Step One: Defining Your Price Range and Your Preferences:
Before you start driving around looking for yard signs, do some homework to fine-tune your dreams and expectations.
Determining Your Down Payment
When preparing to buy a home, the first thing many Homebuyers do is look at "homes for sale" ads in newspapers, magazines and listings on the internet. Some potential buyers read "how-to" articles like this one. The next thing you should do - before you call on an ad, before you talk to a Realtor, before you shop for interest rates - is look at your savings.
Because determining how much money you have available for down payment and closing costs affects almost every aspect of buying a home - including the loan programs you qualify for, shopping for interest rates, and how you write your purchase offer.
If you only have enough available for a minimum down payment, your choices of loan program will be limited to only a few types of mortgages. If someone is giving you a gift for all or part of the down payment, your options are also limited. If you have enough for the down payment, but need the seller to help with your closing costs, this further limits your options. If you borrow all or a portion of the down payment from your 401K or retirement plan, different loan programs have different rules on how you qualify.
Of course, if you have enough for a large down payment, then you have lots of choices.
Your loan choices include such varied programs as conventional fixed rate loans, adjustable rate mortgages, buydowns, VA, FHA, graduated payment mortgages and all the varieties of each. Our Prudential Premier, REALTORS agent can help you drastically in time and energy by helping you to get the best value while reaching your real estate goals.
Another very important reason you need to have at least some idea of your down payment is for shopping interest rates. Some loan programs charge a slightly higher interest rate for minimal down payments. Plus, the interest rates for different loan programs are not the same. For example, conventional, VA, and FHA all offer fixed rate loans. However, the rates vary from one program to another.
Another reason you need to know about your down payment is because it affects how you write your offer to purchase a home. Not only are you required to put your down payment information in the offer, but different loan programs have different rules which also affect how you write your offer. This is especially important when dealing with FHA and VA loans.
If you are asking the seller to help with closing costs, you have to be certain your loan program allows what you are asking. For smaller down payments, lenders allow the seller to pay less closing costs than for larger down payments. Some loan programs will allow a seller to pay certain types of costs, but not others.
Finally, your down payment also affects your ability to qualify for a loan. When you make a small down payment, lenders are fairly strict about having you conform to their underwriting guidelines. For larger down payments, they will tend to make allowances or exceptions to the rules.
As you can see, the down payment affects every choice you make when you buy a home. Although you should look at ads, familiarize yourself with neighborhoods, learn about prices, and read as much as you can - when you get ready to take action - the first thing you should do is figure out how much money you have available for the purchase.
Sources of Your Down Payment:
When buying a home, it is not enough to just "come up" with the money. With the exception of "no asset verification" loans, lenders want to verify where the money comes from. If you can document the funds come from your personal savings, the lender is more confident of your strength as a borrower.
In addition, if you can verify you have additional assets that are not needed for the down payment, it is important to document those, too. Additional assets are "reserves" you can draw upon during times of trouble, such as unemployment, medical emergencies, and similar occurrences. Additional assets can also help to document that you have a history of saving money, which makes you a more dependable borrower.
It is extremely important to completely document the paper trail of any funds you use for down payment and closing costs. The sections below provide guidance on both verifying assets and documenting them as a source of your down payment:
Checking, Savings, & Money Market Accounts - The quickest and easiest way to document funds in your bank account is to provide your lender with copies of your most recent bank statements. Most lenders request two months bank statements, but some still ask for three. Some lenders still send a "Verification of Deposit" to your bank in order to determine your current bank balances and average balance for the last two months. However, that is the old way of doing business and most lenders nowadays prefer to have bank statements.
If the money you are using for the down payment and closing costs has been in the bank for the entire period covered by the bank statements, you're fine. These are known as "seasoned funds." However, if your statements show any large or unusual deposits the lender will ask you to explain them and document their source.
Stocks, Bonds, Mutual Funds, etc. - Most of those who own stocks get a monthly or quarterly statement from their brokerage. You will need to supply statements for the most recent sixty or ninety days in order to document these assets.
Though it is rare nowadays, some people actually have stock certificates instead of having a brokerage account. When this is the situation, make copies of the certificates and provide those copies to your lender. You might also want to supply tax records to indicate you have owned these stocks for some time.
If part of your down payment will come from the sale of stocks and investments, you will need to keep all documentation that applies to the sale. Provide these copies to your lender as well.
Gifts - Especially when buying a first home, some borrowers need help coming up with the down payment. This help should come in the form of a gift from a close family member. Lenders will require the donors to sign a special form called a "gift letter." The gift letter states the relationship between the parties, the address of the purchased property, the amount of the gift, and sometimes the source of the funds used to make the gift. The gift letter also clearly states that the funds are a gift and not required to be repaid.
With most lenders, the donor will have to also provide evidence that they have the ability to make the gift. This can be in the form of a bank or stock statement to show they have the funds available. You should also make a copy of the check used to make the gift and keep a copy of the deposit receipt when you deposit the gift funds into your bank account or escrow.
401K or Retirement Accounts - It is important to provide documentation about your retirement accounts or 401K programs because this is another asset you could draw upon as reserves in case of a problem. It is also another way to show you have a savings history. Just provide a copy of your most recent statement to your lender.
Many people use these accounts as a source of funds for their down payment, too. Some employers allow you to "cash out" a portion of the 401K and some allow you to borrow against it. Be sure to keep copies of all paperwork involving the transaction. If they cut you a check, be sure to make a photocopy of that, too, including any receipt for deposit into your personal bank account.
If you are borrowing against your 401K, some lenders will count this as an additional debt to go along with car payments, credit cards and other obligations. This may seem kind of silly because you are borrowing your own money, but from the lender's viewpoint it is still a monthly obligation that you must come up with and should be taken into account. If you are "tight" on your debt-to-income ratios in qualifying for a home loan, this could be an important consideration. It may affect whether you choose to cash out the account and pay any tax penalty, or simply borrow against it.
Employers Assistance - Some companies provide down payment assistance for their employees. They may feel that Homeowners are more stable and reliable employees, or that providing down payment assistance fosters an environment of higher morale and loyalty to the firm. Just make copies of all the paperwork, including a copy of the check and the receipt when you deposit the funds into your personal bank account. It is important that these funds do not require repayment.
Savings Bonds - If you have Savings Bonds, they are a financial asset, too. Since you hold the actual bonds in your possession, the easiest and best way to verify them for your mortgage lender is to make photocopies of them. If you choose to cash them in for down payment or closing costs, you should do this at your local bank. Be sure to keep copies of the paperwork the bank provides because that will establish the current value of the bonds and show that you received their cash value.
Personal Property - Cars, Antiques, etc. - Personal property includes automobiles, vehicles, boats, furniture, collections, heirlooms, antiques, art, clothing, and practically everything you own except for real estate. The mortgage application asks you to estimate the value for these items.
The larger the loan amount, the more important it is for you to provide details on your personal property. This is because larger loans usually indicate larger incomes, and lenders check to see if your personal property matches your income. If it does not, this sends a "red flag" to the underwriter and they take a closer look at your application.
You are not required to document the value of personal property unless you intend to sell them to come up with your down payment.
Selling Personal Property - For those Homebuyers who do sell personal property in order to come up with their down payment, the verification process can be arduous. Lenders are much stricter about documenting this method of coming up with your source of funds.
Selling a car is perhaps the easiest to document. First, you need to photocopy the registration that shows you actually own the vehicle. You will have to provide a copy of the page in the "Blue Book" that shows your model and its value. Then you need to photocopy the bill of sale showing the transfer to another individual and a copy of the check used to purchase the vehicle. Do not get paid in cash because that makes it impossible to show you actually received the funds. Make a copy of the receipt when you deposit the funds into the bank.
Other types of personal property are more difficult because you have to show that you actually own the property and that it actually has the value that you sold it for. This is a little harder to do for most assets than it is for automobiles.
If you have records to show you purchased the property, that would be helpful. You could also provide an old inventory that documents ownership. To determine value, you may have to contract with an independent appraiser or a specialist who has the knowledge for that particular type of property.
If you cannot document the item's value, the lender will not view the sale as an acceptable source of funds. Just like selling a car, you have to prove you own the item, make a copy of the bill of sale, copy the check used to purchase the item, and make a copy of your receipt when you deposit the funds into your bank.
As a general rule, your monthly housing cost should not exceed 28 percent of your gross monthly income. If you have outstanding long-term debt (things like car loans, student loans or credit card balances), that monthly debt plus your monthly housing costs shouldn't exceed 36 percent of your monthly gross income.
Ask your Prudential Radford & Associate, REALTORS agent for a Lender Information Worksheet. This worksheet helps you to organize all those details needed for the financing application process. It will also assist you in itemizing your living expenses and income so you may analyze your budget more thoroughly.
Before speaking with a lender, know what monthly dollar amount you feel comfortable committing to. Then when you discuss mortgage pre-approval with your lender, it is easier for you to determine the monthly amount and what value of home the monthly amount translates into. Do not put yourself in the position where you will be paying more each month than you intended simply because the "dream" house requires it.
If you're not sure on the price range, your Prudential Premier, REALTORS agent will give you names of helpful lenders. Preapproval will let you know how much you can afford so that you can look for homes in your price range. Getting pre-approved helps you to alleviate some of the anxieties that come with home buying. You know exactly what you qualify for and at what rate, you know how large your monthly mortgage payments will be, and you know how much you will have for a down payment. Mortgage preapproval is like securing a loan before you find a house, and its real peace of mind to know exactly what you can afford.
Deciding Which Area(s) You Would Like To Live In
Once you know how much you can afford, ask yourself where you want to live and what is the best location for you and/or your family. Things to consider and do:
Step Two: Finding Your New Home:
Now the hunt begins. This task should be easier, and more exhilarating since you've already completed important preliminary steps.
Our Prudential Premier, REALTORS agents will let you know your options as you create and submit an offer.
Understanding Financing Options
The number and variety of financing options can seem overwhelming at first, but most fit in one of these main categories:
Final Details & Closing the Deal
Your Prudential Premier, REALTORS and you will take a final walk-through of the property just before closing to see that everything is as it should be. If there are any problems or unresolved issues, take care of them before closing.
You will then sign the note promising to repay the loan and mortgage, with the house as your security for the note. You will also sign the other papers fulfilling governmental regulations and transaction information.
Tips For Buying a Home:
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