to your credit as much as you can. If you know you will not be able repay your debt, don’t let damaging economic events linger, take action as soon as you can to resolve your finances. Take the hit and take steps to rebuild your credit right away. Having a plan will help you. You will need to do your homework.
One of the best tips I could share about rebuilding your credit is to not allow; ever, any derogatory events after a bankruptcy or foreclosure. Although the seasoning is 7 years for foreclosure and 4 for bankruptcy, with regard to conventional loans, you can improve your credit scores and bring them back within a few years.
If you are trying to restore your credit and working towards getting ready to buy a home, you could begin by finding a Mortgage Planner. This is different than calling the bank. A Mortgage Planning Specialist will work with you to create a game plan and give you guidance towards your goal.
A Mortgage Planner will have a team of partners that can provide good resources for you. For example, there are credit repair specialists that your Mortgage Planner may be able to direct you to. Your Mortgage Planner will also review your credit with you and provide steps for you to take to get your credit restored.
Remember that no one can do this for you; you will have to do the work, but there are people who can help you and give you guidance. For a fee, a good credit repair specialist can do a lot of the heavy lifting. You need to find a good one though; oftentimes credit repair companies will take your money but not provide satisfactory results.
SOME THINGS TO ADDRESS WHEN YOU ARE WORKING TO RESTORE YOUR CREDIT
- Unpaid charge offs or collections – For conventional and FHA loans, medical bills do not need to paid, however, they have a significant negative impact on your credit score because they can continue to report monthly on your credit, each time affecting your credit score.
- Judgments – if you owe anyone money, these debts will need to be paid.
- Liens – Tax liens must be paid.
- Late payments – no late mortgage payments in the last 12 months. No 60 or 90 days late payments in the last 12 months.
- Credit usage – by paying down credit card balances relative to the card limit, you can increase your credit scores. Generally, keeping balances down below 30% will improve your scores and keep them in good standing.
- There are 3 credit bureaus; Trans Union, Equifax, and Experian. The middle score is used for pricing and qualifying. Your qualifying score can be the middle score of any of the bureaus.
Please don’t hesitate to call/text us at 925-216-9735 or contact us with any questions.
Debt and Income
EVALUATE YOUR DEBT LOAD AND ANALYZE YOUR MONTHLY BUDGET
After reviewing your credit it’s time to look at determining what you can afford to pay per month for your house.
Review your income relative to your debt and how you budget your money each month. What are your spending habits like and what are your financial goals? What are your other goals, including career goals, and where do you see yourself financially 5-10 years from now? Will your income be more or less?
Should you save money for a down payment first or work on paying off debt first?
DEBT-TO-INCOME RATIO
Debt-to-income ratio (DTI) is your gross monthly income relative to what your monthly mortgage payment and consumer debt will be. The two main kinds of DTI are known as the ‘front-end’ and ‘back-end’ and are expressed as a pair, using the notation x/y (such as 32/42). The front-end ratio is the percentage of income that goes toward your mortgage payment only (including taxes and insurance). The back-end ratio is the percentage of your income that goes toward both your mortgage payment and consumer debt combined. Per automated underwriting, most back-end ratios cannot be higher than 45%. Once you have a payment, determine if it is – combined with your consumer debt – more than 45% of your total gross combined (for 2 or more borrowers) monthly income.
Please don’t hesitate to call/text us at 925-216-9735 or contact us with any questions.
Down payment and closing costs.
HOW MUCH DO I NEED TO SAVE TO PUT DOWN ON A HOUSE? WHAT ARE MY OPTIONS?
This depends on several scenarios.
- How much money do you have or can you get?
- Can you afford the payment for the house you want with less money down?
- Programs range anywhere from .5% – 20% or more
- Looking at the big picture; where will house prices be 5 years, 10 years, or 30 years from now?
- What are your plans? Do you intend to be living in the house for more than 5 years?
- Is it more important to by the house now while the value of the home may be appreciating or can you wait to save up enough money for down payment? Will the price of the home be 10% to 20% higher by the time you save enough? Will interest rates be higher or lower?
- You need a house to live in and you can always rent while you save up enough. Keep in mind though, rent can be expensive and there is no return. If you can; buy your home now and realize equity appreciation.
- Do you want to have a cushion after you buy your home? Consider putting less down to retain a rainy day fund if you can afford the payment.
DETERMINE HOW TO GET YOUR FUNDS TOGETHER FOR THE DOWN PAYMENT AND CLOSING COSTS
Once you’ve determined how much you need for your down payment and closing costs, you need to be aware of the rules for your down payment money. The lender wants the home buyer to have skin in the game; they will want you to use your own money, not someone else’s. Any deposits into your bank accounts have a clear source and paper trail.
Your money may be “seasoned ” if you have had it for at least 60 days in your bank account. 60 days bank statements will be used to verify this. There can be no large deposits with in the 60 days on the bank statements or your funds are not seasoned. If there are any large deposits then you must show where the money came from. If you need assistance from a family member for your down payment, depositing it in your bank account well before you need it will really help.
A good tip is to set up a designated account you will be using for your home purchase. Do not have numerous deposits and withdrawals from this account, this will allow you to show your closing funds in one account and make your closing simpler.
A quick note on vested accounts: these are accounts where funds need to be liquidated to use. Stocks, bonds and vested retirement accounts are examples that will need a paper trail showing the liquidation or sale of the investments.
SOURCES FOR YOUR DOWN PAYMENT AND CLOSING COSTS
- Savings – Do some homework on the different ways to set saving goals and save.
- Gift – The donor must be a relative and cannot be a non arms length donor. FHA allows all gift funds for down payment. Conventional requires that you must have at least 5% of your own money unless you are putting down 20%. If there is anyone who can help you, it’s a great way to get a jump start on your funds to close. Parents and relatives may be willing to gift part of their anticipated inheritance to purchase a home.
- Brokerage Accounts – If you have stocks and/or bonds, once you liquidate them, you can use the proceeds to purchase your home.
- 401K, IRA and Other Retirement Accounts – You can liquidate these, but remember, they’re taxable events. You can also take out a loan against your own retirement account.
- Down Payment Assistance Programs – Make sure to explore available down payment assistance programs if you need help!
WHAT WILL ALL THE COSTS BE? WHAT ARE REOCCURRING AND NON REOCCURRING CLOSING COSTS?
Closing costs are a part of buying your home; expect to pay anywhere from $5-10K for closing costs. You will get a lender estimate within 3 days of your loan submission once you are in contract. Your lender may show you a fee sheet if you are not in contract to give you an idea of what to expect.
Keep in mind, each state can have different fees.
Non-reoccurring closing costs or one time fees that include:
- Title Insurance – For the lender and homeowner policy
- Escrow Fee – Charged as a percentage. This is a onetime fee charged by your title/escrwo company to close your transaction
- Appraisal Fee – You will need an appraisal to make sure the home is worth what you are paying for it and the lender will require. Usually not more than 500.00 but it can be higher if the home is a higher priced home or it is a income property you are purchasing
- Misc Fee – Such as courier, loan tie-in, etc.
- Inspection Report Fees – Termite report and home inspection report. These can range from $150 – $300
- Underwriting Fee – Charged by the bank. This fee can range between $800-$1,200 depending on the bank.
- Processing Fee – Sometimes this will be charged by a mortgage broker, but many do not charge a processing fee.
- Credit Reporting Fee – Cost to run credit reports and any work needed regarding credit reports.
- Wire Fee – This is for wiring in funds to escrow. Usually the lender will charge this for your loan.
- Tax Cert Fee – $20.00 charged to confirm current property taxes.
- Transfer Tax – In California, there is a transfer tax; it is based on a percentage and varies from county to county. Some cities have their own, in addition to the county property tax. In California, the tax is most commonly charged at 1.10 per thousand. Some higher cost areas have very high city transfer tax, so you will need to check with your realtor or lender on how much that will be. Sometimes the seller will pay for this.
Reoccurring Closing Costs:
- Mortgage Interest – Accrues in advance each month. A full 30 day cycle is needed so interest can accrue and a payment can be calculated. When you close on your new home, “odd days interest” are charged in advance so that the correct mortgage payment can be calculated after the first 30 day cycle.
- Property Taxes – Collected in advance. Property taxes are due in two separate installments each year. The fiscal year for property taxes is July 1st – June 30th. If the sellers owe any portion of the property tax due they will pay it to you at the time of closing. Any taxes that are coming due or where the bill has been sent out will be collected.
- Home Owners & Hazard Insurance – If you lose your home to fire, the lender will want to make sure there is insurance to cover the cost of rebuilding the home. The lender will ask that the rebuild is according to the specs of your previous home. You may also be able to use the insurance claim to pay off the lender in order to rebuild the home to your own specs, however, you may need additional financing to do this.
- Escrow Account – If you opt to pay taxes and insurance as a part of your mortgage payment, you will be required to fund a escrow account. Usually, 1 installment of the property taxes and 2 months of the hazard insurance policy will be collected. If you are making mortgage insurance payments, one month of that will also be collected.
POINTS – ORIGINATION AND DISCOUNT
Origination: Because the lender pays your mortgage consultant, you won’t pay any points. However, in some cases, you may opt for a borrower paid origination. Your loan officer will usually let you know if it makes more sense for you to pay the origination. This option is more typical on larger loans, such as Jumbo loans.
Discount: You do have an option to buy down your interest rate. This is known as a “paying down the rate”. Usually, paying for a rate decrease is not justified due to the high cost. You can ask your Mortgage Planner about this, however, they will normally let you know in advance if it makes sense during your initial consultation.
WHAT IS A LENDER CREDIT AND HOW DO I GET IT FOR MY LOAN?
Yield Spread Premium (YSP): this occurs when the interest rate you select has enough YSP to cover loan level price adjustments and some credits are left over. These credits are applied towards your closing costs and cannot be kept by the bank or loan officer.
For a slightly higher rate, you can opt for lender credits to pay for some or all of your closing costs. This is common with FHA loans as well as conventional. The advantage here is that you don’t pay the closing costs out of your own pocket.
WHEN DO I LOCK MY RATE AND WHAT DOES THAT MEAN?
At some point during your transaction you will select an interest rate for your home loan. This is done with your Mortgage Planner and they will help you choose the correct rate depending on the scenario. Once you have decided on an interest rate, you will need to lock that in. This will protect your rate from movement during escrow. You can lock your rate for different time periods. 30 day locks are most common but they go up to 90 days.
WHY DO INTEREST RATES CHANGE EVERY DAY?
Interest rates can change daily and tend to mimic the fluctuation of the 10 year Treasury note. If the yield of the 10 year Treasury note goes up then mortgage rates may follow and visa versa.
Mortgages are bundled into mortgage backed securities and are sold into a bond market; they have fluctuating yields just like treasuries. Since mortgages are bought and sold in MBS bundles, the interest you pay is dictated by the supply and demand of these bonds. Banks and lenders have their own pricing desks and issue there pricing accordingly. Since they are all in competition with each other; rate sheets tend to be similar from bank to bank. Sometimes if production volume is low or too high, lenders may buy the market by undercutting the market slightly or by slowing down the incoming applications by increasing pricing slightly.
Your Mortgage Planner will know which banks have the best pricing to assure you that your rate will be among the best priced offered.
WILL THE SELLER PAY FOR MY CLOSING COSTS?
Depending on your market, sellers may be willing to pay for or split closing costs with the buyer. Usually these are the title and escrow fees. Transfer tax is typically paid by the seller.
When you write your offer, you can ask for a credit towards closing costs. Generally this is acceptable in a buyer’s market. A sellers market means that buyers have little leverage and prices are appreciating rapidly. In a buyer’s market, price increases are slowing down, staying flat, or going down.
Please don’t hesitate to call/text us at 925-216-9735 or contact us with any questions.
Housing Market
Understanding the housing market to get a realistic idea of home prices in the area you want to buy in is essential. It’s a good idea to understand each market in your area and what your options are. Schools districts are an important factor to consider if you have kids or plan to have a family. They are also an important aspect of future resell demand. Being in a desirable school district is a plus.
While looking on Zillow and other related websites is a good starting point to get an idea of home values, understanding realistic home values can be better approached by working with a realtor. It’s important to get an accurate understanding of the market you want to buy in. Do as much homework as possible and visit houses online and in person. Driving through neighborhoods at different times of day really helps you get a feel for them.
In some markets, there will be multiple offers for houses, this is when you must be 100% prepared, which leads to our next topic.
BEGIN TO INVESTIGATE YOUR LOAN OPTIONS
You need to have some idea of how much a house payment will be relative to the house market you wish to buy in. Generally there are to main things to consider; how much you can put down and the cost of the home.
It’s important to be aware that purchasing a home for the first time is a huge giant step. It’s a good step and a step towards success. Your mortgage payment with taxes and insurance will become your biggest and most important financial obligation. You may not have the luxury of having a comfortable payment if you live in a high cost area such as California. Usually incomes are relative to the cost of real estate but some areas are higher cost. By putting more money down you can achieve a smaller payment. Don’t be afraid if your new payment is higher than what you are anticipating; it most likely will be. This is a part of the deal, to get the house you want you may have to sacrifice some of your prior lifestyle expenses to make it happen.
WHY IT’S GOOD TO HAVE SOME SAVINGS OR A RAINY DAY ACCOUNT
If you can plan in advance and have a good idea the total cost to buy your home you may want to make sure to have some reserves. Some loans require reserves but most conventional loans do not require this unless you own multiple homes. FHA does not require reserves.
6 months of your home payment including taxes and insurance is a good figure to try and target; so for example if you’re housing payment is 2k per month you will want 12k total for reserves.
If you have 5-10k; that’s good enough to give you a cushion; you may also want to consider purchasing a home warranty so you do not have to pay out of pocket or use credit cards in case any thing in your home stops working and needs to be repaired. Often realtors will offer to pay this for you as a part their service.
WHAT IS MORTGAGE INSURANCE?
Mortgage insurance is required whenever you put down less than 20%. FHA loans require mortgage insurance no matter how much you put down.
Mortgage insurance or MI will insure loans in case of default to cover any loss to the lender over 80% of the value of the foreclosed home.
For example if a home goes back to the bank; the loan amount on the defaulted note is 200k and the house is worth only 190k the lender would recover the full 200k upon sale and mortgage insurance would cover the 10k difference.
It’s something you pay to insure against loss to the lender for any home that is financed with less than 20% down.
SHOULD I TRY TO TIME THE MARKET?
NO. You need a house to live in. You are paying to live in the house just like renting except you own it.
I say no about timing the market because you the buyer have no idea what will happen after you buy your home. You may think you are buying the bottom of the market and yet the market keeps going down. You need a place to live and making mortgage payments are forced payments to yourself.
One thing a prospective buyer may be able to do in certain markets is to look for supply of inventory and who is a buyer in your market. Are these real estate investors buying? traditional home owners? foreign buyers? All good things to consider; if there is a fair amount of supply of inventory, is it being bought up once prices go down to a certain point. If inventory is going down and home sales numbers show an increase from the last report, prices are the next to follow.
Interest rates play a huge role as well. Lower rates tend to stimulate buyers and buyers and markets usually become more active.
Please don’t hesitate to call/text us at 925-216-9735 or contact us with any questions.
The Process
Here is a overview of the process:
- Get pre approved
- Find house with realtor and make offer
- Get offer accepted
- Open escrow and put down a deposit from verified account. MP will explain this to you
- Order and review inspections
- Conditional loan approval
- Order and review appraisal
- Any renegotiations will be done here at this time if there are issues such as repairs to home or value not coming in on appraisal
- Final sign off on loan
- Closing Disclosure goes out
- Final walkthrough home to be sure all conditions and agreements are met
- Loan and closing docs are ordered and sent to title
- You sign your docs and any funding conditions are taken care of within the next 48 hours
- Your loan funds and new deed is recorded
- You are now the owner of your new home and you will get your keys from your realtor
HOW LONG DOES ALL THIS TAKE ONCE I FIND A HOUSE?
The process of closing can happen in as soon as 3 weeks but can sometimes take longer than 45 days.
Please don’t hesitate to call/text us at 925-216-9735 or contact us with any questions.