I know, when I say “real estate” you may be thinking that’s way too far away to concern yourself with. And that’s not entirely inaccurate, studies are showing that fewer millennials are buying homes than previous generations. Even more, there’s a growing argument that home ownership isn’t all it’s cracked up to be. In any case, whether you’re choosing to opt-in, opt-out, or want it to be an option down the road, it’s important to have a basic understanding of what the process entails. To help get some answers, I asked Licensed Realtor Felicia Fosgate and Loan Officer Kimberly Downs some of the more common beginner’s questions.
What’s the difference between a Mortgage Broker, a Local Bank, and a Mortgage Bank/ Lender?
A Mortgage broker works with a variety of lenders, but do not lend money out directly.
Savings banks are federally funded and offer mortgage loans in addition to a variety of other services. Mortgage Lenders/Bankers are licensed in order to protect the consumer, specialize only in lending money allowing them to be very competitive in mortgage lending. It is important to note that Mortgage Lenders only get paid if the loan closes, which typically leads to a high level of customer service. The benefit of working with one is that they work “Realtor hours” (evenings and weekends), and are not limited to bank hours and holidays. The most important thing is that you find someone that you trust and with whom you can form a good working relationship.
Discussing finances isn’t always easy. You want someone who takes the time to explain the process to you, welcomes and answers questions, and will get the job done in a timely manner to ensure you meet the deadlines set in the contract. It is not only permitted but expected that you to shop around for lenders. If you interview 2-3 in a short time it will not have a negative impact on your credit score, as these are “soft pulls”.
When should I meet with a Mortgage Lender?
For first time homebuyers, it is highly recommended that you meet with a Mortgage Lender months before actively looking. Every situation is different and some people need more time to save money or improve their credit score. It takes 30-60 days to process a loan. If you are renting you should coordinate the timing of the purchase with the end of your lease so there is a slight overlap to allow time for you to move in.
What will the Mortgage Lender need from me?
First, they will need to establish a 2-year work history. And the good news is, working towards your degree counts! Yes, if you are a full-time student or part-time student with a part-time job, you are eligible to apply for a loan. While school transcripts would be needed if schooling is included in your job history; there is no minimum GPA.
You will also need to submit two years of Federal Tax Returns / W2s, Pay Stub(s) for the past 30 days, 60 days of current bank statements, and of course, a government-issued photo ID. As you progress through the process there may be requests for additional/updated documentation. It is important to return this in a timely manner.
What kind of loans are there and which one should I get?
There are many types of loans and it is important to sit down with your Mortgage Lender to discuss your options. For first-time home buyers, there are loans that offer 0% – 3% down payment. That means 3% of the purchase price of the home, so if you want to purchase a home that costs $175,000, you’ll need to have $5,250 saved for a down payment.
There are also government-gifted down payment programs. A good Mortgage lender will explain these; the best ones will offer them to you without you asking. Money can be gifted by a family member or established long-term friendship. Wedding gifts can even be deposited into an account to be used for a down payment.
Your Mortgage Lender will help you decide which is right for you at this time in your life, as each has positive and negative aspects. A great lender will ask if it is more important to you to have 1) a low down payment 2) a lower interest rate or 3) the lowest monthly payment.
What are pre-paids?
This is money set aside into an escrow account to ensure you have enough at the end of the year to pay homeowners insurance and property taxes.
What are closing costs?
Closing costs are fees paid to process the loan and are based on the loan program you choose. They typically cost $2,000-$3,000 depending on the loan. These fees cover all expenses the lending and title company incur to process the loan and record the transaction in order to document the change in ownership. These are typically loan origination, title, and recording fees. In addition to closing fees, the home seeker will need to have money to cover home inspections, appraisals and two months of your projected house payment.
It is important to know what you are being charged. The best loan officers walk you through a loan worksheet to help you compare costs between lenders. If you do not get a worksheet, find another lender! This is why it is very important to work with a lender in person and you don’t limit yourself to filling out an online application. Often times lenders are able to price match. If you like and connect with one person, and found a better deal elsewhere, go back to the first lender and ask if they can price match. Having the right person working for you is important in a transaction of this magnitude.
I’ve heard that I really don’t need to pay closing costs, is that true?
You are encouraged to talk to your realtor, as this depends on the market. While the Seller is allowed to pay them, it is important to remember this is a part of negotiations and not a given. A good lender will assume you have to pay the closing costs to make sure you have enough money for all possibilities. If you have a great realtor who can negotiate on your behalf, you may have money left over at the end to buy the fun stuff for the house.
How much should I borrow?
This is a personal decision based on your priorities in life. While you are in the home buying process you should not make any other major purchases such as a buying a car as this can affect your debt to income ratio. Many lenders will pre-approve you for the max amount allowed, however, the best ones help you decide what monthly mortgage payment you are most comfortable with and then tell you how much house you can afford. You want to still be able to enjoy life and save for the future. You can always buy a bigger house later using the equity built in your first home instead of paying rent to someone else, which you never see ever again.
How do I know what I qualify for?
It is best to sit down with a lender who will take the time to explain the process and determine where you are at in the process. Beware of online lending programs that approve you solely based on credit score and stated income. This is not enough information to make a recommendation. If you are preapproved this way, and the loan falls apart at the last minute, you may find yourself out inspection and appraisal money.
How will my student loans affect my ability to get a mortgage loan?
It is important to have a payment plan stated on your credit report. Meet with a Mortgage Lender who will give you the personal guidance you need to ensure that you are able to budget for both to protect your credit score.
What if I have bad credit now, will I be able to buy a home?
Meet with a Mortgage Lender who can come up with a plan so you can get where you want to be. Don’t try to do it on your own. While the Mortgage Lender is not a credit expert, they can guide you to someone who is. Be wary using online programs that claim to help with your credit. Have a recommendation from a person who is willing to sit and discuss options with you.
If you have additional questions about home ownership and the buying process, they can be reached at:
Realtor brokered by Keller Williams
UHM NMLS #2229 LO NMLS #1130753
Additionally, in partnership with Financial Literacy, we will be hosting an Are You Ready? Event later this month that specifically tackles issues on student loan repayment and how that will impact future purchases. Stay tuned for futher details.