Welcome to the "Empowering Homebuyers" Blog.
Buying real estate can be a rewarding yet complex experience. Here you will find current topics relating to financing & buying a home to help make your home buying less overwhelming. We are also here to lend our expertise, to learn more about our services please visit the about YOUR Team page.
Quick links to topics:
- Benefits of getting pre-approved
- Credit score needed for buying a home
- 5 Most Common Questions Asked by First-Time Home Buyers
- Which loan is right for me?
- Mini-glossary of terms
The benefits of getting pre-approved for your home loan..During the mortgage pre-approval process, a mortgage lender will review your financial situation to determine whether or not you're qualified for a loan. If you do appear to be qualified, they'll also give you a maximum amount they are willing to lend.
It's a worthwhile process for several reasons. Here are the four main benefits of getting pre-approved for a home loan, before you start shopping for a house.
1. You can identify problems early on in the process.
Lenders can uncover a lot of potential problems during the mortgage pre-approval process. Maybe your debt levels are too high in relation to your income. Maybe your credit score is too low. The sooner you can find out about these things, the better. It gives you more time to correct them.
Without this process, you could spend days or weeks shopping for a home only to find out you're not qualified for a loan. That's a waste of time and energy. Identify problems early, and then work on correcting them. This is the sensible approach. It's also one of the key benefits of getting pre-approved.
2. It helps you narrow down the house-hunting process.
Imagine this: You spend three weeks looking at homes in the $300,000 price range. You look at them online and also by driving through neighborhoods. Then you find a house that is perfect for you. So you approach a mortgage lender to apply for a loan. The lender says they're willing to lend you $225,000 -- max. This can't be right, can it?
So you speak to three other lenders, and they all give you similar numbers. You've just wasted a lot of time by shopping in the wrong price range.
This is another area where mortgage pre-approval benefits you, as a home buyer. Granted, your own personal budget is the most important spending limit to keep in mind. But it also helps to know what the lender is willing to lend you. That way, you can limit your house-hunting process to the types of homes you can actually afford to buy.
3. Real estate agents will want to work with you.
Many real estate agents are reluctant to work with buyers who haven't been pre-screened by a mortgage lender yet. Here's a scenario that illustrates why:
Let's say I spend three weeks showing homes to a nice couple who are buying their first house. They find a suitable house, and they go on to speak with a lender about getting a loan. It turns out they both have very low credit scores and a mountain of debt. No mortgage loan for this couple. And I've just spent three weeks of my time showing them houses they can't even afford.
These days, most agents will only work with buyers who have a mortgage pre-approval letter from a lender. They want to make sure you've been "vetted" by a lender, before they spend a lot of time helping you with your house hunt. It's perfectly logical when you think about it.
4. Sellers and their listing agents will take you seriously.
This piggybacks on what we just talked about. If you try to schedule a showing to see a home, the listing agent will probably ask if you've been pre-approved by a lender (or if you have some other form of financing lined up).
They do this for the same reason we discussed earlier. They would rather deal with buyers who have been pre-approved, because it indicates there's a good chance they'll get financing.
Now imagine a scenario where the seller gets two offers -- one from a buyer who has been pre-approved, and one from a buyer who has not. The second buyer is an unknown variable, where financing is concerned. Which offer do you think the seller would accept? Which one would you accept?
Contact us and ask about our list of preferred lenders to get pre-qualified today. This costs you nothing and puts you in the best possible situation when looking for a new home.
Credit score needed for buying a home..
Credit reports and scores are a popular topic among home buyers these days. In truth, this has always been an important topic for people buying a home, but it's even more important today due to stricter lending standards.
So, what kind of credit score does a borrower need to qualify for a home loan these days? As in the past, this depends on the individual mortgage company involved and their particular lending practices. But one thing is for certain -- a better credit score will certainly make your home-buying process a lot easier. It will help you qualify for a loan quickly, and it will also help you secure the best interest rate on that loan.
Average Score in the U.S. Is Around 685
Depending on who you ask, the average credit score in the U.S. is somewhere between 660 and 700. This is on the FICO scoring scale, which goes from 300 to 850. Higher is better.
Most lenders today want to see a credit score of 620 or higher for basic loan qualification. But this number is not set in stone. It's just an industry-wide trend. So don't be discouraged if your score falls below this range. The only way to find out for sure if you're qualified for a loan is to apply for one.
Improving Your Credit Before Buying a Home
Now let's assume that you have requested copies of your credit scores from a website like MyFICO.com, and you have discovered your score is below the ideal range mentioned above. How do you go about increasing your score before buying a home, so that you can qualify for a loan?
Here are some things you can do:
1. Most importantly, make sure that you pay all of your bills on time. This includes your credit card bills, car payment, student loans and the like. This will help you improve your score faster than anything else, because your "payment history" weighs the most in the credit-scoring models.
2. Consider reducing your total debts as well. This is especially important if you have a high level of debt in relation to your monthly income (a metric known as the debt-to-income ratio, or DTI). Reducing your debt load could help you improve your credit score, while also improving your DTI ratio. Both of these could help you qualify for a home loan.
3. Lastly, be sure to avoid any new lines of credit or loans. You don't want any new forms of debt dragging you down when trying to buy a home.
Summary and Conclusion
What credit score do you need in order to buy a home? That will depend on the lender. But most experts agree that a 620 or higher is necessary to get your foot in the door. You'll need an even higher score to qualify for the lender's best rates, but that's another lesson entirely.
Of course, you have to know what your score is right now before you can decide what needs to be done about it. If you currently have a 750 or higher on the FICO scale, you're probably in good shape. If you have a 620 or higher, you might qualify for financing but probably won't get the lender's best rate. If your score is below 600, you could have trouble qualifying for a loan. Contact us and ask about our list of preferred lenders to find out today! This costs you nothing and will let you know exactly where you stand.
5 most common questions asked by first-time homebuyers..
1. How do I determine my price range?
Determining your price range should be one of the first steps you take. Once you know how much you can comfortably afford to pay each month, you'll be able to narrow your house-hunting process to homes that fall within your budget. This will save you a lot of time and energy.
To determine your price range, sit down and compare your monthly income to your monthly expenses (savings, credit card payments, car payment, groceries, entertainment, etc.). How much is left over each month? Your monthly mortgage payment should be less than this amount. Now you can use an online mortgage calculator to break each sale price down to a monthly amount, and determine if that amount is inside or outside your comfort zone.
2. Do I need a real estate agent?
The short answer is yes. If you're buying a first home, it's a good idea to have a real estate agent. Buying a home is one of the biggest financial transactions you will ever make. So it makes sense to have professional help.
Your agent will help you find homes that match your price range and desired features. He or she will also help you validate the asking process (see below), prepare a purchase offer, negotiate with the seller, and navigate the rest of the home buying process.
3. How do I research the asking price?
First, you have to realize that it's called an "asking price" for a reason. The price set by the seller is never set in stone. It's what they are asking for, but it might not be the true market value of the home. Your real estate agent will help you validate the asking price by looking at comparable, recent sales in the area. This will tell you if the asking price is reasonable or too high, based on current marketing conditions.
4. Which type of mortgage loan should I choose?
First, do some research on the basic types of home loans -- fixed rate, adjustable rate (ARM), FHA versus conventional, etc.
When researching the different mortgage types, pay attention to paragraphs that begin with: "This type of mortgage might be best for you if..." Generally, this type of statement is usually followed by a series of pros and cons that will explain the type of buyer who might choose that option.
As a general rule, if you're going to be in the home for quite a while (five years or more), it's probably best to choose a fixed-rate mortgage. On the other hand, if you think you'll only be in the home for two or three years, you might want to choose an adjustable-rate mortgage to save money during your short period of ownership. Please read the next chapter "Which loan is right for me" to help guide you more on this.
5. What happens at the real estate closing?
The real estate closing (also known as a "settlement") is when property ownership transfers from seller to buyer. All remaining fees will be paid as well, and these are known as closing costs. The seller receives their portion of the payment, minus what they still owe on the mortgage. The deed of ownership is transferred to reflect the new owner.
As a home buyer, you would be wise to save more money than you think you'll need at closing, just to be safe. You should also make sure you receive a HUD-1 statement (or "settlement statement") at least one day prior to the closing date. This document gives you an itemized list of the costs you'll be expected to pay at closing. The Real Estate Settlement Procedures Act (RESPA) requires that the escrow agent or lender provide this document at least one day before the closing.
Which loan is right for me?
- Conventional - This is the most common mortgage option and usually has the best interest rates.
- Down Payment: 10% minimum, 20% standard
- Best For: repeat buyers
- FHA - Makes ownership more affordable with less down and easier credit requirements.
- Down Payment: 3.5% minimum, 20% standard
- Best For: first-time buyers
- VA - Takes away the need for a down payment without the risk of PMI. Only available to veterans.
- Down Payment: no down payment
- Best For: military veterans
- USDA -This mortgage option was developed to promote the purchase of rural land.
- Down Payment: no down payment
- Best For: investors; anyone interested in living in a rural atmosphere
- ARM - These rates start out lower than any other option, but fluctuate with the market (and usually not for the better).
- Down Payment: 10% minimum, 20% standard
- Best For: anyone interested
Preferred Lenders - Have questions on any of these? Call any one of these lenders and you will be in great hands!
Chris Lawler - Nova Home loans 520-577-4774 | firstname.lastname@example.org
Robert Hatch – VIP Mortgage 520-349-8943 | email@example.com
Mary Maza - Long Mortgage
520-918-5225 | firstname.lastname@example.org
A mini glossary for first time home buyers..
So one of the first steps you should take is to learn the lingo. After all, buying a home and taking on a mortgage loan are two of the biggest financial moves you'll ever make. You don't want to make a costly error simply because you misunderstood the meaning of a certain term.
Here is a short list of the most common home-buying and mortgage terms you are likely to encounter:
Adjustable Rate Mortgage (ARM) -- This is a type of loan that starts out with a lower interest rate for an introductory period (3 years, for example) and later adjusts to whatever the current interest rate is at the time of adjustment.
Appraisal -- A professional appraiser's estimate of the market value of a property. Appraisers consider local market conditions and the unique characteristics of a particular property. Home appraisals are required by most mortgage lenders.
Closing -- The official transfer of property ownership from seller to buyer. It usually happens in the form of a formal meeting between the buyer, seller, settlement agent, and the buyer's and seller's agents. In some states, it can be handled separately. It varies. At closing (or "settlement"), the buyer will sign the mortgage document, the seller will receive payment for the property, and the buyer and/or seller will pay the closing costs.
Comparables -- Also known as "comps," these are comparable homes that have sold in the same area as the home you're considering. By looking at recent comps for other homes that have sold recently, you can better validate the seller's asking price.
Debt-to-Income (DTI) Ratio -- This is one of the criteria lenders will evaluate you on, to determine if you are "credit worthy" of a loan. This ratio is calculated by dividing monthly debt by gross monthly income.
Down Payment -- The money paid by the buyer to the lender at the time of the closing. It goes toward the purchase price and is generally expressed as a percentage of the home price. Smaller down payments (less than 20%) usually require mortgage insurance.
Escrow -- Also "escrow account." These are funds set aside and held by a neutral third party, usually for payment of taxes and insurance.
FICO Score -- Also referred to simply as a credit score, this is a computer-generated score used to determine how likely a person is to repay a loan. Your credit score is based on your credit reports. Lenders use this score to analyze the level of risk you bring. FICO stands for Fair Issac Corporation, the company that created the credit-scoring model used by most lenders these days.
Fixed-Rate Mortgage -- With this type of mortgage loan, the interest rate stays the same for the entire term of the loan, regardless of what the economy does. Thus, the monthly mortgage payments will also stay the same for the life of the loan.
Foreclosure -- This is what happens when a homeowner can no longer pay their mortgage. It is the legal process that allows the lender to recover and sell a property after the owner has defaulted on the loan.
Home Inspection -- A complete "top to bottom" inspection of a home's physical condition. Home inspections should be conducted by a professional, licensed home inspector and should cover all major systems and structural elements of the property. Home inspection fees are typically paid by the buyer.
Homestead Credit -- A state-sponsored property-tax credit program (only available in some states). It reduces property taxes for eligible households. Ask your agent if your state offers such a program. Also known as Homestead Exemption.
Mortgage -- A financial agreement between a lender and a buyer in which the property is used as collateral for the loan. A mortgage gives the lender the right to collect payments on the loan (and to foreclose on the property if those payments are not made).
PITI -- This home buying acronym refers to the primary components that make up a monthly mortgage payment. It stands for Principal, Interest, Taxes and Insurance.
Principal -- The actual amount of money borrowed, not counting interest. The part of the monthly payment that actually reduces the remaining balance of a mortgage. Think of it as the "core" amount borrowed from a lender, excluding interest.
Purchase Offer -- A detailed, written document that makes an offer to purchase a property. The offer may be modified, or "amended," several times during the course of negotiations. When the offer is signed by all parties involved, it becomes a legally binding contract. It is also known as the purchase agreement, offer or contract.
Settlement Statement -- A document required by the Real Estate Settlement Procedures Act (RESPA). An itemized statement of charges that must be paid at closing or settlement. The buyer has the right to examine the settlement statement at least one day before the closing. It is also known as a Closing Statement or a HUD-1 Settlement Statement.
Deed -- A written document that shows ownership of a particular property. It includes the signatures of current owners and a legal description of the property.
Clearly, this list is not all-inclusive. You might encounter additional mortgage and home-buying terms that are not on this list. These are just some of the most common terms. Is there something on this list you've never heard of before? If so, your next home buying step is clear -- research those topics!