What it Means to Get Pre-Approved
A pre-approval means a lender has approved you for a loan at a specified amount based on your income, assets, debt, and credit. The lender will provide a letter of pre-approval verifying the loan amount you’ve been approved to borrow. It is customary and most likely that all sellers will require this pre-approval to validate the sales contract on a home. Pre-approvals can usually be done within 24 hours if all information required is provided at the time of application.
What You Need to Get Pre-Approved
There are several things that the lender will require from you to complete the application process. Make sure that you have these things readily available before calling. You will need to provide your full name and address in addition to the following items:
- Social Security Number to pull your credit history
- Last 2 pay stubs (if paid bi-monthly, last 4 if paid weekly)
- Last 2 years of Tax returns to include W-2s and/or 1099s
- Your employer's Human Resources department contact information
- Last 2 months of bank statements to show reserves and closing costs needed to complete closing
Your credit will also be a major factor in the loan process. A good credit score will allow you the lowest interest rate available without having to buy your rate down. A good credit score makes you less of a risk to creditors. If you have negative marks on your credit, do the work to repair them before you apply, or ask the lender for assistance on what you can do to improve your score. By law, you’re allowed to receive one free copy of your credit report per year. You can do this by visiting any one of the credit reporting agencies or a service like Free Credit Score. Scores range from approximately 300 to 850. Generally, the higher your score, the easier it is to qualify for a loan.
There are different costs associated with buying a home. It is imperative that you have savings for down-payment and closing costs. Your down-payment will depend on the type of financing you are approved for. As there is no longer 100% financing available for home loans unless you qualify for a VA loan and are military personnel, you are required to put down a percentage of the cost of your home. FHA financing requires a down-payment of 3.5% of sales price. Conventional financing requires a down payment of 5-10% of the sales price. The closing costs associated with the loan is separate from the down-payment of the loan. Closing costs include fees such as title services and title insurance, homeowners insurance, appraisal, home inspection, property taxes, recordation and transfer taxes to add you as the new owner on record, cost of the loan from the lender, and any additional processing fees of your contract and loan.
An example of the total cost needed to purchase a home can be considered as simple as a total of 5-6% of the sales price. If you were purchasing a property that cost $200,000 and you were pre-approved for FHA financing, your down payment would be 3.5% of the sales price: $7,000. Your closing costs would be an additional 2.5% of the sales price: $5,000. Total closing costs to include with the down-payment would total $12,000, of which is 6% of the sales price.
Your lender will provide a Good Faith Estimate (GFE) of your cost at loan application. This will help you better prepare for closing on your new home. As a new homeowner, you’ll have to pay things like real estate taxes, PMI (mortgage insurance) and homeowners insurance that will affect your monthly payments. Your mortgage company will escrow these costs monthly into an account to pay as they become due. You may also live within a community that is governed by a Home Owners Association. You will need to budget for HOA fees, unexpected repair costs, lawn care, snow removal, pest control, and potential for other things that pop-up from time to time. You need to include considerations of your current income against these costs and the mortgage payment in your budgeting.
What’s your lifestyle?
A home isn’t just a house. It’s also about location and lifestyle. You don’t want to make a decision that you’ll come to regret later. Another consideration to have in mind is how long you plan to be in the home or the area. If you have a more transient lifestyle, then you may want to postpone buying a home until you’re ready. Also, are you ready for the responsibility of owning a home? Remember, you’re the one who will have to be in charge of its upkeep, financially and otherwise. Ask yourself if you are willing to take this on.
A home is more than just a collection of rooms. Several similar properties may represent totally different designs, commuting distances, lot sizes, tax costs and dimensions. It’s important to have in mind the things you want in a home before you start looking. Consider the price, location, size, amenities, and type. Also, think several years down the road: if you think you’ll need a larger home, or a larger yard, or need to be closer to school for the kids, now is the time to consider those things instead of having to move again in a few years.
Where to Look
Once you know what you want, it's time to start looking. It’s important to target the search with basic criteria, such as, location, price, and other features you want in your home. Once you have an idea of what you want, give us a call so that we can begin to assist you with your home search. It is important to obtain the services of an experienced realtor who knows the area well. We have developed solid relationships with lenders that may prove useful.
Making an Offer
Once your loan has been pre-approved and you’ve found a home, you need to make an offer to the seller and, if accepted, secure a contract to purchase the property. Usually there’s a bit of haggling involved between the buyer and seller, so sellers may price their homes a bit higher. As a general rule, it’s good to start about five percent below the asking price. Once you’ve made an offer, it doesn’t necessarily mean it’s final. The seller can make a counter offer and you can counter again. Once you’ve agreed on a price, you’ll make an earnest money deposit, which is money that goes in escrow as a sign of good faith that you intend to purchase the property.
Inspection and Appraisal
A home inspection safeguards you against unforeseen problems that could pop up down the road. A typical home inspection includes testing electrical, plumbing systems and appliances, including evaluating the home’s roof and exterior structure and foundation. A similar but separate process is the appraisal. An appraiser will determine how much the house is really worth by comparing it to other similar homes on a number of features like lot size, square footage, etc. Your lender will order an appraisal of the home you intend to buy. You don’t have to be present. Your realtor or the seller can let the appraiser into the home. The lender normally sends a copy of the appraisal to the buyer.
Closing on a home means that the sale is complete, and all the terms and conditions of the purchase agreement have been met. At this point, the seller gives the buyer the title to the property. Congratulations! You have completed one of the most important investments of your life.