Are you overwhelmed by the amount of information required for your home loan? The good news is that it doesn’t have to be so daunting. This helpful guide will walk you through the steps for buying your first home. From gathering the required financial paperwork to the keys in your hand, Capstar’s trusted loan officers are ready to work through the process with you. Let’s go step by step.
Step 1: Get Ready
Review Your Credit with a Knowledgeable Loan Officer
If you have credit cards, car loans, or have ever made a large purchase, chances are you have credit. Whether or not you have good credit is another story. Things like paying bills on time and avoiding maxing out your credit limit determine good credit. You should never charge more than 35-40% of your credit limit. Late payments reflect poorly on your credit, as past payment history and spending habits predict future performance.
Make sure you know the full picture as it relates to your credit, including your FICO® score. The FICO® score is the standard credit score in the U.S. It is used in more than 90% of lending decisions and determines your qualification for the best interest rates. If your credit picture is looking less than desirable, you may want to work on improvements before applying for a loan. Talk to your loan officer for details on your situation.
Develop A Budget That Works for You
Many people associate the word budget, with sacrifice. That doesn’t have to be the case if you create a budget that fits your lifestyle. Look at it this way: a budget is simply a plan that lays out your income and expenses as precisely as possible. It helps you to learn how to use credit and achieve your goals. Whether the goal is small, like taking an annual vacation, or larger like saving for college or buying your own home, a budget will put you in control of your financial future.
Ask Your Loan Officer to Get You Pre-qualified
Pre-qualifying can be frightening if you don’t know what to expect. Lean on your loan officer to guide you through the process. Pre-qualifying will show you just how much home you can afford, and help determine your monthly payment by considering income, debt, savings, and current interest rates. Your lender will help determine the sales price based on the size of your down payment and desired monthly mortgage payment.
Step 2: Buying Your Home
Decide What You Are Looking for In a Home
There are many options to consider when shopping for a home. The interior condition, such as plumbing, floors, and walls, as well as lifestyle choices like distance from schools, commute to the office and neighborhood. You will have to prioritize, and most likely compromise, when your wish list doesn’t match your budget. A good Realtor can help you balance your dreams with reality.
Get A Real Estate Agent Referral from A Friend or Colleague
Selecting a reputable Realtor truly simplifies the process. You will shop for houses in your area and hone in on what you want and need in a home. The Realtor will also have information about the neighborhood that is not otherwise readily available like tax rates, school district, and transportation options.
Don’t Rush into a Purchase!
Looking at homes can be an emotional experience. Sometimes we fall in love with a place only to find out the plumbing needs work or the taxes are too high. It is important to look at homes in different neighborhoods so you can make the best decision from a wide a variety of options. In some extremely competitive markets, you may feel rushed to submit an offer. In that case, brush up on things like tax rates, schools, and transportation options so that you can act quickly.
Make an Offer When You Are Ready
Typically, when you are ready to make an offer, you will meet with your Realtor and prepare the contract. Make sure your agent reviews every section of the form, so you understand your commitment. Now is the time to critically evaluate factors such as how much can you afford to pay, how badly you want the home, and whether other offers are pending.
There may be strings attached to your offer called contingencies. These protect you from finalizing a loan until certain conditions are met. A common contingency is a home inspection. If the inspection reveals major termite damage or foundation issues, you will need this period to reconsider or possibly withdraw your offer. Ask your Realtor to recommend a trusted home inspector, or consult the American Society of Home Inspectors (www.homeinspector.org website.
A thorough home inspection usually takes three hours and covers the cooling system; electrical and plumbing; walls, floors, and ceilings; insulation; plumbing; the condition of the roof; and other exterior items. It is up to you whether or not you are present during the inspection. If you are, you’ll have the opportunity to ask questions. Be sure to request a copy of the report to review with your Realtor.
Step 3: Secure Financing
Choose the Best Loan for You
There are many types of loans to consider, and that match your unique situation. Most mortgages range from 10-30 years. The loan term is part of what determines your monthly payment, as well as how fast you build equity. Before selecting a loan, consider the monthly payment you can afford, size of loan you qualify for, and how much of a down payment you have available. The monthly payment will include mortgage (principal), interest, taxes, and private mortgage insurance. It can also include homeowner’s insurance and HOA fees, especially for condominiums or properties in a planned unit development (PUD).
The most common types of loans are fixed- and adjustable-rate loans (ARM). With a fixed-rate loan, the interest rate does not change over the life of your loan, whereas with the ARM, the interest rate fluctuates based on changes to the prime rate also known as the index. Please refer to the Consumer Finance Protection Bureau (CFPB) (https://www.consumerfinance.gov website for more information.
The down payment will determine how much equity you have in your home at the time of purchase. Equity is the difference between what the house is worth and what you owe on the loan. The more you can invest, the more you own, and the less you owe. A higher down payment also lowers your monthly payment and the amount of interest you will pay. If you are a first-time home buyer and not in a position to invest 20% for your down payment, your lender may require your loan to have Private Mortgage Insurance (PMI).
With PMI, you will pay a bit more per month to help protect the lender in case of default. Other options such as VA Loans and FHA loans offer the lender a type of guarantee on your mortgage when you don’t have the 20% down payment. These government-insured programs are available to help and allow a lower down payment than conventional loans.
Step 4: The Application Process
The application process is the stage that has most first-time home buyers throwing up their hands in frustration. A good loan officer should be able to make this as easy as possible for you. Your lender will likely re-run your credit and financial records to make sure that everything is as expected. You will review and sign paperwork including a Loan Estimate which is the lender’s estimate of total closing costs and fees, as well as outlines total loan cost including finance changes, interest rates, and your monthly obligation.
Locking-in your Rate
Once under contract on a specific property, you will be eligible to lock in your interest rate. Your loan officer will provide an estimate based on your contract terms and interest rate. Your loan will then go to a loan processor or who works directly with the loan officer. The loan processor will send you a more detailed list of items needed. There may be a few back-and-forth requests during the information-gathering process.
Once you are out of the option period, your appraisal will be ordered. The appraisal determines the market value of the property. Therefore, it is important for the value to match or exceed your sales price, since it becomes the collateral for your loan. The appraisal takes six to eight business days. Once the lender receives the appraisal, they will be able to get full loan approval as well as send you a copy of the report. You are at the finish line!
Step 5: Closing Day!
What to Expect
Your lender will provide a preliminary Closing Disclosure three business days prior to closing which outlines the funds required to close, and all costs associated with the loan. The actual loan closing will be at the title company office. The buyers will be in attendance, along with the title company’s closing officer, and possibly the Realtors, loan officer and seller.
What to Bring
Bring a photo ID or driver’s license, and a cashier’s check that covers closing costs and the down payment to the closing. If you prefer to wire funds, please contact the title company for instructions.
Make sure you review the loan documents for accuracy, including the mortgage note (terms of the loan), the mortgage itself (Deed of Trust), and the Closing Disclosure (itemizes all costs).
The keys are in your hands! You know exactly what to do to make this process less daunting and more rewarding. Congratulate yourself and celebrate making your home buying dreams come true!
Whether you are a first-time homebuyer, interested in refinancing, or relocating to Texas, Capstar Lending is ready to help. Let’s get started today!