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Congratulations, you are thinking about purchasing a home!
You're ready to join the tens of millions of other Americans who have bought their own homes and are enjoying the many benefits of home ownership. Like any new venture, you are probably a little bit nervous as you start to research buying a home so this website is designed to give you some general ideas on how to go about the process, and to make you a more knowledgeable buyer. What follows should give you enough information so that, with your Realtor and lender, you can make informed decisions about buying your home. Done right, owning your own home can be the single best way to build your future financial success.
There are basically four main things to consider when purchasing a home:
1) Financing the home purchase,
2) Choosing a Realtor,
3) Selecting the right home, and
4) Making the offer.
Perhaps the most important consideration when buying a home is how to finance the purchase. Buying a home can involve the commitment of a significant amount of your savings. Questions such as ‘how much can I borrow?’ and “how much can I afford to pay on a monthly basis?’ are very important because these are decisions which can significantly impact your financial situation for years to come.
Let's start by addressing the issue of the down payment. There is no hard and fast rule on how much to commit to a down payment, but try and anticipate your cash needs as best as you can before determining how much to commit to a down payment. Generally the smaller the down payment you have, the greater the loan you are going to need to close the purchase. The greater the loan, the greater your monthly payment will be which means the income you need to qualify for the loan will need to be greater too. If you don’t have money saved for a down payment, there are down payment assistance programs available. Many are open to all buyers and some are specific to buyers who earn less than the median area income. If you need down payment assistance, ask me or lender for more information about these programs.
Most borrowers want the ‘best’ interest rate possible. You will see rates advertised in the media but bear in mind the rate you actually qualify for is influenced by a variety of additional factors. Loan rates are always in flux, as reflected by local or national averages, and your rate options will also be determined by your specific loan-to-value, credit scores, dollar amount of the loan, whether the home will be your primary residence and your debt-to-income ratios. Lending is big business – it’s not charity. Lenders look at the level of potential risk involved in lending to you. The higher the risk that you might default or not be able to pay on your loan, the more the lender will charge you to get the loan. From the borrower’s perspective this can feel like reverse-logic. But since the lender has the money you need, the lender gets to make the rules.
Loan programs vary greatly and a higher rate loan can sometimes be your over-all most cost-effective option. Make sure your lender reviews with you both the monthly payments and the cost of the loan over the entire time you expect to have it. Ask about both PI payments (principal and interest) and PITI payments (principal, interest, taxes, insurances) plus HOAs or any other required fees. Make sure your lender gives you a written Good Faith Estimate (GFE) but know that this document is only an estimate and is not legally binding. And until you actually 'lock' a rate by signing a lock sheet, rates will continue to change. A rate lock fixes your rate for a specific number of days, so be aware of the costs involved in locking for shorter or longer times. It is not uncommon to have to pay to extend a lock if your closing is delayed beyond your original lock period. Be sure to coordinate your lock with the dates in your purchase contract. And ask about any pre-payment penalties associated with your loan, so you know any impact on future options for refinancing or selling.
The number and types of loans available for home purchase are about as numerous as the number of lenders making loans, so the information here is designed to give you only a broad view of the lending market. Lenders generally make two types of loans available for home purchases, a Variable Interest Rate Loan (sometimes known as an Adjustable Rate Mortgage or ARM) and a fixed rate loan. Within these two types of loans, the loans can either be 'Conforming', which means the loan amount is within the Fannie Mae/Freddie Mac loan limits (check with a lender in your state for the current loan limits), or it is 'Non-conforming', which means the loan amount is in excess of Fannie Mae/Freddie Mac loan limits.
Variable Interest Rate Loans generally have a lower interest rate at loan origination, but have the provision for the lender to increase or decrease the interest rate on the loan based upon the movement of whatever index the loan is tied to. Because the interest rate can be adjusted, the lender has the right to increase or decrease your monthly payment accordingly. When and by how much the payment can be changed depends upon the loan terms you agreed to. The one thing you need to be watchful for is that many times a lender will qualify you for your loan at what is called a 'teaser rate'. While teaser rates are designed to help you obtain a loan, this is generally accomplished by starting your loan at an artificially low rate. After a specified period of time has elapsed, perhaps three to six months, the interest rate on the loan is then increased to bring it in line with where the true interest rate should be. This can result in a significant increase in the amount of the monthly payment. While Variable Interest Rate Loans have become popular over the past fifteen to twenty years, if you are not comfortable with the idea that your payment can be increased or decreased by your lender, then the more traditional fixed rate loan is probably for you.
Fixed Rate Loans are still the most popular form of financing. With this type of loan, your payment will remain constant for the entire term of the loan. These loans generally have a slightly higher interest rate than the Variable Interest Rate Loans at origination, but unlike the Variable Interest Rate Loans, the interest rate will remain fixed throughout the term of the loan. The traditional fixed rate loan generally fully amortizes over a thirty-year period, with the payment in the first month the same as it is in the 360th month. For those buyers who want to know that their monthly commitment to a home payment will always be the same, this is the loan for you.
Escrow Whatever type of loan you obtain, the lender will likely require a reserve account or ‘escrow’ for real property taxes and insurance. Escrow accounts are designed to make sure that the borrower has enough funds available to pay for property taxes and insurance when they become due and payable. The good news is that you won't have to remember to make your tax and insurance payments yourself; you'll just need to watch your loan statements to see that your lender pays them from your escrow accounts.
Shopping for a loan You may want to interview a variety of lenders to find out what your loan options are. Each lender will want to pull your credit report. It is important for you to know that whenever a lender, or other vendor, pulls your credit report your credit score is lowered by a few points (a higher score is a better score). To protect your credit score, if you plan on speaking with multiple lenders, you may wish to buy your own copy of your credit scores and provide this to each lender. No lender will give you a firm commitment until they pull your scores themselves, but at least they can ballpark rates based on the information you provide. There are three credit reporting agencies and you will need to have your report from all three. One place you can order this information is from www.myFICO.com. FICO is the name of the main credit scoring index. When you order your own report there is no negative impact to your score.
It is a good habit to review your credit report for any errors once a year. Always speak with a good loan officer or legitimate credit repair agency if you are anticipating purchasing a home and you see any errors on your report. It is essential that you make no major credit purchases or have any significant change in employment or income from the time you begin working with a lender to the time you close on your home purchase. Loans, and homes, have been lost by buyers making even simple furniture purchases the day before closing. Remember that once you actually apply for a loan, all the information you use to qualify for the loan will be verified through the loan qualification process. Verifications may be made up until the time of closing. Always speak with you loan officer prior to making any income or debt change when you are involved in a home purchase or refinance.
How much home can you afford to purchase? This is a difficult question to answer because each buyer's situation is different. The very best way to answer this question is to talk to lenders and ask them to calculate how much they can qualify you for based upon your income, length of time on your job, and amount of your down payment. Lenders will need to know how much debt you have, including car loans, credit cards, lease-to-own, student loans, etc. Different lenders will have different loan programs with different qualification requirements. Before you make an offer on a home, you will want your lender to give you the maximum amount for which you are pre-approved.
Keep in mind these two things:
1) The ‘pre’ in pre-approval means that you have not been fully approved for your loan yet. All of the information you provide to your loan officer will need to be verified. Once you are under contract for a home, the lender’s underwriters will review your information, the value and condition of the home you wish to purchase, and your purchase contract. If the deal makes good financial sense to the lender, the underwriter will approve the loan and give loan commitment.
2) You may wish to buy less thanyour maximum approved loan. The percentage of your income that lenders will allow to go to home payments is higher today than it was in the past. Buying conservatively can give you more financial flexibility to weather an unforeseen economic downturn. If you buy below your threshold, consider budgeting an additional monthly amount to short- or mid-term investments such as CDs or money market accounts. As you build your financial future it can be useful to diversify your assests so that not all of your resources are invested in your home.
Realtors and real estate brokers (or real estate agents) are not the same. A real estate broker or broker associate is a person licensed by your state to facilitate real estate purchases or sales for clients. This person becomes an agent when you sign an agreement for him or her to represent you. A Realtor is a licensed real estate broker, broker associate, or agent, who has agreed to be held to a higher level of ethics and service by joining the local and national Board of Realtors. A Realtor is trained in the process of making the home buying process easier for you. They can offer help in locating properties that are available for sale, give recommendations on financing, help you to understand the local real estate market, and help advise you in preparing an offer and negotiate the sale.
I am a Realtor with the Denver Metro and Colorado Board of Realtors and I am a licensed real estate broker associate with Broker One Metro Properties. I specialize in representing representing Buyers. I offer additional education and support for first-time homebuyers. I do not pressure my clients to sign a contract with me. Instead I ask that we work together for a day or two to make sure we are a good fit and communicate well in meeting each others' expectations.
Of all the issues involved in purchasing a home, this is probably the most subjective. Ask yourself, what type of home satisfies your needs? Is it a single family, detached home with a backyard, or a condominium? Do you want your home on one story or multiple stories? Is it close to schools, shopping and work? I can consult with you to help you refine your criterial and decision making. I provide access to neighborhood information and school information from links on my home page. You will find many additional resources in the Links section on the main navigation bar. On this website you can also search for homes or you can put in a request for me to search for you!
Making the Offer
Negotiating a real estate purchase can be very complex. It often takes multiple offers and counter-offers before a contract is finalized. Realtors can make sure that the offer you make is in line with the value of homes in the area in which you are trying to buy. They are also experts on what disclosures are required in a sale and what inspections need to be done. A good Realtor will be with you every step of the way, from identifying your new home and making the offer until you finally close your home purchase. You should view your Realtor as an expert who is there to help you in each step of the transaction.
What other questions can I answer for you? Please give me a call or send me an email if this information has been helpful. And very best wishes in your adventures in home ownership!
Sarah Harman
(303) 475-0784 Direct
sarah@powerhousing.com
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