Lesson 1: Where To Begin The Home Buying Process
Jewell: Hello, my name is Jewell DiDucca and welcome to American Consumer Credit Counseling's presentation on home buying. Our Home Buying Workshop is a 9 Lesson Series focused on the essentials of owning your own home.
Today, we'll begin discussing Lesson One: Where to Begin. Let's get started.
You may be asking yourself, "Am I ready to become a homeowner?" First, you have to consider that owning a home can be more expensive than renting. For instance, as a homeowner, you have to be prepared to pay for utilities, homeowners insurance, property taxes, repairs, and purchasing costs.
However, there are advantages to owning a home of your own. Most notably, owning your own home will allow you to establish roots within your community, decorate to your own personal taste, own pets, and reap possible tax benefits. But most importantly, investing in home ownership will allow you to build equity and invest in your future.
Secondly, you need to properly evaluate your budget, otherwise known as a spending plan. Please remember that your spending plan will depend on a variety of factors such as your family size, the age and health of your family members, your current financial situation, where you live, and where you work.
In order to accurately calculate your spending plan, you'll need to determine your monthly net income and expenses. Initially, you need to determine your gross income. Remember that gross income is the amount of money that you make before any deductions for taxes, insurance, or other deductions. Lenders will base their calculations on your gross income.
Secondly, you need to determine your net income. Net income is the money you have left after all of the deductions are made from your gross income. It's important that you use your net income in order to develop your spending plan since that's the actual amount of money that's available to you.
Next, you need to write down all of your fixed monthly expenses. These are bills that recur every month and the payments are always the same. Fixed monthly expenses might include your car payment, your rent, student loans, or child support. You'll also need to determine your average monthly utility costs. To do this, add each monthly utility bill for the past year and then divide by twelve.
You'll also need your average periodic expenses. These expenses are bills that are not billed on a monthly cycle. They might include car insurance, maintenance, or even gasoline charges. Finally, you need to list your flexible expenses. Flexible expenses are those that you have some control over and you can change or eliminate. These types of expenses could include cable TV, internet access, food, clothing, or holiday gifts.
Once you've documented these expenses, you can now properly calculate your spending plan. First, add your expenses together to determine your total monthly expenses. Again, these expenses include fixed, average, periodic, and flexible expenses. Your total monthly expenses will show approximately how much you're spending each month.
Next, you need to subtract your total monthly expenses from your monthly net income to determine your discretionary income. After determining this figure, if you find that you have an answer that is zero or a negative number, you're not financially ready to buy a home. Moreover, you may be headed toward a financial hardship. However, there's still time to take steps to improve your financial situation.
If you find that you're not in a position to purchase of home, there are a variety of actions you can take to stabilize your situation. You may want to contact a financial counselor at a non-profit consumer credit counseling agency. You can also seek assistance at a HUD approved housing counseling organization. At these institutions, you'll have access to many different programs such as financial counseling, housing counseling, education programs that benefit all consumers and consumer's rights programs.
However, please make sure you contact a non-profit accredited organization that's been in service for several years. Also remember that credit counseling programs are not just for people with credit problems. A reputable credit counseling agency will be able to help you with your budget, suggest changes in your spending habits, explain credit reports, and explain credit offers.
In addition to their educational services, credit counseling agencies most commonly provide debt management programs or debt consolidation plans. In this case, the credit counseling agency will negotiate with each of your creditors to reduce or eliminate interest charges and fees to obtain a manageable monthly payment for you.
Keep in mind that a debt consolidation program offered by a credit counseling organization is not the same thing as a debt consolidation loan offered by a lender. In a debt consolidation loan, a lender will give you a new loan that pays off several of your current loans and bills. Consider a debt management program when you're past due on your accounts and you're having trouble making full payments.
At this point, your credit may have already been adversely affected due to partial payments or accounts in collections and a debt management plan will help you get back on track. If you're in a situation where you need to get your finances in order, you might need to track every dollar that you spend for three months to get a realistic picture of where your money goes. Pay off some bills to reduce your debt, change what you spend your money on, change how your spend your money so you don't take out new debt, pay off collections and judgments, and pay your bills on time.
The next step may be to start saving some money for closing costs, your down payment, moving expenses, and maintenance costs. Buying a home is a complex process and calculating a spending plan is the first step that everyone should complete. This process can be overwhelming, but by taking it one step at a time, you will soon own a home of your own.
After you've properly calculated your spending plan, it would be helpful to become familiar with the individuals involved within the home buying process. Among the individuals you work with to purchase the home are the lenders, which could be a bank, a credit union, a broker, or any other institution that will lend you all or part of the money needed to purchase a home. It's important to note that the lender will receive compensation through fees charged at the closing. Some of these fees include origination fees, discount points, commitment fees, underwriting fees, and document preparation fees.
You'll also have a lot of contact with the loan officer. A loan officer is the person employed by the lender to take your application, collect your documentation and submit it to the proper people for review and processing. It's the responsiblity of the loan officer to explain the process, the documentation and any required disclosures to you in terms that you understand.
A real estate agent is also heavily involved in the process. This agent works with the seller to market the home for sale and to help locate buyers. The real estate agent is usually paid by the seller from the proceeds of the sale.
You may also have contact with a real estate attorney. This person will help buyers or sellers to write or review purchase agreements and deeds. It's their responsiblity to advise and represent their client in the real estate transaction. A real estate attorney will collect their fees directly from the client.
Prior to purchasing a home, you'll also need to contact a home inspector. A home inspector is hired to examine the home you wish to buy. During their inspection, they will determine the current condition of the home and any safety, maintenance, or structural problems that exist or could develop in the future. The cost of a home inspector is usually paid directly by the person who requests the inspection.
An appraiser will also be involved in the home buying process. This person will determine the sale or market value of the home. The lender usually collects an appraisers fee at the time of the loan application.
In addition to the individuals already discussed, there are several other participants in the home buying process. There's a surveyor. This individual does all of the measurements and drawing of the properties to show the exact boundaries of the property as well as any improvement on the original property such as a garage, a fence, or a driveway.
The underwriter is the person hired by the lender to review the mortgage application files for credit decisions. In doing so, the underwriter will make sure that the documentation provide meets all of the loan guidelines for credit qualification and property conditions. The underwriter will approve or reject the loan based on those loan guidelines.
You'll also have to contact an insurance company to receive coverage in order to protect yourself against damage or loss to the property. It is the responsiblity of the buyer to pay the first years insurance premium directly to the insurance company.
It may also be required of you to contact a title or abstract company. These individuals research the chain of ownership on a property and will provide insurance to the lender and owners for clear title protection.
There will also be a closer involved in the process. This individual can be an attorney, an employee of the title company, a real estate broker, or a lender who finalizes the transaction with the buyer and the seller.
Finally, you'll deal with the servicer. This is the company responsible for collecting your payments and applying them to your account and dispersing payment from your escrow accounts. The servicer may not necessarily be the lender that provided you the loan, because the lender will often sell or transfer the servicing of their loans to another company.
Now that we're familiar with the individuals involved in the home buying process, it's necessary to address the three truths to mortgage lending. Number One: It takes money to borrow money. In most cases, you'll be required to have a minimum amount of your own money for the application fee, down payment, and closing costs.
Number Two: You can't borrow the money to borrow the money. You must save for your required investment yourself, or show that the funds came from a secured or collateralized loan, bonafide gift funds, or a documented sale of personal property.
Number Three: Your word alone is not enough. You must provide documentation to support your income, payment history, and cash to close. The more complete, accurate, and clear your documentation is, the faster your loan will be approved.
Oftentimes, people will ask, "What will the lender want to know in order to make a credit decision?" The lender wants to know that you make enough money to pay back the loan, that you're willing to pay the money back, and that the house you're buying is worth the amount of money you're borrowing.
Okay, now that you're ready to begin, the first thing you need to do is to start gathering the documents for your loan application. A lender will ask you to bring in documentation for the qualifying process. These documents include: your most recent pay stubs to cover a one month period for all incomes, W-2's for all of the jobs you've worked in the past two years, tax returns for the previous two years, your most recent two months of bank statements and investment statements for all of your accounts, and a list of your current monthly bills including, your credit cards, car payments, student loans, child support, alimony, and debt management programs.
You will also need proof of citizenship, a social security card, a green card, or US visa, and if applicable, a completed divorce decree including the property settlement and stipulation. If applicable, a copy of bankruptcy statements with all schedules and discharge information.
Your loan officer may ask for additional documentation because it's their policy, or you don't have an established history on your credit report. You might have non-traditional income or your case might have unusual circumstances. Maybe you're pursuing a specific loan program such as a VA loan which requires additional documentation.
After you've gathered all of the documentation for you loan, you can now focus on choosing a lender. It's in your best interest to interview several lenders before you make your decision. You could start with bank where you have your checking and savings account or ask friends for recommendation. Most importantly, you should choose a loan officer that you're comfortable working with.
A good loan officer will return your calls in a timely manner, explain your options and the loan process, discuss the loan products you qualify for, provide a cost estimate for the down payment and the closing cost, and explain everything to you in terms you understand.
After you have a few lenders in mind, you should compare the costs involved. Some things you should consider are: Number One, The Good Faith Estimate. This is an itemization of all of the expected fees for your loan. Number Two, The Truth in Lending Statement. This document shows the full cost of financing of your loan for the term of your loan, plus the up front closing costs that are paid to the lender. Finally, it's imperative that you compare loan programs, terms, and costs that are required by each of the lenders that you interview. Ask yourself which one best suits your needs and situations and choose the program that's best for you.
If, by chance, you're rejected for a loan, do your best to check with two other lenders since they may have a loan product that would work for you.
That concludes Lesson One of our Home Buying Series. I'm Jewell DiDucca with American Consumer Credit Counseling. Please join us next time for Lesson Two, where we'll help you assess your credit payment history.