Buying a house is an inherently stressful process, but for first time home buyers the process can be especially complex. Many first time buyers purchase condos to take advantage of lower prices and reduce their responsibility to maintain the property.
This may appear to reduce mortgage default risk because the monthly payment is lower, but in reality making the homeowner’s association a party to the transaction adds far more default risk than the lower payment removes.
In addition, given the nature of the current economy, many millennial buyers have student loan debt, or work as 1099 contractors instead of W2 employees, which further compounds the risk and makes it harder to qualify for a home loan.
Despite the obstacles, it is possible for a millennial to purchase a home – Millennials were actually the largest segment of buyers for the past five years according to this study by the National Association of Realtors – however, millennials are likely to face greater challenges during the approval process than prior generations.
Most first time buyers, especially younger buyers, are not flush with cash and therefore need a mortgage. In order to make the application process as smooth as possible, it is essential to understand the flow of events involved and identify any potential roadblocks before they become an issue. That means starting the process far earlier than you think you need to and staying in diligent contact with your loan officer, real estate agent and attorney.
Organization is the key to closing on time. If an underwriter asks for a piece of documentation, every day you delay sending it pushes out your closing date.
Now that we’ve outlined the issues, let’s talk about the home buying process in plain English. Please leave a comment and let us know if you have any questions, or if you find the guide helpful.
Again, if there is any magic pill for a smooth and painless home buying process it is organization. Hopefully your financial documentation is already organized, but if it’s not, the minute you think about buying a home that is the first thing you should do.
Gather everything in one safe and secure place (like your MMA account’s documentation vault) and begin updating it regularly.
Common documents needed for the loan application include:
– 2 years Tax returns
– 2 years W2s
– 30 days paystubs
– 2 months bank statements
– Student loan statement if you are in an income-based repayment plan
This is not an all-encompassing list. Your loan officer will help you identify any unique documents you need to suit your individual situation.
You need to do some general research but don’t fall into the number one home buying trap – settling on a house too early. Speak to your financial planner or run your own figures to determine how much you can comfortably spend.
Keep your spending limit in mind as you move through the pre-approval process. You may qualify for a higher amount than expected. However, the amount you “qualify” for is not always the same as what you can “afford.” A good loan officer will not pressure you into borrowing more than you’re comfortable with, which leads us to step 3.
Settling on a lender is not about finding the lowest rate. Rather, you should choose the loan officer instead of the institution. This is someone with whom you will be sharing the most intimate details of your financial life and who may need to be an advocate and an ally for you against an underwriter.
You will want someone by your side who has the knowledge and expertise to guide you through any problems. Even everything goes smoothly, a good loan officer will clearly explain your options so you can make a well-informed decision. This may ultimately end up saving you tens of thousands of dollars over the life of your mortgage.
Start with recommendations from your friends and family, or check with your bank or credit union. Let the loan officers know you’re doing research, especially if you’re concerned about the interest rate, but don’t ask about the interest rate yet – it’s not useful until you know your mortgage credit score. This is not the same as the score your credit card company sends you for free.
Keep the contact information for your top two or three choices handy. If there is a major underwriting issue, you may need to change lenders. If you follow the next two steps, this should be a non-issue but surprises do happen from time to time.
As soon as you’ve identified your loan officer you should start the pre-approval process. This means running a credit report, which will temporarily drop your score 5-10 points for each pull. This is why you interview lenders first, then shop rate between the handful of qualified options.
If your credit history is good, this decrease is not significant enough to hurt you. If such a small change affects your ability to qualify, you have other more important issues to worry about. Focus on addressing them first.
Work with your loan officer to rectify any errors or document any inconsistencies before moving on to step 5.
A credit approval letter is the equivalent of a commitment letter minus having a specific property attached to it. An underwriter will review the loan file and identify any red flags.
This is a must if you aren’t a “vanilla” borrower (W2 employee with excellent credit, have enough to put 20% down + have some reserves left over, and buying a single family primary residence from a renting position).
Obtaining a credit approval letter will save time when you need it the most (at the end). It can also save money and frustration – too often the underwriter discovers an issue weeks after attorney review closes. Getting back an earnest money deposit after the review period closes can be a nightmare.
Only NOW should you contact a real estate agent or begin looking at homes online. Don’t commit to a property only to find out you cannot qualify for the mortgage.
Make sure your agent is familiar with the area you’re buying in. Your loan officer can probably make a strong referral if you don’t already have someone in mind.
If your real estate agent has experience and is familiar with the local market, he or she can give you advice on how much a home is worth, answer any questions about the property and the area, and serve as a liaison between you and the sellers. This is the benefit of using an agent vs. dealing with the seller directly, but beware of using the same agent that represents the seller.
When you submit the contract, or shortly thereafter, you will need to submit a “good faith deposit,” usually $1000. This shows the seller you’re serious, without committing too much money. The contract should contain a contingency period for attorney review and inspections. Any good faith money is refundable if the sale falls through during this time.
Some states require the use of an attorney, others leave it up to the buyer’s discretion. New York state also requires you to retain an attorney on behalf of the lender (this can be the same attorney you use for your own representation or a separate party). Ask your loan officer for guidance if you’re not sure whether you need an attorney.
If your state does not require you to use an attorney, you may use only a title company or choose to use an attorney and a title company (in this case, the attorney will most likely pick the title company for you).
Whether it makes sense to use an attorney depends on the complexity of the contract. For example, if the seller will remain in the property after closing or the buyer will move in early, it is advisable to use an attorney. Again, ask your loan officer or real estate agent for guidance.
Your attorney will revise the contract then send it to the seller’s attorney for comments and further revisions. Once both parties agree, attorney review ends.
A home inspection is not the same as an appraisal. The inspection is meant to determine the structural integrity of the home, whereas, while the appraiser will make note of any health or safety issues in the report, the appraisal’s purpose is to determine the market value of the home.
Sometimes the inspection will happen prior to the end of attorney review, other times it will happen immediately afterwards. Many people choose to wait until after attorney review because once the inspection visits the property the fee is non-refundable, regardless of whether you end up purchasing the property. However, if time is of the essence it is advisable to have the inspection sooner, rather than wait.
Once you receive the inspection report you will work with your real estate agent to come to an agreement with the sellers on any repair items. Sometimes the seller will agree to repair, sometimes they will offer to credit you money toward your closing costs, sometimes they will not agree to any concessions. At that point you will need to determine whether or not you can repair the items yourself or if they are so great as to be a deal breaker.
If the seller decides to credit you any funds you will need to obtain a contract addendum and both parties will need to sign it. This should be sent to your loan officer as quickly as possible because the appraiser will need to include the pricing information in the report.
If all goes well with attorney review and inspection, the countdown to closing begins. You will need to review and sign a packet of initial disclosures, including a loan application, a loan estimate and other lender and loan-specific disclosures.
At this point the lender will request payment of upfront fees, typically the credit report fee and appraisal fee. Once the appraiser visits the home these fees are generally not refundable. The lender has already run your credit report during the pre-approval stage, but until the appraisal is conducted you are entitled to a refund.
This is why it’s important to start the process early. The more potential issues you address upfront the less you have to worry about after you’ve committed money,.
If the appraiser finds any issues with the property that affect its safety, the underwriter may request that the sellers repair the it before closing. The appraiser must then go back to the property to document the repairs and update the appraisal, which means you will need to pay a revision fee. You can avoid this by waiting to schedule the appraisal inspection until after you and the seller have decided how you will handle any repairs.
FHA loans usually have stricter appraisal requirements, though they’ve become less so in the past few years. If you have concerns about whether something will be an issue, ask your loan officer.
Timing your rate lock is an art, not a science. We could write an entire post on this topic. Work with your loan officer to decide when to lock in and whether to pay points.
As mentioned at the beginning of the post, condos come with higher risk because the homeowner’s association has its own financial obligations and risks. For example, if someone sues the association, it will need to cover the costs or pass them to the unit owners.
If you are planning to purchase a condo unit, inform your loan officer right away. This is even a good thing to ask a potential lender before choosing an institution. If the bank has recently made loans for the same complex, they may be able to reuse the existing approval.
Otherwise, the lender must make sure the association has a plan in place to handle emergencies, whether that be through cash reserves, insurance coverage or a combination of both. In addition, they must also review other investor guidelines such as how many units are primary residences vs. rental properties, how many units are vacant vs. occupied, how much of the square footage is residential vs. retail space, etc.
Your commitment letter is your seal of approval from the lender on both your ability to repay the loan and the property you are purchasing. Address any listed contingencies prior to closing. The process will be fairly smooth from this point, unless something changes in your situation or an issue arises from one of the contingencies.
Ask your lender if you have any questions about what the items mean.
Once you address your contingencies, you’ll receive a final commitment letter stating that you are ready for closing. All parties will agree upon a firm closing date. The date will normally be at least one week out so you have ample time to review your disclosures.
Don’t forget to confirm with your moving company. They will need enough notice to reserve a slot for your appointment.
After the date is set, your lender will issue a Closing Disclosure. This document itemizes the cost of purchasing the home, and details which have already been paid and which are outstanding. The law requires you to have a 3-day window to review the document before the closing.
There may be some small changes to the bottom line between this document and the final figures, but the numbers should be fairly accurate. If there are any major changes, the lender will need to reissue the document with a new 3-day review period. This depends on the degree of change and is rare.
Once you have the numbers you’ll obtain a certified check or set up a wire transfer for the balance of the down payment and closing costs. Don’t worry about small adjustments – you may usually pay anything under a few thousand dollars with a personal check. If you overpay, the title company or attorney will reimburse you the difference.
At this point, you’re probably ready to finish up. The final walkthrough usually happens the day before or day of closing. During the walkthrough, you’ll make sure any updates or repairs are completed and the property is “broom clean.”
On the day of closing, you’ll sign your final documentation at your attorney or title company’s office. The closing packet will contain many of the documents you’ve already seen, but these are the final copies. After signing you’ll receive your key, at which point you are officially a homeowner!
Want more tips on home buying? Check out our home buying article archive. Need help with the financial planning or home buying process? Set up a free consultation.
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