Monday, June 10, 2013

First Time Home Buyer's 411

Hi guys! This post is a long time coming. It's not for the average blog reader (It's so long) but for those preparing to buy their first house. I would have posted it earlier but for some reason couldn't find it.  Let me tell ya I was little panicked to the point that I started to think I'd have to ask the NSA if they knew what I did with it.   : D

We are attempting to buy our first home (update we already purchased the home but I started writing this months ago.)   It can be a very confusing process. There are so many variables. It would have helped if we were more familiar  with the process, so when the loops got thrown at us we were better prepared.  By the time I publish this post we should be past all of this and the house should be ours, hopefully.

Even if you are not a first time homebuyer this may be of some help if you were clueless all the way through your first purchase. However, this was written for all of you property virgins out there!
This is long, but it's worth your time familiarizing yourself with this so you are not taken advantage of in the process and know a little more with what to expect to hopefully avoid any unpleasant circumstances midway through the buying process, like losing your home before you close on it.

Although this post will familiarize you with the process and give you most of what you need, every loan is different, there a lot of variables, so keep that in mind.

    Find a Lender and Negotiate Lower Closing Costs 

This is your first step.  Seriously, and I mean seriously, do not look for a house til you have lender shopped.  Shopping for a lender first is muy importante!  You need to find a lender who will give you a great interest rate (along with not charging you a bunch of junk fees, you will read about that below).  Interest rates are at an all time low so there is no sense in not getting a great rate, especially if you have great credit.  Letting a lender know that you are still looking for another lender may get them, and usually does, to negotiate on their fees. Yes, believe it or not, a lot of things are negotiable.

I negotiated 700 dollars worth of fees off of my closing costs simply by letting the lender know I was shopping else where but would still give her a chance if she could let go of some of the junk fees.  You can't always negotiate based solely upon whining about how expensive things are. I know, I tried. You have to be straight up or you will be taken advantage of most likely.

I hate to say it but ignorance is bliss to the people who are getting your money!

Also, you do not want to get in the middle of falling in love with a home on the market, and then quickly try to find a lender to give you a great deal. This usually involves you realizing that you don't have much time to make a bid because the house already has bids (homes are selling fast in some places since the market has taken a slight up turn) and you may be tempted to go with a lender who doesn't give you the best deal, but has already approved you.  Not that I would know about that, or anything *whistling*.

Believe me, this is no bueno.

Repeat after me, " I will not even look at a house until I have found an amazing lender first."

Just let them know that you haven't found a home yet, but you are looking to buy one, and you want to know how much home you can afford and what they will lend and what their interest rates will be on the amount you want to spend.

                        Get Prequalified                           

 This step goes hand in hand with finding your lender. It's simpler than what it sounds, you choose the lender you want and fill out a form, or give them verbal information over the phone, sometimes you can fill it out online, and they will let you know how much you can afford, and are willing to lend, on a home based upon the info you give them. This does not  usually involve any sort of credit check, and they do not verify the information. They are basing this solely upon the information you give them. Do not confuse this with being pre-approved for a loan.

If you prequalify, they will give you a letter and you will give this to your realtor when you are ready to make an offer on a home.

Do not guess at this, know what your credit is like and what you have in the bank. If this info changes slightly it can mean the difference between getting a loan and not getting one when it comes time.

** A lot of realty companies will not allow an offer to be made without a pre-qualification letter anyways.  It just shows that you are serious about the home buying process. From what I understand, if you're buying a foreclosed home, the pre-qualification letter is a must.

Turn around time for a prequalification letter is usually 24 hours sometimes it's 48. 

                                     Get Pre-Approved

 You could go a step further than pre-qualifciation and get pre-approved. You give the lender your info and this time they verify all the information and they do a credit check This will strengthen your offer come bid time. You will look more serious to the seller, and getting pre-approved may just help you get a step up on the competition and get your bid accepted over the others.

Even getting pre-approved is not a guarantee you will get a loan. Some things can happen between the time it takes to get pre-approved and finding the right house. You could lose your job, your credit score could take a dip, the market could change.

BTW, this is not a time to take on more debt. You should not have ANY debts taken on til you completely close on the house. If you do, this could cost you a loan. Also, this is not a time to move money around. A Lender wants to see that you already have the money in your account before you buy the home. They will expect so much of it to come from you alone. If someone wants to gift you the money, let them do it AFTER closing time. They should not deposit ANYTHING in your bank account.

I'm not an expert. I'm just passing along what we have learned along the way. There are other scenarios that could cause a loan to fall through. If in doubt, ask your lender.

(When you do choose a home, make sure your lender gives you what is called a "good faith estimate."  A good faith estimate  shows you in writing what all of your fees are, aka closing costs, as well as down payment and your interest rate, so that there are no surprises come closing time.)

                              Watch Your Credit Score

  Make sure you do not buy a new car or make any other big purchases before you get in the house. Don't try to qualify for other loans. Just a credit check can cause a temporary dip. So, tread carefully around this time. If anything causes a credit dip to happen before everything goes through, the lender may pull out and even if they don't, something simple like a credit check could cause your credit to slightly dip, thereby affecting your interest rate!

I'm not a credit expert, so I can't advise you on every scenario that could cause this to happen, so ask a lender! 



        Consider An Exclusive Buyer's Agent Instead of a Realtor

   A Realtor is paid by a commission split with the broker. This comes from the seller, so it's not something you are paying out of pocket, so don't worry you aren't paying your Realtor.

 Well, in a sense you are because your money is buying the home and without you buying the home, no one gets paid. But also consider the fact that there are Realtors that are not going to be honest with you. I'm not saying all Realtors are like this. The sad fact is that there are many that are, though. They may want you to buy the expensive house, they may push it on you, they tell you "you better hurry there are lots of offers being made", when in reality no one is looking at that house!

When I first started this post, months back, I wrote that we had fired one Realtor and seemed to have a decent one. However, I had to update this because we had to scratch the second Realtor off our list and start again. It's not always a guarantee that you are going to find someone ethical.   Some Realtors will work for you and the seller! To avoid conflicts of interest or even just getting thrown under the bus by your realtor, consider an exclusive buyer's agent. Though, this won't completely protect you, it ups your odds.
The best thing to do would be to see if you can find an agent who would work for a flat based fee, which is not common and can be difficult, though not impossible. Just make sure you realize how much a typical agent makes off the commission split with the listing agent and compensate them accordingly.  Of course you will also want a contract signed stating they will not make a commission and will work solely for you, yada yada.  I would not sign an exclusivity contract with them, however. This could bind you with a sleezeball Realtor, and when you need to find someone new, they could take you to court.
You can read more here about what went wrong with our Realtors!

                             Expect a Good Faith Estimate

  From your Lender when you find the house you want to bid on. A Good Faith Estimate will tell you what interest rate you qualify for, how much closing costs you will have, along with how much you need for escrow and your down payment. This way there are no surprises when closing time comes.  Get the good faith estimate in writing. I think this is law now, but we did have a bank pre-approve us without giving us our Good Faith Estimate when we were lender shopping.
This is where you will find out how many junk fees they are going to add on. If you already have several quotes from a Lender, then at least you will know who will approve you, for how much, and what the interest rates are. If one wants to charge an outrageous amount in junk fees, go to one of the other ones. Speak up and ask them to reduce the junk fees!



 Expect To Pay A lot More Than A Down Payment

You are going to pay closing costs, what it costs for everyone like underwriters and title companies to close the home and transfer it to you, the new owner. Expect to pay 3-5 percent of the purchase price of your home towards closing.

You will also have to put money in escrow to pay the homeowner's insurance as well as the property taxes on the home. Your Lender usually will not let you pay it yourself. Depending on the Lender, they will collect a few months worth to a year of property taxes and homeowner's insurance at closing.  What? You thought all of those thousands upon thousands of dollars you had saved up were going solely down on your house thereby taking a huge chunk off what you have to pay off the principal of the loan?   Ahahahahahaha! Yeah, us too!  It doesn't work that way unfortunately.

Contract Time

When you are ready to bid on a home, your Realtor will draw up a contract first.  Before signing the contract make sure that your Realtor includes a financing contingency and an inspection contingency. A good Realtor will never try to steer you away from this. The only time they may do this is if you are a cash buyer (you don't need a loan) and are willing to accept the home as is no matter what, this would make your offer stronger.

 However, most people want the contingencies in the contract. This is common and you should ask for them. This protects you and allows you out of the contract in case something shows up during inspection and you don't want to go through with the purchase, or if despite your best efforts to obtain financing, the Lender simply can't finance you. This protects your earnest money deposit.

                              Don't Overbid for your home

 I'm not saying you can't over bid but don't over bid! What I mean by that is some people love a home so much they may overbid a little so they get their offer accepted over the other bids on the home, if there are any, that is. This is fine, but make sure it's not going to go over the price of appraisal. 
If the house goes for more than it is appraised for then your lender could back out and you could lose the house in the middle of closing!  That's a little tricky considering you have to bid and get under contract before you get the appraisal.  The appraisal is something you may pay for and should be included in the closing costs on your good faith estimate.  Sometimes when that happens, the seller may go in and do some repairs and spiffing up to bring up the value of the home so the sale will go through, but not always. Tread carefully! You will need to ask your Realtor's advice on this and make sure they don't think you are overbidding.

Of course they want you to overbid so far, so their commission goes up, but they don't want to lose the sale or they don't get paid. Even your Realtor doesn't want you to overbid by too much.

Earnest Money Deposit

 At some point after you go under contract on the house your Realtor will ask for an Earnest Money Deposit. This money shows the seller that you are serious about buying the house. The money will be applied to your down payment at closing. 

There is no set amount that you put down with Earnest Money. They typically ask 1-3 percent of the purchase price of the house, but every case is different and it's between you and the seller. You may be the one deciding how much you put down.  However, tread carefully, if you decide to back out without legal reasons that are spelled out in your contract via contingencies, the seller gets to keep your deposit.

This may not seem fair, but when a seller takes their home off the market they are taking a big risk and they need to know you are going to go through with the sale. Your earnest money deposit helps show you are willing to go through with the contract and if you back out for no good reason, then the seller is compensated for time and money lost.

 Just make sure you have that money ready to send out ON TIME when they are ready for it! Usually you will wire the money from your bank account. Your Realtor will let you know. Do everything promptly! Time is of the essence! 


  According to your contract you will have a certain amount of time to have the home inspected. Get this done with a reputable company from Angie's list.  It's worth the tiny amount of money you have to pay to be a member. You can get "word of mouth" reviews from other paying members. If you have to have an inspection and know the house is in good shape but are running short on cash, you could always do a 4 point inspection for about 100 bucks to satisfy the Insurance company.

                                      Filling out Papers

 Be prepared once you've won the bid on the home to start filling out a truck load of papers for your Lender. What everyone fills out can vary, depending on the type of loan from what I understand. Your lender is going to ask for w2's for so many years back, bank statements, and all kinds stuff.  Fill them out timely, it's rough, but it's worth it in the end. You are on a schedule according to your contract to close at a specific time. Time is of the essence!


Getting Final Approval

After all the necessary papers are filled, things go to an underwriter and who knows where else, but eventually you will get final approval for the home. You thought you were already approved for the house when you got your pre-approval? Unfortunately, no. There are so many things that can go wrong with your credit and such by the time everything is over, that it's possible you may not receive final approval. That is why I stress to you to be on time with filling out papers, be thorough, and do not touch your credit or move money around in your account during this time!

It's Closing Time

Well you were approved for the home and now all you have to do is send your closing costs over and sign the final papers. By now the title company and your Lender are working hand in hand to make all of this happen. Make sure to ask your Lender all the information you need to know, that is what their job is to help you know what is going on and what to expect. Do not, and I mean do not, solely rely on what the title company tells you, we did this and it got us into trouble. Whatever they tell you, back it up with your lender first.

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  1. AMAZING list! So glad you're settled into your place now. That first time buying is TERRIFYING! We're now 2 payments away from being mortgage free. CAN HARDLY WAIT.

    1. Oh my! That is so exciting! I would looooove to out right own! I'm very happy for you!

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