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The Beginning Basics
Lenders use different formulas for arriving at how much you can afford to purchase. A general rule of thumb is that you should spend about 30% of your gross monthly income on housing costs or PITI (principal, interest, taxes and insurance), and no more than 38% on combined total monthly house and other long-term debt payments. However, each person’s financial picture is unique and will be different based on their current financial situation.
Getting Your Mortgage Application Started
Being pre-approved by a lender will put you in a much stronger negotiating position, because it shows the seller that you are a committed buyer, financially capable of buying the property, and more likely to close on the property. Keep in mind that pre-approval is different from pre-qualification. Pre-qualification is merely an estimate of what you may be able to afford. Pre-approval occurs when the lender has reviewed your credit and believes that you can finance a home up to a specific amount. However, neither pre-approval nor pre-qualification represents or implies a commitment on the part of a lender to actually fund a loan.
Here are some of the current documents you’ll need to get started:
- Current pay stubs
- W-2s or 1099s
- Tax returns, usually for two years
- Bank statements
- Investments/brokerage firm statements
- Net worth of businesses owned (if applicable)
- Credit card statements
- Loan statements
- Alimony/child support payments (if applicable)
Understanding the Asking Price
Many factors influence the price that a seller expects to get for their home. While only you can decide how much you feel comfortable offering for a property, we can gather critical information for you regarding the factors that impact how much you should consider paying for the home. These factors include:
- How long the home has been on the market
- If the price has been reduced
- The prices for other comparable homes in the area
- If there are multiple offers
- Other items that might be included in the sale – furniture, hot tub, etc.
- The “list to sale price ratio,” an indication of how competitive the market is for homes in this area.
- Why the seller is selling
Whether the seller is offering an assumable loan or financing
Negotiating the Offer and the Contract
You may make your offer subject to certain terms or contingencies, including securing of financing or perhaps the sale of your current home. You may also make the contract subject to various inspections by both you and professional inspectors. Most contracts include some standard provisions, such as property taxes, insurance costs, utility bills, and special assessments, which will be prorated between buyer and seller. Others outline what happens if the property is damaged before closing, or either party fails to go through with the sale. We will review with you every aspect of your offer. Together, we will plan a strategy for getting the most advantageous terms for you – the buyer – at the price you are willing to pay for the property.
Real estate contracts contain contingency clauses that allow buyers to inspect the property. Certain inspections are required by lenders and others are a matter of observation and what is particular to a region or area. Which party pays for these inspections is negotiable. The two most common types of inspection are:
Wood Destroying Pest and Organisms (Termite) Inspection
This inspection identifies existing or potential pest, dry rot, fungus and other structure-threatening infestations or conditions. The initial inspection fee covers only those areas which are accessible to the inspector. Inspections of inaccessible areas cost more and are subject to an estimate by the inspector. These inspectors must be licensed and can give estimates to correct noted problems, can make the suggested repairs, and can certify that the work has been completed.
This inspection identifies material defects in the essential components of the property based upon a noninvasive physical inspection. The inspector will also run appliances to check for any problems with the operation of these components.
Title Search Process
A title search spells out who has the right of ownership for a property. It is considered “clear” if there are no claims or liens against it. In order to make sure nothing will prevent transfer of the property to you, a title company will conduct a title search and prepare a preliminary title report that indicates what recorded matters affect the title to the property and if the title insurance company is willing to insure the title. At the close of escrow, the title company will issue an Owner’s Policy of Title Insurance to protect you against losses that might arise from covered claims on the title.
Preparing For The Closing Costs
A home purchase is a complex transaction involving many parties and associated fees. In addition to your deposit and down payment, there are a variety of other costs involved in the close of escrow, including:
- Loan origination fees, appraisals, and reports
- Surveys and inspections
- Mortgage insurance
- Hazard insurance
- Title Insurance, notary, and escrow fees
- Recording fees and stamps
The lender will provide a good faith estimate of these costs prior to the close of escrow, so that you will know in advance what to expect. Some of these costs may be negotiable items with the seller. Naturally, we’ll walk you through each item in your good faith estimate to make sure you understand every detail.
Financing Your New Home
The basic timeline for what will happen along the way is as follows:
- You submit the completed application and any required supporting documentation to the lender
- The lender orders a credit report, and begins verifying your employment and assets
- The lender provides a good faith estimate of closing and related costs, plus initial Truth in Lending disclosures
- The lender evaluates the application and your supporting documents, approves the loan, and issues a letter of commitment
- You sign the closing loan documents and the loan is funded
- The lender sends their funds to escrow
- All appropriate documents are recorded at the County Recorder’s Office, the seller is paid, and the title to the home is yours
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