Home Buyer’s Survival Guide
The nuts and bolts of what you need to know when buying a home.
Let’s Get our Home Buying Bearings
Buying a home can make you feel like you are stepping into a foreign country. The lingo sounds strange and maybe you have a translator close by but you’re not entirely sure they aren’t trying to take advantage of you somehow. Perhaps the translator is a relative who has been in the country once or twice before and you’re not sure their directions are gonna get you to the right destination or not.
This guide will help you understand the process and give you the compass you need to know in order to navigate through your options and come out ahead. The right knowledge can save you a lot of money when it comes to buying a home. I’m an insider but I want you to know the secrets to buying a home like a experienced champ!
What can be done and what can’t be done?
What kind of credit score do you need?
How much can you be pre-approved for? How is that even calculated?
What perks do I have as a first time home buyer?
How does the loan process work?
We will answer these questions and more. This guide is meant to be a quick reference, it’s not a college course on real estate. It’s the nuts and bolts of what you need to know when buying a home.
Every realtor and every seller wants you to be pre-approved for financing if you aren’t buying with cash. So let’s look at loan program options first, but we need to define a few terms so you can understand the programs better.
Mortgage insurance is something you will have if you’re not putting down 20%. You sometimes pay it upfront and sometimes its monthly or sometimes you pay both an upfront fee and a monthly fee. The upfront fee is financed into the loan though.
There are 3 credit bureaus lenders look at, they go off of the middle score of the three when determining rate and eligibility, not an average.
If you are self employed your income needs to be reviewed, you can’t go off your gross income but if you are not self employed lenders use your income before taxes (gross).
Every loan has closing costs, you can either pay these yourself or ask your seller to pay all or a portion of them. Closing costs include but are not limited to title charges, taxes, underwriting fees, survey, inspections, appraisal (determines value), and homeowners insurance.
Loan Program Options
USDA $0 Down: If you do not currently own a home, you can possibly buy with no money down! This program does have income and geographic limitations though. You cannot have more than one USDA loan.
- 620 minimum credit score, a 640 or higher gives us more flexibility with debt to income ratios
- 6% max seller concessions for closing costs
- Loan amount can go up to appraised value! (good for covering closing costs if sales price is less)
- Check the eligibility of a property on Google by typing “USDA eligibility”
- Monthly mortgage insurance is .35%, and decreases yearly based on principal owed, this is a very attractive aspect of the program. Up-front funding fee is 1%
- Household income limit of $78,200 for a household of 4, $103,200 for a household of 5 or more, certain deductions apply if your income is close to the max, income limits are dictated by the county or city you live in and could be less or more.
- When the lender is done with their job the file has to go the USDA for approval, this can take around a week, the USDA hotline for current Florida turn times is 352-338-3421
FHA 3.5% down or more: Common program used for first time home buyers that does not have geographic limitation like USDA. It’s also a common program for second and subsequent time home buyers who don’t want to make a large down payment. You cannot have more than one FHA loan.
- 600 minimum credit score,
- 6% max seller concessions for closing costs
- Can’t finance repairs unless you do a 203k rehab loan, escrow holdback allowed up to 5k for repairs.
- Monthly mortgage insurance at .85%, upfront funding fee is 1.75% which is financed into the loan
- No geographic limitations
- Manufactured homes can be financed using the FHA program back to 1976, Tie downs need to be up to code, an engineer will check these for both FHA and conv deals.
- There are max loan amounts, for example Marion County FL has a limit of $294,515 for single family home, this changes county by county.
Conventional: Good program for buyers with a little extra cash and or higher credit scores.
- 620 minimum credit score
- 5% min down payment,private mortgage insurance (PMI) is based on credit score and down payment size, no pmi at 20% down, 3% down available for first time home buyers.
- 75% LTV and lower = 9% allowable Seller’s concession
- 75.01 – 90% LTV = 6% allowable Seller’s concession
- 90.01 LTV and higher = 3% allowable Seller’s concession
- Investment properties max is 2%, 20% down payment required, better rate with 25%
- 2nd homes need a 10% down payment
- Manufactured homes can be financed using conventional financing
- $453,100 max loan amount, any over is a Jumbo loan.
VA: Awesome program for veterans that can continue to be used to buy with no money down, and in some cases a Veteran can have 2 VA loans.
- 620 minimum credit score
- All closing costs can be paid by the seller within certain parameters, call for details
- No monthly mortgage insurance
- No geographic limitations
- Vet must obtain a certificate of eligibility, a lender can help with this, it can be ordered with a copy of a DD-214.
What Does a Lender Look at When You Apply?
Your credit is crucial, oftentimes people who are on the border of their credit being acceptable or not can depend on the balances of their credit cards, a good mortgage originator can help you determine whether or not you just need to pay a card down or two in order to have a score that’s good enough for a particular loan program.
In some cases collections are okay so don’t sweat that too much. Short sales, foreclosures, and bankruptcies have seasoning requirements so call a lender on that. Some lenders have overlays on this so not everyone treats them the same.
You have two debt ratios, a front end debt ratio and a back end debt ratio. The front end ratio is the percentage of what your proposed home payment would be versus your gross income. Your back end debt ratio includes all other debt that is being reflected on your credit report.
Your max debt ratio depends on your credit score, work history and the loan program you are using.
They range from a max of a 29% front end ratio to 40% in some cases.
That means that if you make $5000 a month your max home payment would be $1,450 if your max was 29%. That payment would include your taxes, insurance, any mortgage insurance and homeowners association dues.
Typical max back end ratios range from 43% to 56%. So your max total debt for your house, your car, and your minimum credit card payments would be $2,800 a month if your max was 56%.
For student loans be careful! Even though you may be on an income based repayment plan some loan programs require lenders to use 1% of the total owed for a monthly payment even though you aren’t required to pay that much.
For work history a borrower typically needs 2 years of history. The same line of work is preferred but if a borrower doesn’t have serious gap of employment a line of work change is okay.
If you have just graduated and are now working in a field related to your degree then the 2 years of work history requirement is waived.
If you have been out of work for 2 months then you typically need to be back at work for 2 months before you could be approved for a loan.
Maternity leave and other extenuating reason for leave are not an issue.
There is more to the story as thee lending business is very nuanced but this gives you an idea! Ultimately you need the advice of a good mortgage originator. Key word, “Good”.
List of Documents to Gather Up!
- 2 years of tax returns, w-2’s, and 1099’s
- 1 month of pay stubs
- 2 months of bank statements
- If you own other property, mortgage statements and homeowners declaration pages
- Be prepared to write letters explaining derogatory credit for some loan types
What are the Different Types of Lenders?
This is where I’m biased, I’ve been a mortgage broker, but now I’m a mortgage banker. A mortgage broker has multiple lenders they work with and so they do not have dedicated underwriters, or dedicated closing staff. I’ve found that mortgage banking is the better route to go. We have dedicated underwriters who are accountable to management for how they perform. Denials have to go through multiple channels of review before they can actually say no to a loan.
We have a dedicated closing department and relationships with the corporate staff on multiple levels. It simply allows for a smoother process when buying or refinancing a home.
We are a mortgage bank, that’s all we do is mortgages, we are not a repository. My experience over the years is that the big repository banks like Wells, Chase, and BofA are slow and cumbersome, and not as supportive when it comes to making sure your loan closes. The same goes with operations like Quicken or Rocket Mortgage. I’m always doing deals for people frustrated with these operations. They also don’t have all the loan options a good mortgage bank does. Credit Unions can be limiting as well.
Our bank does billions in loan volume but that’s still small enough for us to be nimble and customer service oriented. My cell phone is available for all of my clients. Additionally if there is something we can’t do then we have the ability to broker, but I can tell you this is rare.
Wait a Second, I’m a First Time Home Buyer!
The best first time home buyer program we like to help people utilize the MCC tax certificate program for Florida.
In a nutshell this program lets you get up to $2,000 back on your taxes every year that you file following the purchase of your first home! Over time this can be a huge benefit for first time home buyers! It’s a fully refundable tax credit. You must have a current tax liability though, so if you are on disability and not paying taxes then you couldn’t utilize the program.
You are considered a first time home buyer if you have not owned property in the last 3 years.
The program does have income restrictions similar to USDA income limits, they change from county to county so reach out to us to help figure out whether you can use it! You just have to do a short first time home buying class online! It’s well worth the time!
Time to Start Shopping!
Okay so you have applied, you know which loan program you want to go with, you have been pre-approved, now it’s time to start shopping.
Most of the time you need to find a buyers real estate agent! I have a network of agents I work with but if you know an agent that’s great! Give them a try! Connect them with your lender though, whoever it is. A buyers agent gets paid from the sale of a transaction so you are not coming out of pocket for their service. The seller of the home has a percentage built in for real estate agents, usually 3% for the listing agent and 3% for the buyers agent. If you use the listing agent they get paid more, in this case their job is then to represent you and the seller, which can raise issues but it certainly happens.
A buyer’s agent will begin sending you properties to review online that meets your needs! They can then schedule times to view homes.
You can also buy a home that’s for sale by owner, and we can help facilitate that transaction, and or a title company can help as well.
Remember that if you want to buy with no money down going with USDA then you need to make sure the property is in a USDA eligible area. Your agent should be able to help you with this or you can look it up yourself by googling USDA eligibility and typing in the address.
You Have Found a Home!
So it’s time to put an offer in on a property that has caught your eye! It’s at this point that you need to decide whether you will ask the seller to pay closing costs or not. Remember that if you are doing that then what the seller gets is the net after their concession for your closing costs, not the offer price you are giving. So let’s say the property is listed for $200,000, if you give a full price offer at $200,000 but you want $4,000 to go towards your closing costs then the seller is actually getting $196,000.
The seller accepts your offer! Now you need to make an earnest deposit with the title company. This amount can vary but is usually between $500 and $2000. This money is held at the title company and will eventually go towards your closing costs and or down payment. If the seller is paying all of your closing costs and you are buying with a $0 down program its possible you might get some or all of this money back at closing.
Time for a home inspection. Lenders usually don’t require full home inspections but they are never a bad idea! If you are using USDA financing and the property has a well then a bacteria water test is required. If you are using VA financing a lead and bacteria test would be required.
You have a period in the beginning of your contract to uncover any potential issues via inspection of the home that allows you to back out of the contract and get your earnest money back so it’s important to be timely with inspections.
The Loan Process
Now as soon as you got under contract, within a day or two of the lender receiving the contract they should be disclosing the loan to you. You signing the disclosures either electronically or in person allows them to get the file into underwriting and begin verifying income and work history from your employer. Some lenders will actually do this process as you shop! Taking you completely though underwriting process before you even find a home! Honestly we love doing loans this way and it makes for a very smooth transaction and it can strengthen your offers because we let the sellers and realtors know you are completely through the underwriting process! We call this our Almost Home Program.
The lender should have already requested documents for your file once you were pre-qualified but at this point they would ask for any updated items needed to submit the file into underwriting if they haven’t already.
Once the file has been disclosed and the home has been inspected we can order the appraisal. We like to coincide the appraisal inspection date a couple of days after any full home inspection. This gives us a chance to cancel the appraisal if a detrimental issue arises.
Appraisals are now ordered through appraisal management companies (AMC’s), you or the lender can not choose who the appraiser is, they are chosen from pool of appraisers within the AMC the lender uses. This has increased the cost of appraisals but it has also improved accountability when it comes to home valuations.
The appraisal determines the value of the home through comparable sales and listings. You can only finance the sales price if the home appraises for that amount. The appraisal is typically the one charge the lender requires that you have to pay before closing and ranges between $400 and $500 depending on the type of property and the loan program.
Once the file has been reviewed by the underwriter you should receive an approval if the loan originator did a good job pre-qualifying you. The underwriter is like ultimate detective of the file, making sure that the file falls within the loan program parameters. If there were some issues hidden to you or the originator, it’s possible to get a denial or a suspense. Most of the time a file is suspended if a major issues arises, this gives you the chance to satisfy the suspending condition before a denial.
A loan approval typically always has conditions that need to cleared in underwriting. This is very normal, conditions are usually simple items the underwriter sees that are needed in order to satisfy the banks documentation guidelines. Documentation requirements are significantly stricter since the mortgage meltdown in 2008, so be prepared to be patient and detailed when it comes to documentation. Every loan and borrower is different, so some wind up being easy to document and some are more cumbersome.
-Preparing For Closing
Once the appraisal has been received and reviewed and the value is good, and once your loan approval conditions have been cleared the file can go to the closing department.
At this point lenders usually require that you have an insurance policy bound for the date of the projected closing. You can shop this yourself or ask for help from your lender. The survey should be completed as well. Some lenders like to order this and sometimes title companies order them. The cost is usually figured into your final cash to close.
The closing department then sends a package to the title company and works with them to reconcile the exact closing figures depending on the day of closing. A document called the closing disclosure (CD) needs to be signed by you the buyer 4 working days prior to closing. So sometimes the CD is sent before your file is officially cleared to close in underwriting, that way closing isn’t held up just waiting the 4 days until you can close when everything else has been done. This process typically takes 20-30 days. Sometimes sooner if you went through underwriting before you got under contract like with our Almost Home Program.
Things to Keep in Mind During the Loan Process
- Don’t obtain new debt during the loan process!
- Don’t quit your job!
- If you get a gift for closing costs or down payment, it needs to be documented and tracked!
- Cash on hand is not acceptable for down payment or closing costs!
- All pages of bank statements must be provided, so if it says page 1 of 8, provide page 8! Even if its blank! The underwriter doesn’t know its blank.
- Be open about everything you can think of with your mortgage originator, the land mines will be found! You want them found sooner rather than later so they can be dealt with. Example: back taxes, child support, alimony, foreclosures, bankruptcies, cash to close issues.
You’re At the Closing Table!
Nothing you have signed so far actually obligates you to buy the house, but now it’s time for the rubber to meet the road!
The title company will have a pile of documents for you to sign, most of which you should be pretty familiar with because they should be relatively similar the initial disclosure package you signed to get your file into underwriting. Your rate and APR will be there, attestations that the home you are buying will be your primary residence, attestations that if the property winds up becoming a flood zone you will have to buy flood insurance, (this one always confuses people if they haven’t seen it).
If you need any cash to close then on this day you would be bringing either a cashiers check or you would have wired money to the title company. You usually find out the exact amount of money you need for cash to close a couple days before closing, sometimes more and sometimes less depending on if closing is a rush or if the loan was processed well in advance of the closing date.
Stretch your wrist and get ready to sign, sign, sign. Funding from the lender should take place relatively quick after all the docs have been signed. Then the keys are yours! Congratulations!!
Your first payment should be due anywhere from 30-60 days from closing.
Key Terms to Understand
- APR is the cost of money shown in percentage form, so your rate could be 5% but because of closing costs your APR is 5.4%. This could include a government funding fee, underwriting charges, or cost for rate.
- Discount fee for rate- Sometimes you may want a lower rate, you can always get a lower rate but sometimes it costs! Sometimes your score may be so low that the lender has to charge for rate.
- WDO- this is a wood decomposing organism report, a licensed inspector can determine if there is wood rot from termites or fungus. This report may be required if the appraiser makes a notation, it’s always required for VA loans.
- Survey- a survey will be required and it determines whether or not there are any encroachments on the property
- Title Work- oftentimes you will hear that title has been ordered, this verifies the chain of ownership, determines if there are any liens that need to be satisfied in order to sell the property and title insurance ensures that no one can lay claim ownership of the property other than you.
- Rate Locks- your rate is considered to be floating until it is locked, this can be done after initial disclosure or even a week before closing, typical lock periods are for 15, 30, 45, or 60 days. If you need an extension it can cost you a small percentage depending on how many or how long. The market goes up and down and the advice of a licensed mortgage originator is needed to quote rate.