Are you getting ready to buy a home but don’t know how to get started? In this video, I’m going to share a recap of our first-time homebuyer class called How To Buy A Home. We discuss preparing to buy, getting a mortgage, buying and closing, and what it takes to be a successful homeowner.
Understanding Your Credit
When you’re getting ready to buy a home, it all starts with credit. Whether you have good, bad, or no credit, it’s where we’re going to start. How do you go about getting better credit if you have bad credit? And how do you establish credit?
The number one thing is to go ahead and get your credit accounts in order. If you have made late payments, there's nothing you can do about it; they're going to be reporting. Going forward, you want to make sure that you make all of your payments on time. This is important because payments are probably the number one factor affecting your credit.
Right behind payments, the next biggest factor is the overall utilization of your credit. Whatever your available balances are, you want to try to keep your usage on those balances at about 20% to 25%. If you have bad credit, you want to try to keep it lower than that at 10 or 15%. If you have really great credit, you can bump that up to about 30%.
As an example, if you have a limit of about $1,000, you're going to want to keep your utilization down to around $200.
Savings And Budgeting
Buying a house takes cash. This is true even if you're going to use some sort of assistance program or you have a family member that's going to give you some cash. You're still going to need at least a little bit of your own.
The easiest way to come up with cash is to create a budget, tracking all of your expenses and all of your income. You also want to make sure that you stick to it. If you say that you’re going to spend $100 a month on eating out, don't spend $300 a month on eating out. Stick to your budget and try to spend as little as possible.
Additionally, make sure when you create your budget that you put everything on there. It doesn't matter if it's new work boots, gloves for the winter, or makeup. If you need to look a certain way for your job and you need dress shirts, make sure it’s in the budget. If you take prescription drugs, put your drug costs on there.
Don't leave anything out. Otherwise, it's really easy to cheat on your budget. The more accurate you are with your budget, the better you'll do at sticking to it.
The Prequalification Process
When you have some cash in the bank and your credit seems like it's at least workable, you might want to start the prequalification process. Prequalifying for a mortgage is the first step of the home-buying process. It's going to let you know mostly what you can afford and what kind of a house you're looking for.
This is important because, if you start to work with a real estate agent or you want to start your search online, you're not looking at things that are way outside of your affordability range. Prequalifying for a mortgage starts with a mortgage lender like myself. This includes providing a handful of documents.
Usually, you're going to need to have a two-year living history of all your addresses for two years. You’ll also want an employment history for the last two years. If you have gaps in there, we're going to need to account for those. We’ll usually collect two years of tax returns, two years of W-2s, two months of pay stubs, and two months of bank statements.
In addition to these basic documents, you’re also going to need a photo ID. From those documents, we can start to paint the picture of what resources you actually have available to you and what your income is. That way, we can start to determine your debts and your income as well as what your ratios look like, as all of the mortgage products are going to have to fit into some level of debt-to-income ratio.
Your Needs And Wants
Now that you're pre-qualified, you're ready to go ahead and buy your home. You need to decide what you’re looking for, like your price range and what’s important to you. I like to have my folks make a list of things that are must-haves.
If you have an entire room full of tools, there's a pretty darn good chance you need a garage or a shed or some sort of workshop to store them all in. If you have a home-based business, you might need a second bedroom. If you are a family with children, you might need a master bedroom and smaller bedrooms down the hall.
Once you make a list of all the things that you absolutely need to have, make a list of the things that you want to have. What school district do you want to live in? What age home would you prefer? Are you comfortable doing maintenance and upkeep? If you hate mowing lawns, don't get a house with a great big giant lawn. Maybe a townhome or a place with a small yard is better.
Additionally, how much size and space do you need? How much are the taxes in a given neighborhood, and does it have an HOA fee? What are the rules? These are all things you’ll want to consider.
The People In The Process
So who helps you actually buy a home? There are a few different people in the process, such as your real estate agent, your lender, the title company, and the insurance agent. However, early on in the process, you’ll be working with someone like myself to get prequalified, know what you're looking for, and take the next step to preapproval.
After that, we're going to get you in the hands of a real estate agent that can help you set up a search online. They'll email you different houses that they think fit your parameters as well. When you're ready to actually go out and look at houses, they will be the ones that will get you in through the lockbox.
Making An Offer
Once you find the house that you're looking for, you're going to want to make an offer. I think that that's at the point where you're going to want to have your fully preapproved loan package in place. This way, we know what kind of loan works for you.
Your real estate agent is going to put a lot of that information inside of your offer when they write the contract. They’ll include the type of financing you’re using and how much down payment you have. The offer may also include if you want money back from the seller of the house or some concessions to help pay closing costs.
They're going to need to know all of that stuff up front. It’s also another reason why you start a process with a loan person like myself.
The Inspection
The home inspection is the one thing that you will do outside of your lender. I really don't have anything to do with home inspections. Assuming that you've made an offer and it was accepted, you're under contract. You’re then going to hire an inspector.
This inspector is going to look at the house from top to bottom and make sure that everything works. If it doesn't work—such as if the plumbing, electrical, furnace, roof, or windows are not up to snuff—then that inspection can become a really powerful negotiating tool.
For example, if your inspector said that there's only one year’s life left on the furnace, you can go back to the seller. If the furnace costs $6,000, you can tell them they need to replace it for you. I always recommend that you get a home inspection; don't skip it. It's worth the money that you spend, but know that you're going to spend it out of your pocket. It doesn't come through the loan process.
Earnest Money And Escrow
Another thing you want to be prepared for is a thing called earnest money. When you put your offer in, you're going to write a check—usually the same day or the next day that they accept your offer. The check will be for some amount of the $500,000 cost of the home.
Earnest money is a deposit on the contract. It means that you're working in earnest to buy that house. Later in the process when you get to the actual closing, you're going to have whatever your down payment was plus your closing costs. Escrow is basically a savings account that you're going to have pre-funded.
Part of your closing costs are costs and part of them are what are called prepaids, or escrows. That's going to be your taxes and your insurance. You always have to pay for the whole first year of insurance upfront—and usually a couple of months extra. That will go into an escrow account. You're also going to pay the first tax period, which is usually half a year. You may need to add a couple of months as a buffer.
All of this money gets collected upfront and held in an escrow account. When the bill comes due, you're not going to pay that directly. Rather, it’s going to get paid from the escrow account. The lender will write a check for your year of homeowners insurance or your next tax bill that comes due. This will also get paid from the escrow account.
What’s In A Mortgage Payment?
First, let's define what is in the mortgage payment. First, there's a principal and interest—which are kind of the obvious ones. Any loan you have will always have a principal portion and an interest portion unless it's an interest-free loan.
Generally speaking, at the beginning of the mortgage process, you're paying more in interest and less in principal. As you make your payments over time, that starts to flip flop. More and more of your total payment is going to go to the principal portion, which is the actual loan amount. So if your loan is $200,000, it's $200,000 in principal plus whatever the interest is on top of that.
The other couple of things that are added to your payment is a little bit of taxes and insurance. You're always paying a little bit ahead on your taxes and insurance. Simply put money into that escrow account so that the money's there when the bill comes due. It’s part of your overall monthly mortgage payment.
Your Downpayment And Mortgage Insurance
Additionally, you’re going to pay mortgage insurance on almost every type of mortgage that you get if you don't put a large enough down payment—which is generally 20%. This class is kind of steered towards conventional mortgages, which would use private mortgage insurance. However, if you use a government loan like an FHA loan, they also have their own FHA mortgage insurance.
Additionally, USDA loans use the same thing. However, if you have a VA loan, you actually don't pay mortgage insurance as a veteran. The down payment is going to be determined by the loan product. As I mentioned, FHA loans—which are government loans—require a 3.5% downpayment. The Veterans Administration loans do not require any down payment.
Much like the prequalification stage (when you're actually doing your mortgage application), you're going to need your two years of tax returns, two years of W-2s, two years of employment history, two years of living history or address history, and your paycheck stubs for two months. You're also going to need two months of bank statements.
If you have other types of bank accounts like retirement accounts, IRAs, 401Ks, and things like that, we’ll need a statement. Those usually have quarterly statements that cover three months, so we would only need the most current statement.
The Loan Estimate
The loan estimate shows you exactly what the terms of the loan are as we know them at that time. So if we think that the rate is going to be 6% or 5% and we have the loan amount, down payment, and fees that are going to be charged, all that's going to go into a loan estimate. It then gets sent to you so you can review it.
Once the loan estimate goes out, there are tolerance levels for changes. A lot of the things on there are not allowed to change at all. For example, one of the things that have zero tolerance for change is my fee. If I say I'm going to charge $1,500, then I can't charge you $1,520 later.
One of the things that have some room for movement is the appraisal fee. If I said it was going to be $700 and the appraiser comes back and charges $800, we would send you a notification of change. The fee would then go up $100.
Processors And Underwriters
Once the loan estimate has been sent to you and we have all of your documentation, the package gets handed off. It then goes to a processor. The processor's job is to take all of the information we've provided, identify any additional information needed, and then collect it.
Next, their job is to tidy up the file so that when we give it to the underwriter, all of the underwriter's questions are already answered. Once we get through the underwriter, we're going to get ready to close on the home loan—which is a pretty simple process.
The Closing Disclosure
Much like the loan estimate you got at the beginning, you're going to get what's called a closing disclosure—or a CD. This has to go out a certain amount of time before you can close on your loan. It's going to look very similar to the loan estimate.
The reason for that is some of the older documentation before 2012—such as the good faith estimate, which is what is now called a loan estimate—and the closing disclosure looks nothing alike. It was really hard to compare the two documents to make sure that the fees didn't change.
Now, the closing disclosure looks almost identical to the loan estimate. This makes it really easy to spot any discrepancies.
Getting Your Keys
Next, you're going to need a certified check or a wire transfer for your down payment and closing costs. This number is going to be identified on the closing disclosure, which is why you did it a few days ahead. At the title company, there's a person called the closing officer. They're going to go ahead and review all of your paperwork with you and have you sign it.
There are a handful of things that are pretty important. First is your mortgage note, which includes your actual loan details. It spells out how much you borrowed at what interest rate and how many payments it's going to take to pay off the house. There's an amortization schedule in there that shows how much of your payment went to the principal and how much went to interest each month. This way, you can always track your progress toward paying down the home.
Then there's a deed, which is the ownership tool. You have a loan and then you have ownership. Even though the bank still has a loan, you own the house. A deed is what says you own the house. Finally, you’re going to get your keys.
Becoming A Homeowner
Congratulations! At this point, you're a homeowner. I hope you enjoyed this recap of my homebuyer class, How To Buy A Home. If you have any questions or would like to get the process started, feel free to reach out to me and I’ll be happy to help.
Don’t forget to subscribe to my channel so you never miss a future video. Stay tuned for more information on real estate and living in the beautiful state of Wyoming.
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