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9-step guide to financing your dream home
Updated: May 27, 2020
Dont worry we will be with you the whole way.
Congratulations! You have made the decision to purchase your dream home. If you are among the majority of home-buyers in the United States then you will be obtaining a mortgage to subsidize the cost. This 9-step guide to financing your dream home provides an in-depth look at the mortgage process, from the pre-approval process to the closing. Here is what you need to know about financing your dream home:
Step 1: Prepare a Comprehensive Budget
Although lenders have guidelines in place to assess the amount of money an applicant is qualified to borrower, these guidelines are based on a standardized debt/income ratio and do not take into account discretionary spending. From a lender’s perspective a buyer may qualify to purchase a $350,000 property. However, the buyer may have miscellaneous discretionary expenditures, which are not scrutinized by the lender.
For example: A lender may qualify a borrower for a $280,000 mortgage based on a purchase price of $350,000, with a 20% down payment. At today’s published interest rate of 4.375% (Wellsfargo.com) for a 30-year fixed mortgage, this loan equates to a principal and interest payment of $1,398. To determine whether or not this figure is financially feasible, the borrower must have an accurate financial picture, which is achieved by developing a comprehensive budget. It is critical to include all expenses including often forgotten items such as: grooming, entertainment, maintenance items, and allowables for unexpected expenses.
“While some individuals can live on $30K per year, others cannot live on $300K per year (Brad Tillem, 2017).” One borrower may elect to dine out once a week, while another borrower may elect to dine at a 5-star restaurant three times per week. Similarly, one borrower may be happy buying inexpensive clothing periodically, while another borrower “must have” that pair of Minolo’s. Lifestyle is a key determinate of how much mortgage debt a borrower can afford to acquire.
Step 2: Prepare the Necessary Documents
Now that you are ready to apply for your mortgage, the lender will require documentation for the application process. To get the ball rolling the lender typically requires the following documents:
1. Two years of income tax returns
2. Three months of bank statements
3. One month of paycheck stubs
4. A copy of your driver’s license
Step 3: Shop Around
Not all lenders are created equal. Each offers different products, rates, and closing cost credits. Products vary based on credit score, type of purchase, and geographic location. It is important to find a lender that understands your financial picture and offers a product tailored to your needs. A pre-approval does not always guarantee a loan commitment. It is imperative that the lender has enough experience to steer you in the proper direction. A multitude of options exist including but not limited to: FHA loans, VA loans, conventional loans, hard money loans, & rehab loans. Shop around and make comparisons.
Ask for a written breakdown of rates and fees. Do a side-by-side comparison. Most importantly, ask around for referrals. Ask a qualified real estate professional to refer you to an experienced lender. We deal with them on a daily basis. We can point you in the right direction.
Step 4: Research Financial Assistance Programs
Financing assistance is available. Do your research to find it. As a Texas Realtor, I make it my mission to stay well versed in programs and incentives that can benefit my clients. Programs presently available include:
1. HomeSteps Financing (Sponsored by Freddie Mac)
2. Tax Credits (IRS program)
3. Home Path Financing (Sponsored by Fannie Mae)
4. Texas Assistance and Aid Programs.
Contact us to inquire further about these financing incentive programs.
Step 5: Selecting a Closing Agent
By making the decision to purchase your dream home, you have decided to invest in your future. It is critical to take the necessary steps to secure this investment. Your lender will also require it as a loan condition. You must now enlist the help of a qualified closing agent, whether a real estate attorney or a title company operated under the direction of a real estate attorney. Don’t panic. Both your Realtor and your loan consultant have long standing relationships with multiple title companies and real estate attorneys. I am always happy to provide reputable referrals.
The closing agent wears several hats. They conduct a comprehensive title examination to ensure that the title to your new dream home can be delivered free of encumbrances and defects and then procure a title insurance policy in the buyers name. This title insurance policy also benefits the lender by ensuring that title disputes cannot result in claims against the property. Also, the closing agent will arrange for a boundary survey to be completed. This will ensure that the property is not encroaching on a neighboring parcel and that a neighboring parcel is not encroaching on the buyer’s property.
In addition, the title company acts in an intermediary capacity between the buyer, seller, and lender. Title companies typically have escrow accounts, which they use to disburse funds needed to close a transaction. For example: Three days before closing, a buyer is informed by the closing agent that they will need to wire $10,000 into their escrow account. Let’s say that the figure includes $5,000 toward the down payment and $5,000 toward closing costs. Once received, the closing agent will disburse $5,000 to the lender to be credited toward the buyer’s principal balance. The other $5,000 will be disbursed for closing expenses such as title search, boundary survey, and recording fees and will also be used to satisfy prorated expenses such as property taxes.
Finally, the closing agent is responsible for recording the property deed and returning the original to the new owner of record.
Step 6: The Home Inspection Process
After entering into a purchase agreement. Buyers will need to arrange for a property inspection. The lender requires a four-point inspection which assesses the condition of four key aspects of the property: plumbing, electrical heating and cooling (HVAC), and the roof. The property must pass the four-point inspection for the lender to agree to financing.
In addition, the buyer will want to arrange for a comprehensive inspection along with a wind mitigation inspection to be completed at the same time. The comprehensive inspection will reveal any areas of concern from appliance deficiencies to leaking faucets . The findings provide leverage for the buyer’s agent to request a credit for repairs from the seller. The agreed-upon credit, if any will appear on the closing statement.
The wind mitigation inspection assesses key features that may decrease the amount of damage that a property will sustain during a hurricane or windstorm (Home Buyers, Jan. 27, 2012). The findings can ultimately offer a drastic home insurance premium reduction, which for an average of a $100 fee, this is money well spent. Speak to your real estate professional for an experienced referral.
Step 7: The Appraisal Process
Now that you have selected your lender and found the home of your choice, the lender will arrange for an appraisal valuation to be conducted. This is a pre-paid expense which will be paid prior to closing, typically around $425 but can vary. The appraisal represents a deemed valuation based on a comparison between the subject property and similar properties that have sold within the last three months and is conducted by a certified property appraiser. Then, the lender will require that the appraisal valuation be greater than or equal to the purchase price. Not only does this help to secure the bank’s investment but it also serves as a piece-of-mind guarantee that the buyer is paying fair market value for the property.
What happens when the appraisal comes in lower than the purchase price? The buyer must first notify the seller’s agent in writing and furnish with a copy of the appraisal report. Then, several options exist:
1. Buyer and seller can elect to negotiate a reduced purchase price based on the appraisal valuation.
2. Buyer can agree to put down a larger down payment.
3. If buyer and seller are unable to reach an agreement then the buyer may terminate the purchase agreement and is entitled to a full return of escrowed funds based on the terms set forth in the real estate purchase agreement.
Step 8: A Conditional Approval
Be prepared to address lender conditions. It is almost a certainty that before the lender will authorize a clear-to-close, there will be conditions that the buyer must oblige. These conditions vary by file but can include any of the following: letters of explanation, the most current bank statement, signed disclosures, an agreement to pay off certain debts prior to closing, & evidence of an clear and unencumbered title.
Step 9: The Closing Day
Congratulations on making it to the closing table! Three days before the scheduled closing, buyers are presented with their closing disclosure, which itemizes all fees. Finally, the title company or attorney that is handling the closing will provide buyers with an amount due-to-close. These funds must be wired to the title company’s escrow account prior to signing closing papers. Due to an increase in fraud, cashier’s checks are no longer accepted for these transactions. Once the papers are signed by both buyer and seller, the lender will fund the transaction and the buyer may take possession of their dream home.
Dont worry we will be with you the whole way.