Buyer Information
Understanding the Home Buying Process
BUYING A HOUSE
· The single most important transaction of your life!
· Should you buy a home or continue to rent?
· Advantages of owning a home:
-It’s your castle.
-Your housing costs stay somewhat steady.
-It’s an investment.
-You enjoy the tax benefits.
YOUR FIRST STEP-
GETTING PRE-QUALIFIED
· Based upon your current income, debt and savings.
· Gives you an estimate of the monthly house payment you can afford.
· Takes only minutes to complete over the phone.
· Use our online pre-qualification worksheet.
PITI is a term used in the lending industry that refers to the four components of the monthly mortgage payment:
1. PRINCIPAL- the portion of the payment that is used to reduce the loan balance.
2. INTEREST – the portion of the payment that is used to pay interest that is due.
3. TAXES – one-twelfth of the annual property tax bill.
4. INSURANCE – one-twelfth of the annual mortgage insurance and property hazard insurance bills.
The amount that is paid monthly for taxes and insurance is usually put into what is called an escrow account.
DEBT RATIOS
· Lenders use calculations, or ratios, to determine the level of housing and overall debt which can realistically be carried by the borrower.
· Debt ratios are calculated from the gross monthly income and monthly debt figures.
· Borrowers can generally afford to spend no more than 29% of their gross monthly income for housing debt and 41% for overall debt.
HOUSING AND DEBT RATIO WORKSHEET
To determine the amount you qualify for, we will use the Housing and Debt Ratio Worksheet beginning on Page 4. We will look at:
§ Gross Monthly Income
§ Net Income
§ Monthly Installment Debt
§ Revolving Debt
§ Housing Debt Ratio
§ Total Debt Ratio
A PRACTICLE EXAMPLE:
In this example we will assume the following:
· GROSS MONTHLY INCOME- use $1,900 and $1,100 for a total of $3,000
· MONTHLY INSTALLMENT & REVOLVING DEBT (A)- use $250 monthly car payment
· A CONVENTIONAL LOAN IS THE TYPE OF LOAN QUALIFYING FOR
1. To determine the Estimated Monthly Housing Expense (B) you qualify for, take the Mortgage Payment Test:
Multiply the Total Gross Monthly Income by the applicable factor for your loan type:
$3,000 x 29% = $870 Estimated Monthly Housing Expense (B)
======================
2. To determine the amount of your Estimated Total Monthly Expenses (C) allowed, take the Total Debt Test:
Multiply the Total Gross Monthly Income by the applicable factor for your loan type:
$3,000 x 41%= $1,230 Estimated Total Monthly Expenses (C)
=======================
3. To determine how much income you have available for your Monthly Housing Expense, take the Available Income Test:
Take the Estimated Total Monthly Expenses (C) and subtract the Total Monthly Installment & Revolving Debt (A):
$1,230 (C) - $250 (A) = $980 (D) Available Housing Income
The amount you can afford to spend on PITI is the smaller of B or D. In this case, it would be B for $870. $870 is the available Monthly Housing Expense.
Use the Principle and Interest Factors chart to calculate your monthly principle and interest payment.
For a 30 year fixed-rate loan at 7.50% and a mortgage amount of $90,000, here’s how you calculate the monthly principal and interest payment:
· Find 7.50% Interest Rate and follow it across to 30 years.
· The Factor is 6.9922.
· Multiply 90 (since these factors are based on 1,000) x 6.9922 = $629.30 monthly principal and interest payment.
==========================================
HOW MUCH CAN YOU AFFORD?
The chart How Much Can You Afford? on page 8 can be used to find out how much of a mortgage you will qualify for based upon your monthly income and the current interest rates being quoted for a 30-year fixed-rate mortgage. These figures do not take into account existing debt, which could reduce the loan amount.
============================================
CONSIDER THE UP-FRONT COSTS
· Down payment-as little as 3%-6%
· Mortgage Insurance-
a. If you put less than a 20% down payment on a conventional loan, you may be required to get private mortgage insurance (PMI).
b. If you obtain an FHA loan, you will be required to pay a one-time up-front mortgage insurance premium (MIP) as well as monthly mortgage insurance. If you buy a condominium, the up-front MIP does not apply; however, you will still pay monthly mortgage insurance.
· Closing Costs-
a. Fees associated with making the loan- Origination, Points, Credit Report, Appraisal, Underwriting, etc.
b. Title Company costs- Title search, title insurance, recording fees, etc.
· Prepaid Expenses-Daily interest on the loan, one year’s hazard insurance premium, and escrows for property taxes, hazard insurance and mortgage insurance.
· Sources for Down payment and Closing Costs:
-Shared Draft or Checking Accounts
-Savings Accounts
-Stocks, Bonds, etc.
-Roth IRA
-Cash Value of Life Insurance Policy
-Retirement Accounts-401(k)
-Gift from Family Member
-Unsecured Loan or Loan Secured by Own Assets
-Down Payment Assistance Programs
YOUR NEXT STEP-
THE PRE-APPROVAL PROCESS
CHOOSING A MORTGAGE
· Fixed Rate verses Adjustable Rate
· Conventional Fixed Rate 15- and 30- Year
· Conventional 1-,3-,5-,7-, and 10-Year ARM
· Conventional 7-Year Balloon
· Conventional Jumbo Loan
· FHA Fixed-Rate Loan
· FHA One-Year ARM
· VA Fixed-Rate Loan
· State Housing Finance Programs
THE LOAN APPLICATION
· Applications can be taken in person, over the phone or by using our Online Application.
· You will need to provide information and documentation for the past two years on your residence, income, assets, creditors, and any adverse credit.
· Review the checklist of items needed.
· Bring your checkbook for the credit report and appraisal fees-approximately $350.
· Good Faith Estimate-outlines all of the costs associated with the loan and is ONLY AN ESTIMATE. It includes:
-Down Payment Amount
-Loan Fees
-Title Company Fees
-Seller Contributions
-Prepaid Interest
-Escrows
-Estimated Monthly Mortgage Payment
· Truth-in-Lending Disclosure- it indicates:
-The annual percentage rate.
-The finance charge.
-The total amount you will pay in principal and finance charges over the life of the loan.
-The number of payments you will make.
-The amount of each payment and when it is due.
-Any late payment charges that may apply.
· Income
-Two years of employment history on a job is usually required.
-Income must be stable and sufficient to support the proposed loan payment as well as other monthly obligations.
-Consider the ratios for Monthly Housing Expense and Total Monthly Expense (29% and 41%)
-Include part-time income, retirement income, social security income, alimony and child support, interest and dividend income, and rental income.
· Credit History
-A Credit Report will be obtained.
-The amount and quality of our credit is considered.
-Adverse credit needs to be addressed.
-Inquiries need to be addressed.
-Collections and judgments need to be cleared.
-Bankruptcies need to be addressed.
· Alternative Credit- If you do not have any credit, we can use documentation such as paid utility bills and rent payments to show you have a history of meeting financial obligations on time.
· Asset Verification
-Earnest Money
-Checking and Savings Account
-Stocks and Bonds
-Borrowed Funds (secured by a real asset)
-Equity from Existing Home
-Sale of a Real Asset (must be verifiable)
-Gift Funds
· Pre-Approval Commitment Letter- Once your loan has run through Charter Funding’s underwriting system and the documentation has been verified, you will receive a Pre-Approval Commitment Letter that outlines:
-Maximum Loan Amount
-Term of Loan
-Maximum Interest Rate
-Type of Loan
-Maximum Sales Price
-Estimated Monthly Payment
-Commitment Date and Expiration Date
Your Next Step-
Shopping for Your Dream Home
· Working with a Real Estate Agent
-Work with a “buyers” real estate agent.
-Find someone who knows the area you are interested in.
· Deciding to Buy
-Look at a wide range of homes before making a decision to buy.
-Don’t buy too quickly.
-Do your homework.
-Think about your purchase carefully. It is the single most important transaction of your life!
· Offer to Purchase
-Meet with your real estate agent and complete the Offer to Purchase together.
-You may want to consult an attorney.
-Obtain a copy of your state’s form from the real estate agent and look it over carefully. Have either the real estate agent or an attorney explain every item thoroughly so that you understand exactly what you are committing to before you actually write an offer.
· Making the Offer
It’s rare to offer the seller’s asking price. Here are some factors to consider:
-How much can you afford?
-How much money do you have to spend?
-How badly do you want the house?
-How many other buyers are interested?
-How motivated is the seller?
-How much work might be needed on the house?
-How does the property compare with similar properties?
· Contingencies
Contingencies are conditions that must be satisfied or you will not be required to go through with the purchase after your offer is accepted. Common contingencies include:
-Ability to obtain satisfactory mortgage financing.
-Getting a satisfactory home inspection within a specified period of time.
-Obtaining satisfactory well and septic tests.
-Requiring evidence that the property meets building and safety code requirements.
-Obtaining an appraisal with a value not less than the offered price.
· Earnest Money
When you submit an offer, you will be required to make a deposit called “earnest money.” This is given as a show of good faith on your part that you are sincere about your offer.
· Counteroffers
-Once you make an offer, the seller has the option to accept it as is, reject it, or make a counteroffer.
- If you receive a counteroffer, you have the option of accepting or rejecting it, or making another counteroffer.
- This is the negotiation process that leads to a final offer that both parties agree upon.
· The Home Inspection
- A home inspection is not a property appraisal.
- A home inspection is an examination of a property to determine the condition of the structural and mechanical systems.
- A home inspection should be completed be a professional home inspector.
- A professional home inspection usually takes two to three hours.
- A home inspection is money well spent.
· The Appraisal
- The maximum loan amount is determined by the lesser of the sales price of the appraised value.
- An appraisal is an estimate of value that is prepared by a professional appraiser.
- Upon receipt of an acceptable appraisal, the loan file is given a final review and final approval and the loan is ready for closing.
The Final Step-
THE CLOSING
· Closing is the final step in the home buying process!!!
- You settle all the financial details associated with the purchase and receive title to your new home.
- The closing officer will make sure that all the necessary documents are signed and verified, and that the money from the sale is properly distributed.
· What Buyers should bring to the Closing:
- Binder for Hazard Insurance and Paid Receipt-
Before closing, the buyer must purchase hazard insurance for the fist year. The amount of coverage must be for at least the mortgage amount.
- Certified or Cashier’s Check-
You will need a certified or cashier’s check for your down payment and closing costs. Contact the title company the day before the closing to obtain the exact amount.
· The Deed
- This is the legal document that transfers ownership of the property from the seller to the buyer.
- The deed is prepared in advance of the closing and should be reviewed by your attorney (if applicable) and the title insurance company.
- Any mistakes on the deed could affect your ownership of the property and, therefore, must be identified and corrected before you close on the purchase transaction.
· Title Insurance
- Title insurance protects your legal ownership of the property you buy.
- The title company will conduct a thorough search of public records to determine the exceptions to coverage, such as any liens or restrictions that affect ownership of the property.
- Separate title policies are purchased for the lender and the buyer.
· The Mortgage Note- your promise to repay the loan.
· The Mortgage- Pledges your home as security for the loan. In some states it is referred to as a Deed of Trust.
· The HUD-1 Settlement Statement- Lists all the buyers’ and sellers’ closing costs. It summarizes both parties’ transactions by showing how funds are transferred among the buyer, seller, lender and any other parties involved in the sale.
· Distribution of Money
- The final activity at closing involves the distribution of the money generated by the sale.
- The closing agent presents checks to the sellers, the sellers’ lender and any others who may be indicated on the settlement statement.
· Start Enjoying the Benefits of Homeownership!
After you have signed all the necessary documents and paid your closing costs and down payment, the closing is finished and you can move in!
