First Time Homebuyers

A Guide for the First Time Home Buyer

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You think you’re ready to buy a home?  Whatever the motivation behind your decision to purchase instead of rent, there are things to consider before jumping in feet first.  In this article, we’ll discuss the process, the key players, and what to expect when you’re buying your first home.

Step One:  Know Your Finances

There are many ways to find out your credit score, but however you choose to look it up, it shouldn’t be of great surprise to you.  You know if you pay your bills on time, have large debts like student loans, or have collectors calling you.  In an ideal world, your score should be above 580 (for maximum LTV) but if it isn’t, there may still be options for you.  Many of the ways to obtain your credit score don’t give you the entire picture of your credit.  We suggest visiting https://www.annualcreditreport.com as it is the only source for your free credit report from all three agencies, Transunion, Equifax, and Experian that is authorized by Federal law.  They won’t provide your score but give you the detailed report allowing you to address any concerns.  Credit score is a factor when it comes to your interest rate.  Often you’ll read about where today’s mortgage interest rates fall, but those quoted rates are “average” and your credit score can dictate a higher or lower interest rate.

Buying a home costs money, most of which is financed into your mortgage, but there are still required down payments and closing costs that the borrower pays out-of-pocket.  Minimum down payment for an FHA loan is 3.5 percent of the purchase price.  A down payment shows the lender that you are financially ready to purchase a home, but also comes into play when calculating loan-to-value ratios (LTV) and the interest rate.  Lower LTV generally means a lower interest rate, and whether you must pay mortgage insurance, which raises your monthly payment.  Closing costs are different than the down payment.  These costs include origination fees, up-front mortgage insurance premiums, title, taxes, transfer taxes, and homeowner’s insurance.  Taxes and homeowner’s insurance are put into an escrow account that is held by the bank until they are needed.  Your mortgage bank will handle paying taxes and homeowner’s insurance from the escrow account. 

Step Two:  Getting a Pre-Approval Letter

Any good real estate agent will tell you, before you even walk into your first open house, have a pre-approval letter ready.  A pre-approval letter is provided to you from your lender or mortgage broker. 

A mortgage broker is like a personal shopper for home loans.  They sign up with several banks that they enjoy doing business with, have great rates, or perhaps have programs that other banks do not.  The broker takes your information, your wants, your needs, and then presents you with your best options from their associated banks.  Different brokers work with different banks, but the key difference between a broker and your local bank is the number of products that they have access to.  Your local bank may only offer one VA loan program, whereas a broker may work with a dozen banks who each have their own VA program and one of those may work better for you than another. 

Once you’ve decided upon a lender, they will supply you with the pre-approval letter you’ll need to start making offers on homes.  You can now home shop with confidence because you know what you can afford. 

Step Three: Home Shopping

Whether you decide to use a real estate agent or not is entirely up to you, but it generally does make the process easier on a first time home buyer.  You may find the perfect home right away, make an offer, and be under contract to purchase it within days, or you may shop for months to find the ideal first home.  As you are home shopping, remember that you were pre-approved based upon your current credit and debts, so here are some important things to keep in mind: 

1. Do not apply for any new credit.
2. Do not pay off any debts.
3. Do not make any large cash deposits into your bank account.
4. Do not change jobs.
5. Do not make any large purchases.

Speak with your lender before making any of these changes as they will advise you what to do and what not to do in your situation.  If you were to find a home that may exceed your budget with taxes, insurance, or homeowner’s association fees, it’s important to involve your lender in the purchase negotiations. 

Step Four: Everyone Else Involved in the Transaction

While you’re home shopping, you’ll need to make a few other decisions regarding inspections, insurance, and title.  These other parties would ideally be selected by the time you are under contract.

• Inspections:  The borrower has a right to have a home inspection, pest inspection, and water inspection.  These inspections are all up-front costs to the borrower.  Your real estate agent or mortgage broker can make recommendations on inspectors, but it is ultimately up to you.  You should check with your mortgage broker to see if any inspections are required by the bank based on the home’s age, location, or water source.
• Homeowner’s Insurance:  The borrower can select whomever they choose for homeowner’s insurance.  Again, your real estate agent or mortgage broker can make recommendations, but it is ultimately up to you.
• Title/Deed:  The borrower can select whomever they choose to handle title and deed, whether that’s an attorney or title company.  Your real estate agent or mortgage broker can make recommendations, but it is ultimately up to you again.

Step Five: Initial Disclosures, Submission, and Conditional Approval

Once your purchase contract has been signed, the mortgage broker may need updated paystubs or bank statements.  You will be sent initial disclosures with estimated costs to sign or e-sign within 3 days of the mortgage broker receiving a copy of the purchase contract (“Agreement of Sale”).  E-signing and electronic submissions have been common place in the mortgage industry for well over a decade now.  Carefully read through the initial disclosure packet, ask question if need be, and sign where appropriate.  These documents, plus your identifying information, asset and employment documentation, as well as credit report will be submitted to the lending bank for approval.  The bank will provide the broker with a conditional approval, suspension, or denial of the loan file.  With conditional approval, the loan file has been approved but requires more documentation such as an appraisal.  As every loan scenario and borrower is different, the bank’s underwriter can request documentation that varies greatly.  Your mortgage broker will discuss the conditions with you and what is needed to continue the loan process.

Step Six: Appraisal

Most banks or brokers will require the borrower pay for an appraisal of the home’s value.  This is typically an up-front cost to the borrower.  Appraisers are a third-party managed by an appraisal management company (AMC) and cannot be individually selected.  They are licensed professionals who complete inspections on the home based upon requirements for the type of loan.  FHA and VA loans can have more strict requirements than conventional loan appraisals.  The appraisal is typically ordered after conditional approval is given by the bank because they do take time to complete.  Once complete, a value is given to the home.  Your mortgage broker will provide you with a copy of the appraisal and discuss any concerns brought forth by the appraiser.  A final inspection may be needed if the appraiser notes any mandatory repairs must be done as a bank will not approve a loan if the home is not in the correct condition.  The final inspection is less expensive than the original appraisal, is also an up-front cost to the borrower, and again can take some time to complete.

Step Seven: Clear-to-Close

After all documentation conditions have been satisfied with the bank’s underwriter, they give the notice every homebuyer loves to hear: Clear-to-Close!  At this time, you will receive your final loan estimate and closing disclosure to review.  Once signed, there is a federally mandated 3-day waiting period before the loan may close.  This time is given so the borrower is absolutely sure they want to purchase the home.  At the end of the three days, you meet with the title company/attorney to sign many documents related to the transfer of the property and mortgage contract.  If there is money due at closing, either the borrower provides a cashier’s check at closing for the sum or can set up a wire transfer ahead of time.  You will need these funds and your valid state identification for this part of the transaction as well.

Once every document has been signed and dated, you’re no longer a first time home buyer, but a home owner!