Home Buying Process
As a potential homebuyer, you might have the question, "How do I purchase a home"? It's crucial to explore various mortgage options, just as vital as researching the neighborhoods you are considering for your future residence. The home buying process of applying for a home loan can be intricate and gaining an early understanding of the most suitable mortgage type for your needs will guide you towards homes within your financial means and budget. It can take 4 - 5 months from start to finish based on New Jersey and New York housing inventory and financing methods. Once your find a home the mortgage process can take up to 21 days from application to closing.
We will explain the different types of mortgage loans, examining the pros and cons of each and understanding the criteria that impact your interest rate, loan terms and choice of lender.
Types of Mortgage:
When purchasing a home, you have several loan options available. The following Mortgage Programs will be discussed further and you can use the table of contents to navigate to a specific mortgage type:
There are many steps in the home buying process. The majority of home sales involve a comprehensive process. Let's looking at the details of each step and navigate throught the journey.
Step 1: Assess Your Readiness to Buy a Home
Acquiring a house is a substantial commitment. Before delving into property shopping and exploring mortgage options, it's essential to ensure your readiness for homeownership. Evaluat your financial stability, consider income and employent status and weigh factors that lenders and homeowners find crucial.
Income and Employment Status
Lenders assess not only your income but also your work history (typically spanning a 2 year period) to determine job stability. Providing recent pay stubs and W-2's determines if you are on payroll. For the self-employed or those with passive income, additional documentation such as tax returns, CPA letter is necessary to confirm self-employment.
Debt-To-Income Ratio (DTI)
DTI is a key metric lenders use to evaluate your loan application. It's calculated by dividing your monthly debt by your gross monthly income. A review of your back-end DTI shoud be 50% or less, is critical to qualify for most mortgage options. For example, debt $3,600 and gross income $10,000, the debt to income ratio calculation would be $3,600 (debt) / $10,000 (gross income) = 36%.
There are two mortgage underwriting ratios associated with getting an underwriting mortgage approval.
1) Housing Payment to Gross Income Ratio = Monthly Principal, Interest, Real Estate Tax, Insurance & Association fee (PITIA) which should be under 32-36% of gross monthly income.
2) Total Debt to Gross Income Ratio= Housing Payment + minimum monthly credit and installment debt (appearing on credit report) which should be under 42 to 50% of gross monthly income.
Liquid Assets
Besides mortgage assistance, having liquid assets is necessary for a home purchase. This includes a down payment and funds for closing costs.
Down Payment
While some manage to buy a home with no money down, most require cash for a down payment, typically 3% or more of the loan amount. Down payment can be a gift from a relative.
Closing Costs
Before moving in, you'll need to cover closing costs, ranging from 3% to 6% of your loan amount, These fees are paid to your lender and other third parties such as attorney, appraiser, title agent, escrows for real estate taxes and home owner insurance. On a purchase transaction, you may be able to negotiate a seller concession to paid for your closing costs.
Credit
Your credit score significantly influences the loan and interest rate you qualify for. Inproving your credit score and managing debt is crucial for favorable loa terms. Most lenders look for a credit score of at least 620. Golden Mortgage Corporation has options starting from mid credit score of 550+. If you have a mortgage, you should not have more than 1x30 day mortgage late payment in the past 12 months.
Willingness to Live in One Place
Considering a mortgage is a long-term commitment, assess your willingness to stay in one location for an extended period. Owning a home can make moving more challenging, so factor in your career goals and family obligations.
Timing
Deciding when to buy a house depends on your personal goals and market factors. Evaluate your financial readiness, lifestyle preferneces, economic conditions and current mortgage rates. Consult with a Mortgage Consultant to determine the optimal timing for your situation.
Step 2: Determine Your Home Budget
Once you've established your ready to embark on the home buying journey, it's crucial to set a realistic budget. Begin by calculating your Debt-To-Income Ratio DTI, examining your current debts and income. Consider the monthly amount you can comfortably allocate to a mortgage. Homeownership introduces additional costs not present in renting, such as property taxes and homeowner insurance. Factor in these expenses when determining the affordable price range for your future home. If you find it challenging to determine a specific budget, give us a call.
Step 3: Accumulate Funds for Down Payment and Closing Costs
Saving for your home purchase involves various strategies, including investments and savings accounts. If willing relatives are contributing, utilize gift money for the down payment, ensuring you provide your lender with a gift letter. To determine the necessary savings, analyze significant expenses related to the purchase:
Down Payment
Contrary to the misconception that a 20% down payment is mandatory, numerous options exist. Conventional loans may require as lttle as 3% down, FHA loans necessitate a minimum of 3.5% and VA loans permit eligible borrwers to put down 0%. Some states offer down payment assistance programs, enhancing affordablilty. While a larger down payment provides advantages such as more mortgage options, a smaller monthly payment and a lower interest rate. It's not always a prerequisite.
Closing Costs
Allocate funds for closing costs, typically ranging from 3% to 6% of the loan amount. For instance, a $200,000 loan may incur closing costs of $6,000 to $12,000. Factors influencing closing costs include loan type, lender policies and location. A Closing Disclosure from your lender will detail the costs before the closing helping you anticipate and recify any descrepancies.
Other Loan Related Costs
Certain loan types may necessitate specialized inspections, such as a pest inspect for VA loans. While these expenses may seem monor compared to overall home-buying cost, prudent budgeting is essential to account for their cumulative impact.
Step 4: Decide What Type of Mortgage Is Right For You
Conventional loans are mortgages that are not backed by an agency of the federal government. Most conventianal loans are also conforming loans, meaning that they conform to the limits put in place by the Federal Housing Finance Agency (FHFA) to regulate how large a loan can be and remain eligible for purchase by government-sponsored enterprises. Fannie Mae or Freddie Mac. However, jumbo conventional loans, which eceed these limits are also available. Conventional loans are alway a popular option for home buyers and you can get one with as little as 3% eown.
FHA Loans
Backed by the Federal Housing Administration, FHA loans are less of a risk for lenders because the government insures them if you stop making payments. As a result, FHA loans have credit score requriements that aren't as strict as conventional loans. You can be approved for an FHA loan with a down payment as small as 3.5%.
VA Loans
VA loans are mortgage loans for veterans, active-duty service members, reservists or National Guard members and surviving spouses who all meet certain eligibility requirements. The most popular benefit of VA loans for home buyers is the absence of a down payment requirement. Learn more at U.S. Department of Veterans Affairs.
Step 5: Obtain Mortgage Preapproval
When you're prepared to initiate your house hunting journey, securing a preapproval for a mortgage is critical. Upon application, your lender will furnish you with a preapproval letter, detailing the approved amount based on your creditworthiness, assets and income. Share this letter with your real estate agent to streamline the search for hoes within your financial scope.
To obtain preapprval, submit an application with your lender, engaging in a prcess that typically involves questions about your income, assets, and desired property, accompanies by a credit check. Golden Mortgage Corp. provides a Verified Approval, bolstering your confidence in making offers by verifying your credit, income and assets through documentation like W-2's, pay stubs and asset account statements.
Step 6: Select the Right Real Estate Agent for You
Navigating the mortgage and home buying process involves multiple stateholders, with your real estate agent serving as a crucial representative in the transaction. Your agent advocates for your best interests, identifying properties that align with your criteria, arranging showings, assisting with offer creation and negotiating on your behalf. Buyers typically incur no cost for working with a real estate agent, as the seller commonly covers the buyer's agent commission, typically 3% of the purchase price. Your agent, as a local market expert, provides insights on property values and guides you through the intricacies of the home buying process.
While it's technically possible to buy a house without an agent epecially for experienced buyers, this approach is not recommended, especially for tirst-time buyers. The real estate process can be intricate and emotional and having an agent by your side aids in navigating the market, ensuring legally sound offers and preventing overpayment. Finding the right agent involves seeking recommendations from family and friends.
Step 7: Commence the House Hunting Process
Your real estate agent becomes your guide in the search for homes within your budget. Creating a list of priorties, tailored to the type of house you seekk wheter a starter home or a forever home.
Factors to Consider During House Hunting
Priortize these factors from most to least important and share the list with your agent,. They will present homes aligning with your criteria. Patience is key during your home search, so remain optimistic. If the process takes longer than expected, online platforms can also assist in your house hunting search. Once your identify a property which satisfies your need and budget, it's time to move forward to the next step.
Step 8: Submit an Offer on a Home
When ready to make an offer, present a written offer letter including details like your name, current address and the proposed purchase price. The offer may also include a deadline for the seller's response.
Earnest Money Deposit
Most offers involve an earnest money deposit, usually 3% to 20% of the purchase price. This deposit contributes to your down payment and closing costs if the home purchase proceeds. Should you cancel the agreement after agreeing to the sale, you may forefeit the deposit. Your agent, usually repsponsible for drafting the offer letter will communicate with the seller or their agent to subnit the offer. Following this, the seller can respond in three ways.
Negotiations may extend beyond the offer submission and your agent will guide you through the process. Be prepared for the appraisal and inspection stages once you ant the seller reach an agreement.
Step 9: Conduct a Home Inspection
While lenders typically don't mandate a home inspection for loan approval, it's highly advisable to arrange one before finalizing a property purchase. A home inspection involves a thorough assessment by an inspector who examines various aspects, including electrical systems, roofing safety, appliance functionality, and more. Upon completion, the inspector provides a detailed report outlining any identified issues.
Handling the Inspection Report
Upon receiving the inspection report, carefully reiew each item, paying attention to major concerns, if the property presents significant health hazards, like lead paint or mold, it's essential to request corrective action from the seller before closing. Should an agreement prove elusive, exploring alternative options may be prudent. Collaborate with your agent to interpret the inspection results and address any major concerns. It's crucial to recognize that you;ll be responsible for major repairs post sale. Minor issues like a clogged toilet are manageable but sustantial problems uncovered during the inspection such as foundation cracks or poorly installed windows may warrant reconsideration of the purchase.
Understanding the Inspection Contingency:
Many homebuyers include an inspection contingency in their purchase offer. This contingency affords buyers the flexibility to withdraw from the pruchase or negotiate repairs, safeguarding their earnest money deposit in the event of significant issues identified during the inspection.
Step 10: Obtaining a Home Appraisal
A home appraisal provides an assessment of the property's current value, typically requried for mortgage loan approval. Lenders rely on appraisals to ensure they don't lend more money thab the home is worth, if the appraised value falls below your offer, potential solutions may include increasing your down payment or renegotiating the offer, Consult with your real estate agent to evaluate whether challenging the appraisal results is advisable, providing additional comparable homes for consideration.
Understanding the Appraisal Contingency
Similar to inspection contingencies, buyers often include an appraisal contingency in their offer. This contingency allows buyers to exit the purchase or negotiate a lower price if the home appraises for less than the offer amount. The specifics of appraisal contingencies vary, underscoring the improtance of comprehending the terms within your agreement.
Step 11: Negotiate Repairs or Credits
Post inspection and appraisal, you may wish to address identified issues with the seller. This can be achieved through one of three ways:
Your agent will communicate your requrest to the seller's representative. In the case of a For Sale By Owner (FSBO) transaction, your agent will negotiate directly with the seller. The seller may accept or reject your request. If rejected and if your offer letter includes an inspection contingency, you retain the option to withdraw from the sale while preserving your earnest money deposit.
Step 12: Conduct a Final Property Walkthrough
Step 13: Finalize the Home Purchase
Three business days before the closing date, your lender is obligated to provide you with the Closing Disclosure. This document outlines the closing costs and sumarizes your loan details. Review the Clsoing Disclosure and ensure that the figures align closely with your initial Loan Estimate, received within three business days of your initital applciation.
Closing Meeting Expections
Documentation: Bring your phot ID, a copy of the Closing Disclosures
Signing: You'll sign a settlement statement detailing all costs associated with the home sale, including your down payment and closing costs. Additionally, your sign the mortage note (a commitment to repay the loanO, the mortgage or deed of trust to secure the note.
Completion: Upon completing the closing, you offically become a homeowner
On average, the home buying process takes about 5 - 6 months. The timeline may vary based on factors such as the housing inventory andfinancing options .
Next Step
We'll help design your mortgage financial plan. Considering how long you plan to stay in your home, prospective future income, personal goals and objectives. Then we can determine the mortgage options which may fit your needs. Call 908-722-9217 to discuss your next move, contact email or apply on line today!