As a potential home buyer what is the first thing I should do?

CHAPTER 1 – Would you go to the grocery store and spend the time and energy to fill your cart without knowing that you had the money to pay for it at checkout?  Most likely, not.  It is the same concept when you are buying a home.  It’s important to know how much you can and want to spend before you start to shop for your home.

If you plan to finance your purchase, you’ll need to speak to a lender, banker or mortgage consultant (referred to as lender for the remainder of this article).  They will discuss loan types (conventional, FHA, FHA 203k [ask about this loan if you are interested in buying a home that needs repairs and putting little down], VA, USDA, etc.), how each program works, which ones you qualify for and what it will cost you.  Your credit score will be part of the discussion, your current debt and your income source(s) will also be important.  The lender can pull your credit, review the report, take note of your basic financial information (salary, debt, assets, etc.) and help you determine what sale price will fit your scenario.

Rate is important, cost can be equally important.  The rate directly affects your payment.  The cost of the loan can affect how much home you can afford as it can deplete your cash reserves.  You’ll need money for the down payment, lender fees, upfront costs (appraisal, inspection(s), etc.), prepaids, taxes and insurance and more.  Be sure to ask your lender about the cash you need to bring to closing and your realtor about how the seller can contribute.

The payment is a determining factor for many potential homeowners.  The lender is going to provide the dollar amount that you qualify for and calculate the monthly payment that fits that sale price.  The payment will include principal and interest calculation; along with taxes and insurance if you are “escowing”.  If you are not comfortable with the monthly payment, discuss it with the lender and make an adjustment to the total amount you want to spend.  You know your finances and lifestyle so be sure to participate in the spending decision.

Several types of loans will call for you to “escrow” your taxes and home owners insurance.  This means that your principal and interest payment will be added to the amount determined for your taxes and insurance in order to calculate your total monthly payment.  The lender or servicer of your loan takes the escrowed amout and pays the annual taxes and insurance accordingly.

Your payment will fluxuate based on your insurance and property taxes.  You can shop for your home owners insurance which is calculated by the cost to rebuild your home, not necessarily the price you pay for it.  You could purchase a $150,000 home and need $225,000 to rebuild it.  You may receive discounts on your homeowner’s insurance for multiple lines with your carrier (home & auto, etc.).  If you purchase property near water or in a flood plain you could be subject to flood insurance which will be an added expense.  Be sure to review your coverage with your selected insurance agent.  What does it cover – cost to rebuild, contents, theft, fire/water/weather, sewer/septic backup, pool, etc.?  Review discounts for multiple lines, being near a fire hydrant or close to a fire station, monitored security system and more.

Taxes on your new home can be a huge factor to your payment.  The property is assessed by the county tax assessor and taxes are calculated based on that assessment.  If you buy a home that will be your primary residence you can file for homestead exemption which can lower your annual tax bill and thus affect your payment.  You may also qualify for additional exemptions – see county tax assessor / commissioner’s information.

Be prepared for the lender to ask you for documents that will be used to support your loan application.  You’ll be ahead if you’ve gathered w-2’s (2 years for all borrowers), tax returns (2 years for all borrowers), last 2 paystubs (all borrowers), 3 months bank statements (all pages for all accounts), and other income or asset documents.

Timing is a factor.  The sooner you can close on the sale the better your offer may be perceived by the seller and the sooner you get in the home.

I suggest interviewing several types of lenders – direct, bankers, community banks, credit union, any financial institution you have a relationship with; your realtor can provide you referrals for trusted lenders.  Different lenders may have different programs or be more or less familiar with a particular property and or loan type.

Understand that the lender is not the only one to review your loan file.  There can be a processor, under writer, quality control, and/or investor.  You may be asked to provide additional paperwork throughout the process.  Not all files, buyers, property/loan types require the same documents and guidelines are continually changing.  Be prepared to participate fully throughout the process.

You’ve interviewed lenders and selected one.  A summary of loan types has been presented to you and you are familiar with the parameters.  You’ve sent your personal documents, completed and signed the loan application to move your loan forward.  The lender has provided you with a payment that you are comfortable with and the corresponding sale price along with a commitment letter.  What’s next?


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