1.
Real Estate Agent
A real estate agent is a licensed professional who helps the buyer
or seller in the house-purchasing process. Most agents work for a real estate
brokerage. As a buyer, you want to hire a good real estate
agent when you are buying a house. A Realtor is even better, they are held to
higher standards than a real estate agent who is not also a Realtor.
2.
Prequalified and Preapproval
Getting prequalified is the first step in the mortgage process. You
give your lender your overall financial picture, the lender evaluates your
information, and then the lender gives you an idea of the mortgage amount that
you will qualify for. Note, a prequalification is not a done deal – you may not,
in fact, qualify for the loan for which you are preapproved.
Preapproval is the second step in the mortgage process. You
complete a mortgage application and provide detailed information to the lender
(although you will likely not have a house picked out, so the property
information can be left blank). The lender will approve you for a specific
amount and you will get a better idea of your interest rate. This puts you at
an advantage with a seller because the seller will know you’re one step closer
to getting a mortgage.
If you get preapproved before you pick out a home, then you can
move quicker on purchasing a house (you won’t have to make your offer
contingent on obtaining financing, which is especially valuable in a
competitive market).
3.
Proof on Employment and Income
You must provide proof of employment and proof of income to
qualify for your mortgage. This shows the lender that you are creditworthy.
It’s usually not great to quit your job during the home-buying process for this
reason. Some lenders may ask for employment verification later in the home-buying
process, so your approval could change if you take a lesser paying job during
the home-buying process.
4.
Types of Loans: Conventional, FHA, and VA
A conventional loan is a loan that is not backed by the government
(meaning that the government doesn’t make any guarantee that you will pay the
mortgage), and therefore, carries private mortgage insurance if you put less
than 20% down. Conventional loans adhere to guidelines set by Fannie Mae and
Freddie Mac and are available to everyone, but are more difficult to qualify
for than VA or FHA loans (you need better credit and a steady income, for
example).
An FHA loan is a loan insured by the Federal Housing
Administration (this means that if you default, the FHA will repay the note to
the bank). Because the loan is insured, the lender typically offers a low down
payment required (3.5%, for example) and low closing costs. Anyone can apply
for an FHA loan and an FHA loan is easier to qualify for than a conventional
loan. Instead of PMI on your FHA loan, you will have MIP (mortgage insurance
premium), which stays with the life of the loan. That means that unlike a
conventional loan where you can remove the PMI, on an FHA loan, you cannot
remove the insurance without refinancing the entire loan (which you must
qualify for in order to do).
A VA loan is guaranteed by the Veterans Administration and is
available only to certain borrowers through VA-approved lenders. Usually, you
need to be in the military or a veteran, and you must also meet certain
requirements the VA sets to qualify. VA loans do not carry PMI and there is no down
payment requirement.
5.
Adjustable rate vs. Fixed rate
An adjustable rate mortgage (ARM) offers homebuyers with a low
interest rate on their loan for an initial period, after which time, the
interest rate increases or fluctuates for the remainder of the loan. This loan
transfers the risk of rising interest rates to the buyer.
A fixed rate mortgage means that the interest rate on the mortgage
is fixed at a specific rate for the entire life of the loan. For example, if
you have a 15-year fixed mortgage at 4%, this means that your loan is for 15
years and your interest rate will be 4% for the full 15 years, regardless of
the market.
6.
PMI (and MIP)
PMI stands for private mortgage insurance. As part of qualifying
for a conventional loan, you must get PMI if you put down less than 20%. Once
your equity in your home reaches 20%, you can get the PMI removed (lowering
your monthly mortgage payment). However, with an FHA loan, the insurance stays
on the loan for the life of the loan, regardless of the equity in the loan. The
private insurance on an FHA loan is called mortgage insurance premium (MIP).
There is no way to avoid MIP on an FHA loan.
7.
15 year and 30 year
Lenders issue mortgages on 30 year or 15 year terms. You will be
hard pressed to find a lender issuing a mortgage for a term other than 15 years
or 30 years. The advantage of a 15-year mortgage is that you pay significantly
less money in interest over the life of the loan than you would under a 30-year
mortgage.
8.
Cosigner
Like any other loan, a cosigner on a mortgage means that the
person is binding himself to be legally obligated to make the debt payments
should you default. So, if you have your mom cosign on your mortgage and you
default, she’s on the hook legally and must make payments. Similarly, if she
wants to get off your mortgage, she can’t do so without you refinancing. If a
cosigner is required, the lender is effectively saying that your financial
history isn’t good enough and they want someone else to be on the hook, too.
9.
Amortization Schedule
An amortization schedule is a complete table showing your
payments, principal, and interest over the course of the loan.
10.
Prepayment Penalty
A prepayment penalty is a clause that will be in your loan
documents (if it exists at all). A prepayment clause says that you will pay a
penalty for repaying your debt early.
11.
Offers and Counter Offers
When you buy a house, you will make an “offer”, which is an offer
to buy the house. The seller may accept your offer or reply with a counter
offer, which will state different conditions than what you offered.
12.
Inspection
A home inspection is an examination of a home done by a
Professional Home Inspector to determine the condition of the home at the time
of inspection. You will need to pay for a home inspection if you’re buying a
house.
13.
Appraisal
A home appraisal is an examination of the value of the property
done by a real estate appraiser. An appraiser determines the monetary value of
the property. You will need to pay for a home appraisal to provide your lender
with the value of the property for which you are trying to purchase in order to
get financing.
14.
Transfer Documents
“Transfer documents” refers to the documents relating to the
transfer of ownership from the seller to the buyer. Documents include: 1) deed,
2) bill of sale, 3) affidavit of title (or seller’s affidavit), 4) transfer tax
declaration, and 5) buyer / seller settlement statement. It’s important that
you do your due diligence and read through the transfer documents to make sure
everything says what it should say.
15.
Home Loan Documents
“Home loan documents” refers to the documents relating to the
mortgage issued by the lender to you, the buyer. These documents include: 1)
note, 2) mortgage, 3) loan application, and 3) Truth-In-Lending Disclosure
(TILA). There may be other documents included. It’s always a good idea to read
the documents yourself, or have an attorney read through on your behalf.
16.
Real Estate Title Documents
The title company and escrow company will also send you documents
to review. The title company will send you the title insurance commitment
showing that the party who has title is in fact the seller, in addition to any
liens on the title. You should review this document and so should your attorney
if you have one. The escrow company will also review it to make sure it says
what it should say.
17.
Title Insurance
Title insurance protects you and the lender from the possibility
that the seller didn’t have free and clear title when the seller sold you the
property. Getting title insurance is a standard step in the home-buying
process. In our area, your Realtor will typically help you get title insurance
after the purchase agreement is signed.
18.
Home Warranty
A home warranty includes basic coverage over certain things that
may go wrong, such as plumbing, electrical, heating, and major appliances. The
warranty is for a certain amount of time and you must pay for it up front if
you want it. Often, it can be written into a contract to have the seller cover
the cost of the warranty.
19.
Closing Costs
Closing costs are fees paid at the closing of the transaction.
Closing costs can be paid by the buyer or seller and they can be part of the
negotiation process. Closing costs can be thousands of dollars, so don’t forget about them!
20.
Escrow and Monthly Payment
When you get a mortgage, your lender will likely require you to
set up an escrow account. A monthly escrow amount is added to your mortgage
payment. The escrow payments go toward real property taxes and insurance that
you would otherwise have to pay once or twice a year. Instead, you generally
will pay a monthly payment and the money sits in escrow to be paid by your
lender when it’s due. This escrow payment is above the principal and interest
portion of the mortgage payment and is required.
21.
Homeowners Insurance
Most lenders require you to have homeowners insurance in place in
order to obtain a mortgage; however, it is not required by law.
22.
Property Tax
Property tax is the amount of money that you are required to pay
based on the property’s assessed value. Property tax can be very costly,
depending on where you live. This is something you’ll want to consider when
calculating how much you plan on spending on your overall home-ownership expenses. Property tax payments are usually due annually, but often, they are
divided into and included in your monthly escrow payment.
For further clarification, to see if you're ready to buy or to find out how much your home may be worth, call The Woelkers Group.
You can reach out to us directly at 734-386-6550.
