Get Prepared to Buy Your First House
I need a large down-payment
This is probably the biggest misconception. While it is true that you have to have some cash to put down, there are several programs that allow for a minimal down payment. Specifically, you can do an FHA loan with just a 3.5% down payment and Fannie Mae now offers, what they call a HomePath loan on their foreclosures, which only requires a 3% down payment. These down payments can be in the form of gifts from relatives as well.
My credit is not good enough
Credit challenges often prevent folks from even considering home-ownership. This is a mistake. Even in the worst credit situations, you have to have a starting point. Once we have a loan application and pull a copy of your credit, we can make a quick determination if it’s possible to get you a loan and under what terms (what size down payment, if any, and at what interest rate.)
If we determine that a loan is not possible at this time, or the terms are too cumbersome, we will offer to review your credit report and provide you with informational materials. In this meeting, we will provide you with a credit profile and very specific recommendations for you to repair your credit. We will then check back periodically to assist you along the way to the end goal of purchasing that home you’ve been dreaming of! (You may need to adjust your initial “wants” into a more realistic “must have” list. In other words, you may need to be flexible.) But the sooner you get your free credit consultation, the quicker you will be in the house of your dreams and saving money on everything from insurance to car loans.
I won't be able to afford a home
Although it is true that some people do buy homes with monthy payments that are less than rent, it doesn’t always happen. The reality is that when you start your search, you will most may find that your “wants,” (location, size, condition, etc.) are more than your budget allows. That is at least the initial perception.
Starting with a realistic budget is the first step in backing into a monthly payment you will be comfortable with. When you purchase a home, the interest and property taxes you pay are generally deductible from your income taxes that you pay each April. Therefore, while monthly housing expenses may be higher when you own your home vs. renting, what you save in taxes can make up some, if not all, of the difference. To get a better idea of how this benefit can work for you, speak with your tax advisor.
The other valuable benefit of home ownership now is the fact that housing is more affordable then it has been in a decade. And while we don’t like to focus on appreciation as a selling point, there is a strong case to be made that now may be one of the best times in history to buy real estate. Values are down 25-30% from there peak putting homes on a major sale!
What about my existing lease?
If you’re considering purchasing a home you most likely are leasing a home or apartment now. One of the first steps will be to review that lease. Determine how much time remains. If you’re within 3 months of the end of the term, then you should move forward and attempt to find a home and close on it when your lease is up. If your lease is up before it is practical to find a home, then contact your landlord and ask if you can continue to live there month to month. If they agree, make sure to get it in writing. Also be sure to give the proper 30 or 60 day notice that will be required by the landlord.
If the lease you signed is not set to expire for an extended period you may have other options. Oftentimes the lease will provide you an exit if you are purchasing a home. Review your lease closely to see if you have this right. If all else fails, contact your landlord to see if they would consider letting you out of the lease with say a 90 day notice. It never hurts to ask!
How long does it take to find a house?
This is a tricky question. Much of the answer depends on the time you can devote to the search and how much inventory is available in the price range and area of town in which you are interested. Technology can really help you to zero in on the available choices. For example, finding a knowledgeable agent is key to narrowing down the hundreds or thousands of choices initially. Good companies will offer online solutions whereby you can enter your parameters (location, price range, number of bedrooms and bathrooms, etc.) and you will receive emails as often as desired, of new listings matching your criteria. Generally speaking, 60-90 days should be adequate, but if you are more particular, or inventory is low, it could take longer.
Where should I live? Finding the right area
Location, location, location! That is the key to making a prudent real estate purchase decision, many would say. While this has good merit in accumulating long-term value, there are numerous factors that enter into picking the right place to call home.
For example, the distance of your work commute, school district rating, proximity to shopping and entertainment, the age of the houses, and general upkeep are just a few of the considerations. Other intangible factors may just as influential. Maybe your parents baby sit and you need to stay nearby. You may be willing to have a long commute in exchange for a large yard for the children to play in, or maybe you are willing to live in a much smaller home in exchange for a shorter commute.
A good real estate agent will be invaluable in helping you come to a prudent decision.
Buying vs. Renting
Most people buy homes for very emotional reasons. But how do you know if it is time for you to purchase?
Most people who rent can actually afford to buy their own home. So what is stopping them?
A lot of people believe that owning a home in requires a big down payment, which is difficult to save while paying all their regular monthly bills. Others are convinced they wouldn’t qualify for a mortgage, and that the payment would be too much anyway. Additionally, just about everyone is overwhelmed by the process of buying a home. It seems life would stay a whole lot easier to just keep paying rent!!
Here are a few facts that may help in your decision:
FACT: The average mortgage payment costs about the same or just slightly more, as the average rent payment. For example, if you are paying $900 per month in rent, you could be making mortgage payments on your own $115,000 – $125,000 home. That would probably buy you a lot more space (and privacy!) than you have right now.
FACT: Many sellers are willing to pay all or part of your closing costs when you purchase a home.
FACT: The majority of renters in metropolitan Atlanta said the biggest reason they don’t even check to see if they can buy a home is that they are afraid of pushy salesmen, or feeling obligated to buy when they are not ready.
How do you stay in control, and figure out how much home you qualify for?
We always counsel folks to talk to a real estate lender and get pre-approved before they step a foot out the door to look for homes. There are so many things this accomplishes.
First: You are in control at this point. You know what you can afford, and what kind of real estate loans you can get. You also know if you need the seller to pay closing costs and can use this in your bargaining.
Second: If there are credit problems, you have time to get them off your record. A good lender will help you do this. If you wait until after you have found a home you love, you may lose it if you have credit glitches that could have easily been handled first.
But remember, ultimately the choice also involves a lot more responsibility on your part. No more calling the landlord to fix everything. And yes, you do have to cut the grass, the neighbors generally do not appreciate it when you don’t.
When should I apply?
We always recommend applying as early in the process as possible. By doing so, you put yourself in the best possible position to purchase a home when the opportunity presents itself. By applying early you 1) detect any credit inconsistencies and give yourself ample time to correct them. 2) applying early allows you time to understand and prepare for any hurdles may have to be overcome (aside from credit) in qualifying for a loan.
Factors Impacting Loan Approval
Information necessary to apply
The initial application consists of the following basic parts:
- Personal – Name, date of birth, social security number, addresses for the last two years, phone numbers, years of schooling, and number and age of children.
- Employment – Two years history including name, address and phone number of employer(s), positions held, pay structure and beginning and end dates.
- Assets – Bank account information for checking, savings, money markets, CD’s, brokerage accounts, IRA’s, and 401K/403B retirement accounts. Account numbers are not necessary upfront for the initial application.
- Liabilities – we will obtain your credit report and our software facilitates the transfer of all of your outstanding monthly obligations directly into your application. We will then verify the accuracy with you directly. Most, if not all of this information is stored in your head!
The ease of automated underwriting
On the flip side are the borrowers with less than stellar credit or not enough for the down payment. Although the process is typically longer and more cumbersome, it is more predictable than it was in the past. Surprisingly, programs are available that open the door to home ownership to an amazing number of people. If you have relatively decent credit, today’s automated underwriting systems provide a list of only the documentation necessary to qualify for the loan. The way it works is that once the lender has your application and has pulled you credit, the files is uploaded to one of three locations, Fannie Mae, Freddie Mac or FHA/VA. “Fannie and Freddie are agencies under government conservatorship and they set the guidelines that dictate whether a loan can be sold on the secondary market. In other words, if it is approved by “Frannie or Freddie” virtually any lender in the country will purchase the loan. If not, plan B would be to go through FHA or VA which allow for lower credit scores and smaller down payment requirements. Once an approval is obtained (it takes less than five minutes once we have all of the information), the approval will tell us what documentation is required to document the file. Be advised that an automated approval does not guarantee full approval because the file still needs to be sent to an underwriter to get the final OK. That is why still encourage the borrower to go thought our certification process.
What type of down-payment will be required?
A standard conventional loan will always require that the buyer contribute a minimum 5% down payment of the actual purchase price of the home. If you believe that you need a good chunk of change to purchase a home, your not alone. The vast majority of first time home buyers have little money to work with and consequently do not believe they are in a position to buy a home. Either that, or credit issues prevent you from investigating the possibilities. But times have changed.
If you have less than that to work with there are many different options. FHA and VA offer loans with 3.5% or 0% down payment repectively. If you live in a rural area, the USDA offer 100% financing to those that fit into the median household income requirements.
If you do a conventional loan and have less than 20% to use for a down payment, you will pay a mortgage insurance premium (PMI). Simply put, mortgage insurance protects the mortgage company against financial loss if a homeowner stops making mortgage payments. Mortgage companies usually require insurance on low down payment loans for protection in the event that the homeowner fails to make his or her payments. When a homeowner fails to make the mortgage payments, a default occurs and the home goes into foreclosure. Both the homeowner and the mortgage insurer lose in a foreclosure. The homeowner loses the house and all of the money put into it. The mortgage insurer will then have to pay the mortgage company’s claim on the defaulted loan.
On an FHA loan you will be required to pay both an upfront Mortgage Insurance Premium (MIP) and a monthly one as part of your payment as well. The monthly MIP generally is slightly more expensive than the PMI that would be required on a conventional loan with a 5% down payment. VA requires no mortgage insurance.
Credit Scores will have a huge impact on what rates are offered for a conventional loan. The government agencies, Fannie Mae and Freddie Mac have come up with a risk based scoring system that provides for adjustments to the interest rates for those with lower credit scores. In addition, you put down less than 20% and require mortgage insurance, these premiums are also tied somewhat to your credit score. If you are doing an FHA or VA loan, you may qualify with a lower credit score without a negative impact on the interest rate you are offered. In general, if you score is less than 680, you most likely will be better off going FHA or VA because you will be offered a much better rate even though the mortgage insurance will be more expensive.
Debt to Income Ratios
There are two ratios that a lender will be interested in; 1) your housing ratio, also known as your “front end ratio,” and 2) your debt-to-income ratio, also known as your “back end ratio.”
The housing ratio is your total housing payment divided by your gross monthly income (your income before taxes are deducted). Your total housing payment includes principal, interest, taxes and insurance.
Your debt-to-income ratio is calculated the same as the housing ratio, except all revolving and installment debt is added to the housing payment and divided by your gross monthly income. Revolving and installment debt can include credit cards, student loans, car loans, personal loans, etc.
Ideally, these ratios should be less than 35% for the housing ratio, and less than 45% fpr the debt-to-income ratio, although today some loans are approved with a borrower having a ratio as high as 55%.
Can I use all of my income?
There are very specific guidelines that must be followed in determining what income is allowable in qualifying for a home loan. For example there are a few situations that prevent you from utilizing your income.
The first is if you have been self-employed for less than two years. Generally speaking you must be able to document that your business has been established for at least two years and have a minimum of one full years’ tax return before you are able to use this income. This also includes people who are paid 1099 income (no income taxes deducted by your employer).
Other situations that potentially fall under the two-year rule are individuals who have commission pay or bonus pay as the basis for their income. If you have changed jobs and are in the same line of work with similar payment arrangements, sometimes underwriters will make exceptions.
For example: You are currently paid a straight base salary. You get an offer to go to work for XYZ Company, taking a 20% cut in base salary in exchange for commissions that historically for that position would give you a 25% to 30% raise effectively. The problem is that without any history of you receiving commission income, the lender will not allow any consideration for it and worse yet, qualify you off the smaller base salary which is 20% less than your old job.
My monthly bills
Monthly obligations that are counted against you when qualifying for a home loan include credit cards, student loans, (even if deferred), auto loans, personal demand loans, and any other revolving, or installment loans. For credit cards, your “minimum monthly payment” will be what they use to qualify you on conventional loans.
Items that do not count against you are insurance, (medical, auto, life) utilities and other personal expenses. In addition, installment loans with fewer than 10 payments remaining can be excluded for qualification purposes.
Assests – How much have you saved?
This is an area that requires some care and education. Lenders will be looking to verify that you have in the bank the necessary funds to close the loan (cash needed at closing) and anywhere from one to two months reserves, depending on your credit and the individual program guidelines. Reserves are your estimated monthly housing payment.
Most conventional lenders require that any money being used for the purchase of a home be “seasoned” for at least one month. In other words, the money must have been present in the account for a minimum of 30 days. Large deposits into your account must be explained to an underwriter. If for instance, you sell a car for $4000 and deposit the money in your bank account. You will now be asked to provide documentation as to the source of this money, including a bill of sale and/or a copy of the check and deposit slip. In the event that someone pays you for this car in cash, there is no way to show a “paper trail” to the underwriter, and the money will not be allowed to be used towards the purchase of your home!
There are also very stringent requirements on gifts from relatives, such as how much you can receive and how to document the gifts.
The best advice is to talk with a mortgage professional well in advance of getting started to gain a clear direction on how to document large deposits, gifts, and transfers between various accounts.
Last but not least, retirement accounts are reduced by 40% of the “vested balance” for qualifying purposes. These accounts can be used for the “reserves” mentioned earlier in this section.
This is a big factor in qualifying for a mortgage. Generally speaking, your lenders will want to see your last 2 year history. The big issue here is how you are paid. If you are on a straight hourly wage or salary and paid as W-2 employee, it is fairly straight forward. You will qualify off that income. If you have changed jobs recently, this is typically not a problem.If you are paid a base salary plus bonus and/or commission it gets trickier. You must have a two year history of receiving bonus and or commission before you will be allowed to count it as income. Same goes for those that are paid 100% commission; you must be able to provide 2 years of tax returns showing the receipt of such income.
If you are paid as a contract employee, 1099 income or are self employed, you have the same requirement. You must be able to prove 2 years of history before you will qualify. The lender will be looking for copies of business licenses or your CPA to write a letter saying that you have been self employed for the last 2 years. The income they will use to qualify you is the net income you report to the IRS after your deductions.
If you do not have a 2 year history yet, it does not mean that you won’t qualify. Talk with a mortgage professional.
When you are purchasing a home that needs work, FHA offers what is called a streamline 203k renovation loan. Essentially it provides up to $30,000 towards improvements. The trick is that you need to factor in enough time to get contractors involved to provide a scope of work and pricing. This typically has at least a 60 day time frame.
FHA and VA loans are backed by the federal government. FHA loans are insured by the Federal government and are available with very small down payments. There is a fee for doing these loans called an upfront Mortgage Insurance Premium (MIP) equal to 1.75% of the purchase price of the home and in addition, you pay a monthly MIP premium to insure the mortgage against default. These loans make sense for a small percentage of people who are credit challenged or lack the required 5% down payment for a conventional loan but you should exhaust all of your other possibilities to avoid paying the 1.75% fee first.
VA loans are guaranteed against default by the federal government and are available up to 100% of the purchase price for eligible veterans.
Fixed vs. Adjustable Rates
Fixed Rate Loans
These loans are fixed for the term of your loan. They are amortized over the period of time you select, so the shorter the period the larger the monthly payment will be. Also, the shorter the time period you select the more significant the interest savings will be over the term of the loan. But one note of caution is that you should make sure that you are comfortable with whatever period you select, i.e. if you select a 15 year fixed you can’t go back to a 30 year later if let’s say you loose your job. Generally there is a slightly better interest rate offered for the shorter term loans.
Adjustable Rate Loans
Adjustable Rate Mortgages, or ARM’s, differ from fixed rate mortgages in that the interest rate and monthly payment move up (or down) as market interest rates change.
Most Adjustable Rate Mortgages have an initial period where the interest rate is fixed, followed by a much longer period during which the rate changes at preset intervals. The rates charged during the initial periods are generally lower than the rates found on comparable fixed rate mortgages. The initial fixed rate period can be as short as a month or as long as 10 years. Five-year ARM’s are the most common, though the so-called hybrid Adjustable Rate Mortgage has become popular in recent years.
These hybrid Adjustable Rate Mortgages — sometimes referred to as 3/1, 5/1, 7/1 or 10/1 loans — have fixed rates for the first three, five, seven or 10 years, followed by rates that adjust annually thereafter. After the fixed rate honeymoon, an adjustable rate mortgage fluctuates at the same rate as an index spelled out in closing documents. The lender finds out what the index value is, adds a margin to that figure, then recalculates what the borrower’s new rate and payment will be. The process repeats each time an adjustment date rolls around.
Get Started Looking For Your New Home
Do I need a Realtor?
Pitfalls of searching on your own
If you do decide to find that dream house on your own, your search will be more complicated. You can look on the internet but many of the sites are only giving you part of the total inventory. You can look at “For Sale By Owner” (FSBO)–generally a small percentage of the market by driving around or in the newspapaer. These are home owners who, for whatever reason, have decided not to use an Agent in the sale of their house. It may be because they think they can get more return by not paying a commission, or it may be because there was no Agent who would take their house listing at the price they demanded. Many Real Estate analysts have found that the selling prices of FSBO homes are equal to–or higher–than those listed by Agents. The biggest hurdle is how to determine if the value is fair.
How do you decide? There is too much money potentially involved to make a “seat of the pants” decision. If you’re not comfortable with your own analysis, be sure to have a proper contingency written into the contract for protection. The next mistake that many buyers make, when they find that their choices are so limited by only dealing with homes for sale by owners, is to jump into the “listed” market by checking advertisements and calling Listing Agents directly or visiting Open Houses. Typically it is possible that the listing agent may agree to a reduction in their commission (which could be used to reduce the sales price) by going direct yourself. There is not a dime to be saved with this strategy (the seller is still going to pay a commission) and you run the risk of ending up with no representation, since the Listing Agent is duty bound to represent the seller. Please see the discussion on Agency. It is crucially important that you understand how it applies when you buy a home.
Agency laws – What you need to know
About Real Estate Agency
One of the most common misconceptions that is shared by a large number of home buyers is that when working with a Real Estate Agent, he or she will “automatically” represent you as a buyer. As we will discuss, unless this is specifically disclosed in writing, in all probability the Agent will be representing the seller.
The traditional relationship (probably going back to when the first thatched hut was sold by someone other than its owner) has been that a Real Estate Agent’s primary loyalty was to the seller of the property. This relationship was in effect whether the Agent was the listing agent or working with a buyer. This situation caused many home buyers to be confused: they assumed that the Agent that had been driving them around showing them houses for the last 3 weeks was representing them. In reality, the Agent was representing the owners of the houses they saw, and was bound to reveal to those owners any information he or she knew about the buyers.
Buyer Agency, which is almost universally available now, changed all that. The buyer now often has a choice in representation: the Agent with whom they were working could continue to represent the seller in the transaction, or the Agent could represent them as buyers. The buyer is now able to compete on a more level playing field.
Although there are state to state variations (please verify the situation in your particular locality), the following is a basic summary of the types of agency, and who the Agent represents.
SELLER AGENCY: The “default” situation. Unless disclosed to the contrary, all Agents involved in a Real Estate transaction (and their Brokers–with whom a listing agreement is actually with) represent, and owe their allegiance, to the seller. If you contact an Agent who has a property listed, that Agent will always represent the seller.
BUYER AGENCY: When an Agent represents the buyer, that Agent “rejects” the implicit seller agency and thus owes loyalty to the buyer. For more information on this subject, see the section devoted to Buyer Agency.
DUAL AGENCY: This occurs when 2 Agents–or the same Agent–working for the same Broker each represent a buyer and a seller in a transaction. This situation must be disclosed to both the buyer and the seller. Privileged information (e.g. the price that a buyer will pay or a seller will sell at) cannot be disclosed to the other party without the express permission of that party.
What it means to you
If you leave the agency question “as-is”, your Agent will automatically represent the seller in the transaction (although it is very likely that they will suggest Buyer Agency.) If the Agent does not represent the seller, in most areas you can opt for Buyer Agency. If the house in which you are interested is listed by the same Broker as your Agent, then you have an automatic Dual Agency situation. To sum it up, if you want full representation and it is available, insist on Buyer Agency.
All About Buyer Agency
Why a special section on Buyer Agency?
Many visitors to this Web Site, in their search for a home, pass by some of the most important information in it–the discussion on agency. They, like many home buyers before them, believe that the Agent with whom they are working–sometimes on a daily basis–represents them and their interests. Without certain disclosures, this definitely is not the case.
The Agent, unless specifically disclosed otherwise, represents the seller in any transaction for the sale of a home. It is that Agent’s fiduciary duty (where their loyalty lies) to protect the seller’s position at all times.
Buyer’s Agency, however, may be an option available to you. Simply put, it allows the Agent with whom you are working to be your representative and to put your interests above all others.
Example 1: You see a house advertised in the newspaper, a home magazine, or the Internet. You contact the Listing Agent (this is who will be advertising the home) and make an appointment to see the house. The Agent is friendly, informative, and tells you what you believe to be everything about the house. The Agent represents the seller, not you.
Example 2: You are working with an Agent, who shows you 25 different homes over 3 weekends. The Agent buys you lunch twice, knows all 4 of your children by name as well as all of your personal likes and dislikes, but does not offer Buyer Agency. You feel comfortable with the Agent, revealing important personal information. Without Buyer Agency, “your” Agent represents, and owes loyalty to, each and every one of those 25 sellers–not you. Any information you reveal to the Agent must be relayed to the sellers.
“Okay,” many buyers say, “so the Agent represents the seller and not me. Is that a big deal?” Maybe not, but it is important to understand that if the Agent represents the seller, they cannot reveal certain things to you, as the buyer:
- The reason for selling (unless the seller specifically authorizes it)
- Any concessions, in price or otherwise, that the seller may be willing to give up.
- Any conversations that the seller and the Agent may have had.
- Any information that could be detrimental to the seller, or give you, the buyer, an advantage. This would include a CMA (Comparable Market Analysis) that could put the seller at a disadvantage.
Buyer Agency turns the tables. If a Buyer’s Agency agreement is struck between you and the Agent, it isyou, rather than the seller,who has the representation from the Agent with whom you are working. If you are represented by a Buyer’s Agent, some of the potential benefits include:
- The Agent can develop a CMA (Comparable Market Analysis), revealing at what price similar properties in the area have been listed for and sold for.
- The Agent can reveal to you any information about the seller that the Agent has been able to ascertain. This may include reasons for selling, potential concessions, or other information that may be to your advantage.
- Information about property value trends that may influence your decision about a certain area can be relayed to you.
Summary. Is it necessary to have a Buyer’s Agent? No. Thousands of home buyer’s have been well served dealing with the seller’s Agent. (For years, it was the only way it was done). The important thing is to understand your options, so that you don’t unintentionally accept less representation than you want.
How much will a buyer’s agent cost me?
If you are looking at property that is listed on either Georgia MLS or FMLS, the seller has already agreed to pay the agents commission for you. The only time that you would ever have to pay your buyer’s agent, would be if a property is not listed and the seller will not agree to pay commission. If this service is essentially free to you, why in the world would you choose to not be represented?
The lender is looking to see what your source of down payment is.
You will most likely be asked you to provide proof of your liquid assets. This includes bank statements for checking and savings accounts, verification of investments, and any other liquid assets. Some of the things they ask for may seem trivial, but keep in mind, if you are planning a move to a new home, it’s important to have all documentation readily available. If the lender asks for cancelled checks or deposit receipts to meet certain conditions, you want to be able to find these things quickly to avoid delaying the closing of your loan. Make sure your paper trail is easy to document, and don’t move money from one account to another. Please be sure to keep track of any deposit in your account that exceeds $500 and to be able to document where the money came from. The lender will want to be able to prove that this was not a loan.
Major purchases tip the scales against your favor. Avoid making any major purchases. You might be thinking about purchasing new appliances for the new home. This is not the time to do it. Avoid making any major purchases on jewelry, appliances, furniture, vacations, or anything with a significant price tag. Buying or leasing a car can make a negative impact on the way the lender views your financial status.
This is a big ticket item that dramatically affects your debt to income ratio. You may feel you have room in your budget to purchase a new car, and think this is a worthy investment if you are looking for a home that will mean a longer commute for you on a daily basis. But by tacking a car payment onto your existing debt, you reduce the amount that you will qualify for in a home loan. A $400 a month car payment can reduce your approved loan limit by as much as $50,000.
Changing jobs – stability and how your paid matters
If you have to change jobs, you may be asked to document why this change occurred. If you are changing jobs to increase your income, that’s a no brainer for the lender. If you have an erratic work history to start with, another job change may make it look worse for you. If you are an hourly wage employee, most likely a job change will have no effect on your ability to qualify for a loan.
If you have a track record of a consistent amount of overtime or consistent bonuses over the last two years, the lender views this favorably. If you change jobs, there is no way of knowing if the new employer will pay overtime. Many do not! If you work on a salary + commission or straight commission basis, it has a dramatic effect on your stability. Call a mortgage professional before you make a switch to make sure it won’t negatively impact your ability to qualify.
Amateur credit repair
Getting knowledgeable advice in this area is critical. Don’t try to tackle this on your own. There is a “rule book” on what makes up a credit score and unless you know the rules to the game, you should never attempt anything before a consultation. Oftentimes, what you think makes logical sense and will help, actually hurts your score.