We Will Find The Loan That Is Right For You
Finding your new home can be an exciting time. Before you start your serious house hunting, take some time to make sure you’re prepared for the home buying process. Drummond Community Bank can help you with your home-financing needs, whether you’re staying in town or relocating.
What Should I Know About Buying A Home?
Benefits Of Buying
Buying a home is a big decision. When making this leap, it’s good to remember the benefits of this investment. If you're currently renting, buying a home may be an added tax benefit. Because your home builds equity every month, you’ll save when you buy it, while you live in it, and possibly make more money when you sell it.
Costs Of A Home
Do a little personal assessment before you walk out your front door. Review your budget and factor in the costs of owning a home. Are you able to maintain a home and make the needed repairs? If you’re thinking of a bigger home, are you factoring in bigger utility payments as well? Don’t forget your down payment and closing costs. Often, owning a home can be cheaper than renting.
Making An Offer
All your searching has paid off and you’ve found the home you want. But before you start thinking of the perfect place to put your sofa, you need to get your offer accepted. Knowing how much to offer may take some thought; after all, the market conditions really affect sale prices. You or your real estate professional need to do a comparison market analysis on recent home sales. You may be able to find the sales information online through your county tax office or you may have to make a trip to the courthouse. Real estate professionals have an advantage since most of the sales information is recorded in the Multiple Listing Service for your area. If you are working with a real estate professional, ask to see the residential property disclosure on the home and find out:
- What’s the difference in asking price versus selling price in recent sales?
- How long are the houses in the neighborhood typically on the market?
- How long has the house you’re considering been on the market?
- Has the price been reduced and by how much?
- Do you know of any prior offers on the home?
You need this information to make a reasonable offer. Everybody wants to feel like they got a deal, but a seller may not take a low offer seriously enough to counter. It’s not uncommon in some areas for homes to sell well above the asking price. Be prepared to go back and forth during the negotiation process until a final number is agreed upon. Remember that generally verbal offers concerning real estate are not binding so make sure that all changes to your offer to purchase contract get made in writing and initialed by all parties.
Purpose of Earnest Money Deposit
You need to include with your offer an earnest money deposit to show “good faith” that you intend to buy the home. The exact amount is up to you and the seller, but usually is 1 to 4% of the offer price. At closing, your money is applied toward the purchase price or closing costs of the home.
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What's Involved With Selling My Home?
Selling your home involves time, energy, and marketing strategy. We can help provide you with advice on getting your house in order so that you can get it sold quickly.
Making The Decision
Before you start seriously looking at buying another home, you may have to put your home on the market. Weigh your options and assess your reasons for a making a move. Are you being transferred? Needing a larger home? If you want to have a smaller mortgage payment, you may want to consider refinancing if the current rates are lower than your fixed rate.
Preparing To Sell
As a seller, you have several factors to consider regarding the sale and marketing of your home. You can choose to sell your home “By Owner,” you could choose to work with a real estate professional, or you could do a combination of the two by using an Internet based realty company to help you with the sale.
If you’re not pressed to move right away, research when the market is most productive for your area. Generally, the home sales season starts to heat up in March and goes throughout the summer, but your area may be different if you live near a major city or vacation spot.
Do your homework. Check around to see what other homes are selling for in your neighborhood. The rule of thumb is to look at the recent home sales within the last six months. If you live in a subdivision or community, it’s a little easier to get an idea of your home’s value and expected days on the market. See if you can access the sales data online with your county tax records. Most states and counties are working toward updating and storing their records online.
Sure you want to make as much as you can on the sale of your home, but be careful not to price yourself off the market. Think of your home as another product that people want to buy. For instance, if you were trying to sell your car and make it stand out on the car lot, what would attract buyers? Low price and low miles-the same is true with your home. The newer you can make your home appear and the more competitive you can be with your asking price, the greater your chances are of a quick sale. It’s all in the marketing.
Know Your Neighborhood
We’ve all heard that “location” is key to home sales. When you’re putting your home on the market include the attractive features of your neighborhood on any advertising flyers. Buyers are interested in your area schools, amenities, shopping centers, and distances to cities and airports. Don’t assume that all the buyers who come to see your home know the selling features of the area-tell them.
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Before you apply for a mortgage, you need to know your:
- Current monthly income
- Current monthly expenditures
- Desired monthly mortgage payment
- Anticipated sale price or home value
- Anticipated down payment amount
How Mortgages Are Approved
There are several factors involved in the approval process of your mortgage application.
- Income. When you're qualifying for a loan, lenders usually use your gross income (all the money you earn before taxes) to determine the monthly mortgage payment you can afford. Gross income may also include the average of overtime pay and commissions, and child support or alimony, if you wish to have them considered.
- Monthly mortgage payment as a percentage of your income. In general, lenders require that your total monthly mortgage payment — principal, interest, property taxes, mortgage insurance, hazard insurance and any homeowner association dues — be no more than 28% to 33% of your monthly gross income.
- Your total debt situation. You may have car loans, student loans, credit cards, child support, alimony or other monthly expenses. In general, lenders require that the total of all your monthly expenses (excluding basics like utilities and groceries) not exceed 45% of your gross monthly income.
- Credit history. A satisfactory record of paying your bills on time is an important part of getting a home loan. If you've had credit difficulties within the past two years, a good explanation of any late or missing payments on your credit report will be taken into consideration.
- Employment history. Lenders usually prefer to lend money to people whose incomes have grown steadily over the past several years and who have worked consistently in the same or related occupations. You will need to verify employment. If you're self-employed, work on commission or have been at your job less than two years, you may need to provide additional information about your work history.
- Property appraisal. A professional appraisal is done to determine the value of the home. An appraisal is based on the home's condition and selling prices of comparable properties in the area and confirms that the property is worth the purchase price you're offering for the home.
Reviewing Your Credit
- Credit report. After receiving a loan prequalification request or application, the lender will request a credit report from the credit bureau. The credit bureau collects and organizes information about people who have credit. The information generally goes back seven to 10 years. This report includes your name, address, employer, length of employment and previous credit history. Credit history includes account types, balances remaining, payment status, collection information and inquiries.
- Lack of credit history. Most traditional mortgage loans generally require some kind of established credit history. Some lenders offer flexible home loan options for people with limited or no established credit history. These options look at other ways to establish credit worthiness, such as timely payments of rent and utility bills.
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What You Should Know About Credit Reports
Credit reports document your financial behavior over the past seven years — how much credit you have, how long you've had it and whether you pay your bills on time, among other things. Knowing what information is in your report can help you identify any problem areas and plan what steps you might take to correct them.
Three credit reporting agencies — Equifax, TransUnion and Experian — maintain credit reports. Lenders buy credit reports to help them decide whether to offer you a prequalification. You can also purchase a copy of your report from these agencies. Your credit report contains information about:
- Credit accounts and payment history
- Applications you have made for loans and other time payments
- Personal information, including your name, address, and Social Security number
- Employment information
- Legal actions (for example, judgments, collections, bankruptcy)
For more information on credit reports, contact:
Your credit report also carries your credit score, a numeric ranking between 300 and 850 that many lenders use to decide whether you are creditworthy. The score is used to help predict whether you'll repay a loan. It's calculated using five sources:
- Payment history
- Amount owed
- Length of credit history
- New credit
- Types of credit in use
In addition to telling lenders your creditworthiness, your credit score can also influence the interest rate you pay. In many cases the higher your score, the lower your interest rate. Your credit score is available from the three credit reporting agencies.
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Costs and fees associated with getting a mortgage:
Down payment. When you borrow money for a home, you may be required to contribute some of your own money toward the purchase of the home. This money is called your down payment. The amount you need varies depending on the type of mortgage you choose, the purchase price of the home and your financial situation.
Closing costs. In addition to your down payment, you will need to pay closing costs for processing your loan and transferring the property ownership from the seller to you, the buyer. Closing costs can range from 3% - 5% of your loan amount, depending on where you live, the loan you choose and your closing date. In some cases, you can finance certain closing costs in your mortgage loan. When you apply for a loan, your lender will give you an estimate of closing costs, which may include:
- Origination fees, which are the costs of processing your loan (including property survey and appraisal) Items paid in advance, including first-year mortgage insurance premium, first-year hazard insurance premium and first-year flood or earthquake insurance premiums, if required Escrow account, an account held by the lender into which the home buyer usually pays for city/county property taxes, mortgage insurance, hazard insurance and flood or earthquake insurance, if required
Title Insurance charges
Fees associated with your Title Insurance
Recording and transfer charges
Fees associated with recording your deed
Fees associated with your Real Estate Attorney(s), if applicable
Mortgage payment. When you make a mortgage payment, most of your payment goes toward the principal and interest of your loan. The principal is the remaining balance of your loan, and the interest is the cost of borrowing the money. Typically, all or most of your interest payments are tax deductible.1 In addition, a portion of your mortgage payment is usually set aside in an escrow account to pay property taxes, mortgage insurance and hazard insurance.
Mortgage insurance. If your down payment is less than 20% of the home purchase price, you can expect to pay some form of mortgage insurance. Home loans that are insured let you buy a home with a lower down payment than the lender would otherwise require. Mortgage insurance costs vary, depending on the amount of your down payment and the type of loan you select.
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Applying For Your Loan
Information you may need to provide to apply for a mortgage:
Employment information. Names, addresses and telephone numbers of all your employers for the last two years.
W-2s. These are the forms you get from your employer every year to file your income tax returns. Usually you will need to provide copies of your W -2s for the two most recent years. You may also provide other income information, such as social security, pension, interest or dividends, rental income, and child support or alimony, if you choose to have them considered. Self-employment income may also be considered.
Pay stubs. Provide your pay stubs that cover the 30-day period before the date of your mortgage application.
Federal income tax returns. If you are self-employed, or more than 25% of your income comes from commission, overtime or bonuses, you may need to provide complete copies of federal income tax returns you filed for the two most recent years.
Bank statements. You may need to provide statements from all your accounts (checking, savings, mutual funds, money markets, certificates of deposits, 401(k) or other retirement accounts) for the last two months to verify the exact amount of cash you have available for your down payment and other costs associated with your home purchase. For certain mortgage loans, a portion of the down payment may come from a gift from a family member or a grant from a local down payment assistance program.
Current debts. You'll need to provide the account numbers, current balances and the minimum monthly payments of all credit accounts, such as loans, credit cards, child support and other payments you make each month.
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Once all the required documentation has been gathered, your application is submitted to underwriting. Underwriting is the process of reviewing all of the information and making a decision as to whether a borrower qualifies for a loan. Underwriters evaluate your ability to repay the loan (income), your willingness to repay the loan (credit) and the value of the property that you've identified (collateral).
Loan application. The information provided on your application helps the lender answer basic questions such as:
- What is the source of your income, and is the source stable?
- Is your income adequate to cover the expense of the new mortgage payment?
- How much long-term debt (debt that will not be paid within the next 10 months) do you have?
Credit history. Your credit history helps lenders evaluate your ability to manage debt. It reflects how repayment of your bills has been handled in the past. In some cases where borrowers don't have an extensive credit history, some lenders will consider alternative payment records, such as rental payments and utility bills.
Property appraisal. An appraisal provides an estimate of the market value of the home that you wish to buy and is based on similar homes sold in the neighborhood. Lenders usually grant up to a certain percentage of the property's value in a mortgage loan. This percentage is called the loan-to-value (LTV) ratio. The rest of the property value is covered by your down payment.
Hazard insurance. Hazard insurance (sometimes referred to as a homeowner's policy) protects you and the lender from loss in the event the home is damaged or destroyed by fire, storm or other hazards. You're responsible for obtaining hazard insurance prior to closing and for providing proof of insurance to your lender. The lender may also require additional insurance against loss by flood or earthquake.
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Closing The Deal
The closing is the final step in which the home is transferred to you. Once your loan is approved, a closing date is set. Depending on the laws of your state, the closing may be conducted by either:
- Your lender
- A title insurance or escrow company
- Your real estate broker
- An attorney who represents either you or the seller
The purpose of the closing is to make sure the property is ready to be transferred to you from the seller. To ensure that the transfer can be made, the lender normally prepares the following items ahead of time:
Title search and report. Research of land records, court records and other legal documents to determine if the seller has a clear, marketable title to transfer to you.
Title insurance binder. Indicates the result of the title search and assures the lender the title to the property qualifies for a title insurance policy.
Survey. Confirms the property boundaries are as described in the purchase and sale agreement. (A survey is not required in all states.)
Termite, well, sewer or septic certificate. Certifies that the sewage and water supply work properly and that the property is free of termites and/or other wood destroying insects. The sales contract will state whether you or the seller is responsible for these inspections and certificates.
Title insurance. Title insurance protects your lender against losses that may be incurred because of a defect in the title, a forgery, a recording error, claims of undisclosed or unknown spouses or heirs, and other risks that did not appear in the public records when the title search was done.
Hazard insurance. Hazard insurance (also referred to as a "homeowner's policy") protects you and the lender from loss in the event the home is damaged or destroyed by fire, storm or other hazards. You are responsible for obtaining hazard insurance prior to closing and for providing proof of insurance to your lender. The lender may also require additional insurance against loss by flood or earthquake.
Several other documents must be prepared by the lender before the closing:
HUD 1 settlement statement. An itemized list of the credits and charges, for both you and the seller, based on the contract terms.
Loan documents. Final loan documents that grant your lender a lien against the property in order to secure the repayment of your loan. These documents include a promissory note, which is your legal promise to repay the loan; and a deed of trust/mortgage, the instrument that is recorded in the public records.
The deed. Transfers ownership of the property to you. The deed must contain a legal and accurate description of the property.
Make sure you ask to review all your settlement documents at least one day before you sign them. Also consider asking your attorney to review them.
At the closing, you will sign many documents, including:
- Settlement statement
- Promissory note
You will probably be required to pay any remaining down payment and closing costs. A certified or cashier's check rather than a personal check is usually required.
When all the necessary documents and releases are recorded, you will receive the keys to your new home!
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Your Rights As A Consumer
Under the law every consumer has the right to equal access to credit and the right to full disclosure of all costs associated with obtaining a mortgage.
The Equal Credit Opportunity Act (ECOA) provides for equal access to credit regardless of:
- National origin
- Marital status
- Income from public assistance programs
- There are additional protections if you have a physical or mental disability.
For more information on your housing rights, contact the U.S. Department of Housing and Urban Development (HUD) and request the Fair Housing — It's Your Right brochure.
In addition, the ECOA requires that you be notified as to whether your application has been approved as requested, modified or rejected within 30 days of the completed application. Specific reasons for rejection must be given to you, in writing, at the time of rejection or upon your written request for the specific reasons.
An application is considered complete once the lender has received all the information necessary to make a loan decision. This may include such information as:
- Credit reports
- Employment/income verifications
- Approvals by insurance companies
- Additional information, as required
- Additional consumer protection laws include:
Real Estate Settlement Procedures Act (RESPA). RESPA requires lenders to give you advance notice of estimated closing costs in purchase and refinance transactions.
Truth-in-Lending Act. The Truth-in-Lending Act requires all lenders to fully disclose, in writing, the terms and conditions of a loan including the Annual Percentage Rate (APR), which reflects the cost of obtaining credit.
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Download a HUD "Buying Your Home" Packet