Understand The Closing Process
Understanding The Closing Process
Once your offer on a home has been accepted, your inspections are complete, and your financing is in order, you’ll likely breathe a sigh of relief and get focused on packing for the move.
But before you’re handed the keys to your new home, you’ll need to attend the settlement or closing. The more you understand about the closing process, the easier it should be.
Preparing for Closing
If your team of professionals—particularly a REALTOR® and your lender—have been providing you with good service throughout your home search, you should be well-prepared for settlement.
Essentially, settlement day involves the formal, legal requirement of transferring ownership from the seller to you.
Settlement regulations vary from one jurisdiction to another, but two aspects of the process are usually the same no matter where you buy a home.
Your contract should allow you to schedule a walk-through of the property 24 hours before the closing. At this walk-through, you need to make sure the seller has completely vacated the property (unless you’ve arranged to rent back the property after closing) and the home is in the condition described in the contract. Look to make sure any required repairs have been made and items that are contractually supposed to convey to you are in place. If the walk-through reveals any problems, you can delay the closing or ask for money from the seller to address the issues.
You have the right to receive the HUD-1 settlement statement for review 24 hours before your closing. Compare the HUD-1 statement to the Good Faith Estimate your lender provided to make sure they’re similar and ask your lender to explain any discrepancies between the two documents.
What You Need at the Closing
Throughout the home search, you’ve likely accumulated a lot of paperwork. Bring these documents with you to the closing in case an issue arises and you need to produce one of them—particularly your proof of homeowner’s insurance and your copy of the contract.
Bring your identification and discuss with your lender how you’ll make the down payment and closing costs that aren’t rolled into your loan. You may be able to transfer these funds electronically based on an estimate before the closing, but you could also be required to provide a cashier’s check or certified funds.
You should bring your checkbook, too, for the difference between the estimated balance owed and the final amount.
What Happens at the Closing?
As a buyer, you’ll sign a stack of legal documents including paperwork related to your mortgage and paperwork related to the transfer of ownership of the property. You’ll also pay closing costs and fees and the initially required escrow payments for your homeowner’s insurance and property taxes.
Traditions vary by location, but at closing, there’s usually a representative from a title company or an attorney. In some cases, both the seller and buyer will have an attorney present. Typically your real estate agent will attend your closing and usually the seller’s agent and the seller will attend as well. Some lenders attend the closing, but others simply provide the loan documents to the title company.
When your closing is finished, you should not only have your keys to your new home, but you also need a stack of documents for future tax returns and when/if you eventually sell the property. These documents include your final HUD-1 statement, your Truth-in-Lending statement outlining your mortgage terms, your mortgage note and your deed of trust.
Article originally posted on Realtor.com
Get a Mortgage Pre-Approval
How to get pre-approved for a mortgage
There’s nothing more frustrating than falling in love with a home and then discovering you can’t afford to buy it.
Consulting with a mortgage lender is the first step you should undertake in the home buying process. Almost all first-time buyers need a mortgage to finance their home purchase, so get prepared before you look.
When you’re armed with the knowledge of what you can afford, it focuses your search and allows you to make a move when you find a home you love.
What Is a Mortgage Pre-Approval?
Lenders offer borrowers either a pre-qualification letter or a pre-approval letter, but most REALTORS® recommend you get a pre-approval letter before you start home shopping.
A pre-qualification letter states the amount a lender thinks you’ll be able to borrow based on your income and credit profile without any actual documentation.
However, mortgage lending standards have tightened since the housing crisis, and all mortgage loans now require full documentation and verification of income and assets—so most sellers will only accept an offer from a buyer with a full pre-approval letter based on verified information.
Your home hunt will benefit with a pre-approval for two main reasons:
First, you’ll have completed the credit check and paperwork requirements for a mortgage, so you’ll know your ability to finalize a home purchase. If the lender finds a problem with your credit or an error on your credit report, you’ll have time to fix it before making an offer.
Second, since your documentation will already be in place, a mortgage pre-approval will likely speed up the process once you make an offer.
How to Find a Mortgage Lender
To help you land your dream home, try a pre-approval service like the one featured on the realtor.com® individual listings pages. By checking the box that says, “I want to get pre-approved by a lender”, you’ll be connected with up to three lenders right away.
A REALTOR® should also be able to recommend a lender or two for you to interview. You can check for a loan officer’s license and read reviews online to be sure you’re working with someone reliable.
As a first-time buyer, you should call a few lenders to find someone experienced with first-time buyer needs who can possibly help you identify special loan programs in your area.
What to Expect From Your Mortgage Lender
The best lenders take a collaborative approach with borrowers and explain all your loan options. When your lender checks your credit report, they should give you feedback on how to improve your credit profile.
They should also offer recommendations on how to handle your money between the time you apply for a loan and settlement day.
Your mortgage lender should provide advice about when to lock in your loan rate and discuss the pros and cons of various loan programs.
What Your Mortgage Lender Expects From You
Your lender needs you to be honest about your finances and responsive to all requests for additional information, no matter how unimportant it may seem to you. The more cooperative you are with a lender, the easier the loan process will be.
You should be prepared with tax returns, W2s, bank statements, employer names and addresses, and your current landlord’s information.
Your lender will generate a mortgage approval based on your debt-to-income ratio and credit score, but you should also consider your budget and your own comfort level with the payment amount.
There’s no need to borrow the maximum amount you qualify for, particularly if you know you plan to spend money on items that don’t show up on your credit report. Your careful planning and preservation of your emergency fund are important for responsible, long-term home ownership.
Article posted originally on Realtor.com
http://www.realtor.com/advice/finance/get-a-mortgage-preapproval/
Your Mortgage Payment Explained
Your Mortgage Explained
As a renter you are used to sending your landlord a monthly payment, which sometimes even includes your utility payments. Once you become a homeowner, your monthly mortgage payment becomes more complicated.
Unless you are paying cash for your home, you will have a mortgage payment. There are typically four parts to this monthly mortgage payment, often referred to as PITI:
Principal: This is the portion of your payment that goes to pay down the balance that you borrowed. If you opt for a fixed-rate loan, your monthly payment will not change over the loan term, but the makeup of your payment will change. In the early years of your loan, you mostly pay interest, but gradually you will begin to pay more of the principal. For example, in the first month of a 30-year fixed-rate loan of $200,000 at 4.5%, your payment will be $1,014 with $264 toward principal and $750 toward interest. In 20 years, the payment will still be $1,014 each month—but the payment will be shifted to $647 toward principal and $367 toward interest.
Interest: The interest you pay is the cost of borrowing money.
Taxes: Your lender usually requires an escrow account and will collect one-twelfth of your annual property tax bill in this account with each mortgage payment.
Insurance: You will pay one year of homeowners’ insurance premiums at your home settlement as part of your closing costs, and then your lender will collect one-twelfth of your annual insurance premium in this account with each mortgage payment. While most lenders require you to pay your homeowners’ insurance this way, some offer you the option to pay the insurance company directly rather than include it in your monthly bill.
If you make a down payment of less than 20%, your mortgage payment may also include mortgage insurance, a fee you pay that protects your lender in case you default on the loan.
While there are sometimes exceptions to the rule, lenders generally require your house payment to be 31% or less than your gross monthly income. So when you are calculating how much you can afford to spend on a home, you should keep that figure in mind.
Other Housing Expenses
If you buy a condominium or a home within a homeowners association (HOA), you will also need to pay association dues. These dues are not part of your mortgage payment but will be considered as part of your debt-to-income ratio. Condo fees are usually collected monthly, and HOA fees can be collected monthly, quarterly or annually.
When you are making up a housing budget, you also need to estimate your utility costs—which you will pay separately from your mortgage. You can ask the sellers of a home you’re interested in for their average utility bills. Don’t forget you may need to pay not only gas and electric bills but also a water bill and possibly a trash removal fee.
As a renter, you’ve been able to call your landlord when an appliance breaks or you have a plumbing leak, but as a homeowner these problems will become yours. You need to budget for maintenance and repairs, but it can be difficult to predict what issues will arise in any particular year.
It also depends on the age and condition of your home. A home inspector can give you an idea of when you might need to replace particular appliances, but you can also keep about 1% of your home value available for emergency home repairs.
Budgeting for homeownership is a key element to maintaining your ability to keep your home and to help it hold onto its value. Making your monthly house payment is the biggest part of the financial commitment—but certainly not the only one.
Article originally posted on Realtor.com
http://www.realtor.com/advice/finance/your-mortgage-payment-explained/
What Home Buyers Need To Know About Insurance
What do Home Buyers Need to Know About Insurance
No sensible car owner would drive without insurance, so it figures that no homeowner should be without insurance, either. The essential idea behind various forms of real estate insurance is to protect owners in the event of catastrophe. If something goes wrong, insurance can be the bargain of a lifetime.
What Kind of Insurance and How Much?
There are various forms of insurance associated with homeownership, including these major types:
Title Insurance: Purchased with a one-time fee at closing, title insurance protects owners in the event the title to the property is found to be invalid. Coverage includes “lenders” policies, which protect buyers up to the mortgage value of the property, and “owners” coverage, which protects owners up to the purchase price. In other words, owners coverage protects both the mortgage amount and the value of the down payment.
Homeowners insurance: This insurance provides fire, theft and liability coverage. Homeowners policies are required by lenders and often cover a surprising number of items, including in some cases such property as wedding rings, furniture and home office equipment.
Flood insurance: Generally required in high-risk, flood-prone areas, this insurance is issued by the federal government and provides as much as $250,000 in coverage for a single-family home, plus $100,000 for contents. Local REALTORS® can explain which locations require such coverage.
Home warranties: With new homes, buyers want assurance that if something goes wrong after completion, the builder will be there to make repairs. But what if the builder refuses to do the work or goes out of business? Home warranties bought from third parties by home builders are generally designed to provide several forms of protection: workmanship for the first year, mechanical problems such as plumbing and wiring for the first two years, and structural defects for up to 10 years. Home warranties for existing homes are typically one-year service agreements purchased by sellers. In the event of a covered defect or breakdown, the warranty firm will step in and make the repair or cover its cost. Insurance policies and warranties have limitations and individual programs have different levels of coverage, deductibles and costs. For details, speak with a REALTOR®, insurance brokers and home builders.
When Do You Get Insurance?
The time to obtain insurance and warranty coverage is at closing, so speak with a REALTOR® or insurance broker prior to closing. Be sure to ask about limitations, costs, deductibles and “endorsements” (additional forms of coverage that may be available).
Originally posted on a Realtor.com article
http://www.realtor.com/advice/home-ownership-and-insurance/
Smart Financial Planning Must Come Before Home Ownership
Smart Financial Planning Must Come Before Homeownership
Whether you’ve got house envy about your best friend’s new place or just want to start building equity instead of renting, the first time you think about becoming a homeowner is the moment you should start financial planning.
While it may be tempting to begin looking at homes for sale, you need to be financially prepared so you don’t fall into the trap of identifying your perfect home—and then realizing you can’t afford to buy it.
Casual visits to open houses or random Internet searches are fine to see what homes cost where you want to live, but you will need to start working on your finances, too.
The most important elements of the financial planning you need to put in place before buying a home are developing a budget and starting to save.
Financial Planning for Homeownership
When you are ready to consult a lender to find out if you can be approved for a loan, the lender will base a decision on your credit profile, income, assets, job history and debt-to-income ratio.
Your debt-to-income ratio for the lender’s purposes is based on the minimum monthly payment for all of your credit card debt, student loans, car loans and personal loans—compared to your gross monthly income. In many cases the amount a lender will say you can borrow is higher than you may feel comfortable borrowing.
It’s crucial you decide what you think you can afford for your monthly payment and work with that number when you begin searching for a home.
Your comfort level should take into consideration other financial goals you have—saving for child-raising expenses, college tuition, retirement and even things like vacations, skiing or golf. Most of those expenses won’t be part of your lender’s calculation of what you can afford to spend on a housing payment.
Most lenders allow a maximum overall debt-to-income ratio of 43%, and some allow only a 41% ratio. The housing payment portion of your income should be a maximum of 31%, so if your annual income is $60,000 and your monthly gross income is $5,000, then your housing payment should be $1,550 or less.
Housing Payment
Homeowners have extra expenses renters don’t, such as property taxes and homeowners insurance. Your mortgage payment will include those costs as well as the principal and interest on your loan. You may also pay mortgage insurance if you make a down payment of less than 20%.
If you live in a condo or a community with a homeowners association (HOA), you will pay condo or HOA fees separately.
You should also budget for maintenance and repairs on your home, at least 1% of the home value.
Before you become a homeowner, you should create a budget based on your current finances and consider how you can adjust that budget to accommodate extra savings to allow you to buy a home and to afford potentially higher housing payments.
Saving Strategies
There are countless resources for living frugally and finding ways to save on everyday expenses such as your cable bill and groceries, but in order to save for a home you will need discipline to set aside money for the future.
Here are some ways to do that:
Create a special savings account for your home purchase and have part of every paycheck automatically transferred to that account. Start with as little as $100 if you can afford it so you get used to living on less and then gradually increase the amount.
Consider saving the difference between your rent and anticipated housing payment. This increase your savings, and you’ll also show a lender an established savings pattern and the ability to afford the housing payment.
Work extra hours or take on a second job temporarily to increase your income. Even something simple like walking dogs each evening or babysitting can help your savings accumulate more quickly.
If you get a bonus, a tax refund or a cash gift, deposit it into your home-buying account.
The simple process of creating a financial plan should be the beginning of a long-term plan to buy a house—and to keep it.
Article originally posted on Realtor.com
http://www.realtor.com/advice/smart-financial-planning-before-homeownership/