Buying Your First House

Prepare Your Financial Credentials | Shopping for a Mortgage

Buying your first house and shopping for a mortgage can be a challenge. Nothing can deflate the joy of buying a new home more than worrying about being turned down for a mortgage loan. Avoid disappointment by sharpening your credentials before you go hunting for a loan. The following steps apply to both spouses if both incomes are being used to qualify for a loan.

1. Job stability.

Lenders look for stability of employment. Two years in the same job or at least the same occupation is considered the minimum. It is usually best not to change employment if you have a home purchase in mind unless it's going to increase your income.

Whatever you do, don't start a new business within two years before applying for a mortgage. As much as everyone else loves an entrepreneur, lenders do not. If you are self employed be prepared to show your business financial statements.

2. Credit.

Lenders judge you on how you have paid back your previous loans. Your credit report will show your lender all of your past and current debt. It will also show if you paid on a timely basis. The best advice is to make all of your credit payments on time. You will be asked to explain any late payments on your credit cards, car payment, or mortgage. Don't say you forgot. Lenders don't accept this as a reason to be late. If you presently have a mortgage make sure you don't make payments after the thirty day grace period.

Conventional lenders will not make you a mortgage if you have been delinquent in the past twelve months. A note about poor credit. There are lenders who will make loans to people with poor credit histories. Be frank with your lender since you are only wasting time if you are less than truthful. If you have bad credit, seek out lenders who will accept your credit problems. Although these loans come at a higher cost, once you reestablish good credit you can refinance your mortgage to get a lower interest rate.

3. Don't buy anything new.

If you know you are going to be buying a new home, it is not wise to go out and buy a car or make other major purchases on credit. Your total monthly bills will be added up to see if can afford the home payment. The higher your monthly bills, the lower the amount of mortgage for which you will qualify. Don't buy anything even if you are going to pay cash. Lenders like to see money in the bank and consider these funds as cash reserves.

4. Savings.

When you start thinking about purchasing a home, all of your efforts should be directed to saving money. The more you put down on the purchase price, the lower your monthly payments. A larger down payment also makes it easier to qualify for a loan. There are also many costs associated with home loans that generally add up to about 5% of the loan amount. The lender is going to want to verify that you have enough money to pay these closing costs in addition to your down payment.

In today's market there are loans available that have no closing costs if you are willing to pay a higher interest rate. A good idea when money is tight at closing, but it will be more expensive if you live in the home for a long period. Do not get your down payment money from a sock under the mattress. You should be able to show that you saved the money yourself so it is best to keep all of your savings in one account. The lender is going to want to see at least two consecutive months of bank statements verifying your savings. Lenders will typically allow you to receive part of your down payment as a gift. The gift giver will be asked to provide a letter stating that he or she made the gift to you and do not expect repayment.

5. Income.

Your income is one of the most important ingredients for qualifying for a home loan since it will be used to determine the amount of mortgage you can afford. Your employer will be asked to verify your employment by completing a written verification form or you will be asked to produce pay check stubs that show one month’s pay. If you are self employed you will be required to provide a copy of two years tax returns. For qualifying purposes, only the income you show on your tax return will considered.

6. Property.

Look for a sound home in a good neighborhood where property values are steady or rising. The home you contract to buy will be appraised by an appraiser from the lender’s list of appraisers. The appraised value should be close to your purchase price. If the appraised value is less than the amount you are paying, consider renegotiating your purchase contract to reflect the lower appraisal amount. A low appraisal will mean the lender will use the lesser of the purchase price or appraised value in determining the maximum loan that will be made on the property. Thus you would have to put more money down.

On existing homes, a termite inspection and roof inspection may be required by the lender. This protects both you and the lender and typically is nominal in cost. You may be able to negotiate with the seller to pay for these inspections. You should also consider hiring your own home inspector to make sure the house is sound and everything is working properly. If repairs are needed, the lender will require that they be completed before you can close on the loan. Such repairs are usually the obligation of the seller, but the terms of your purchase contract will prevail.

7. Pre qualify.

Visit a lender who will show you what types of financing are available and the maximum payment you will be able to afford. That will tell you how much house you can afford. Arranging your financing in advance will give you a strong bargaining position with a seller and will help you be realistic in your home hunting. Also, most Realtors will only work with pre qualified buyers. 8. Shop around. Talk to several lenders. Work with someone who you are comfortable with, who has intelligent responses to your questions and does not use high pressure tactics. Look for a lender that has several different types of loans to offer and then ask many questions.

9. Educate yourself.

By learning as much as you can about mortgage financing you can save tens of thousands of dollars over your lifetime. Read articles, check out books from the library, attend lender seminars for new homebuyers or ask your local financial institution for information that may be available. Surf the Internet. There are hundreds of sites that provide mortgage information. Just be critical of who is supplying the information and review several sites to make sure the information offered is consistent and accurate. The application process.

10. Alternatives.

If all attempts to finance your new home fail, ask your Realtor to identify property where the seller is willing to do the financing. Most sellers offering this type of financing are anxious to sell and might not be so fussy about a cloudy credit history and other institutional lender concerns.

Shopping for a Mortgage - Borrower Rights

Mortgage Regulations are Intended to Protect Consumers

Whether you submit a completed application or a loan representative prepares your application for a loan, the lender is legally required under RESPA to give you a copy of the Real Estate Settlement Protection Act booklet titled "Shopping for a Mortgage." If the lender does not give it to you in person on the day of your loan application, it must put it in the mail to you no later than three business days after your application is filed. Failure to do so is a serious violation of mortgage lending regulations and should be reported to your lender's regulatory agency.

Required Disclosures

When you file your application for a loan, the lender must also, under the terms of RESPA, provide you with a Loan Estimate of Settlement Service Charges you will likely incur as a cost of the loan. If they do not give it to you, they have three business days in which to put it in the mail. See my article about "Loan Estimate and Closing Costs" for a full discussion of settlement services or "closing costs" as they are sometimes called. On the form entitled "Closing Cost Details" you will see settlement services and charges you will encounter.

Loan Estimate

Lenders are required to give you a "Loan Estimate" based upon his experience in the locality in which the property is located, for each settlement charge that you will pay, except for paid-in-advance hazard insurance, and if required, flood insurance premiums.

Note Regarding Homeowner Insurance:

As a home buyer, you should determine the cost of homeowners insurance prior to signing a contract for purchase. In many areas the cost of homeowners insurance is significant and may affect the affordability of the house.

The estimate may be stated as either an exact dollar amount or a dollar range for each charge. (I.e. $400 -$500.) When your lender designates the use of a particular vendor, such as an appraiser, the lender must make its Loan Estimate based upon the lender's knowledge of the amounts charged by that appraiser.

The form used for this Loan Estimate must be concise and clear, and the estimates must bear a reasonable relationship to the costs you will likely incur. This information is important for you to know as you evaluate the different mortgage programs being offered to you.

Reserve Accounts

You will see something called reserve accounts on your Loan Estimate. These refer to money that will be put into an escrow account to pay for such annual expenses as property tax and homeowners insurance.

- Taxes

The calculation for taxes will depend on when property taxes must be paid in your area. Ask your lender about their policies regarding reserve accounts, for what items the lender requires reserves and for what period of time.

You may want to ask the lender to run through a hypothetical calculation for you based on the date you will most likely close on the house. Other assumptions may be necessary. For example, the assessed value of the property for determining property taxes.

Typically the Realtors listing for a house will show taxes paid by the sellers in the past year. It should also show present owners homeowner insurance costs and whether house is in a flood zone for insurance purposes.

- Insurance Premiums

The lender can probably be more specific on hazard and flood insurance premiums, particularly for the coverage that a lender requires. Note that homeowner insurance and flood insurance are two different types of insurance. All lenders require homeowners insurance, but flood insurance is only required when a house is designated as being in a flood zone. Flood insurance can be an expensive addition to your insurance costs.

When working with a Realtor be sure to ask about flood insurance for each house as it will vary from house to house.

- Estimates

Once you have obtained these estimates from the lender be aware that they are only estimates. The final costs may not be the same. Estimates are subject to changing market conditions, and fees may change. Changes in the date of settlement may result in changes in escrow and pro ration requirements. In certain cases, it may not be possible for the lender to anticipate exactly the pricing policies of settlement firms. Remember, depending on custom in your locale, you or the sellers have the right to choose the settlement company (title or escrow agents, not the lender.)

Lender Designation of Settlement Service Providers

Some lenders follow the practice of designating specific settlement service providers to be used for legal services, title examination services, title insurance, or the conduct of settlement. Where this occurs the lender, under TILA RESPA, is required to provide you as part of the Loan Estimate a statement in which the lender sets forth:

The name, address and telephone number of each provider he has designated. This must include a statement of the specific services each designated firm is to provide for you, as well as an estimate of the amount the lender anticipates you will have to pay for the service, based on the lender's experience as to what the designated provider usually charges. If the services or charges are not clear to you, ask further questions.

The lender must also state whether each designated firm has a business relationship with the lender. While designated firms often provide the services needed, a conflict of interest may exist. Take for example the situation where the provider must choose between your interests and those of the lender. Where legal services are involved, it is wise to employ your own attorney to insure that your interests are properly protected.