The process of buying a new home is a journey that begins with looking for a home and ends with the closing. And, like any journey, along the way you can expect there to be days when you’re excited and days when you’re frustrated. The purpose of this guide is to help you understand the home buying process so you will be able to navigate it as smoothly as possible. In this portion of the guide, we will be going over the following topics:
- How long does it take to finance a home?
- What is the home financing process?
- What’s the best advice for a first-time mortgage applicant?
A home financing checklist will also be provided so you can be sure you have all of the documentation you need when applying for your mortgage.
How Long Does It Take to Finance a Home?
According to the National Association of Realtors, the average homebuyer looks at ten homes over a ten-week time period before they are ready to settle on a home and start the application process. This doesn’t include the time it takes to finance the home.
The typical finance process from contract to closing takes anywhere from 30 to 45 days, not including the pre-qualification process. In some cases, the process can even take 60 days, but rarely does it take longer than that. Of course, if certain issues arise after the application is submitted, it can cause a delay in the processing.
The Contract Timeline
The usual timeline for financing a new home is as follows:
- 1 to 5 days for negotiating and submitting an offer
- 1 to 3 days for signing the sales contract
- 21 to 30 days for securing the financing
- 7 to 10 days for the home inspection to be completed
The best way to ensure the financing process goes as smooth and quickly as possible is to have all of the requested information and documents collected, and the application completely filled out before submitting it.
Once the contract is accepted, the lender may require additional documents or information. To keep the process on-track and on-time, it is crucial for the requested documents or information be provided to the lender as soon as possible.
What Is the Home Financing Process?
The home financing process is complex and can sometimes be quite lengthy. This is especially the case when the borrower doesn’t have the documentation needed at the very beginning, so knowing what is required is crucial for helping the process along without any issues.
Throughout the process, the borrower will hear terms like “escrow,” “titles,” “appraisals,” “closing,” and others. For the first-time buyer, these words can seem confusing or even intimidating, but they are simply processes that need to be met before a mortgage can be approved.
The home financing process is made up of ten steps:
- Educating Yourself on the Mortgage Process & Needs (welcome to the Homes How Tos!)
- Getting Pre-Qualified for a Mortgage
- Determining the Down-Payment
- Applying for the loan
- Locking in an Interest Rate
- Loan Processing and Property Appraisal
- Mortgage Loan Approval
- Preparing Escrow and Title Documents
- Title Transfer
Getting Pre-Qualified for a Mortgage
Obtaining a pre-qualification from the lender is one of the first things a home buyer needs to do for three key reasons. First, it will determine whether or not the borrower meets the credit requirements. Second, it lets the borrower know how much home they can afford. Third, being pre-qualified shows sellers that you are serious about buying a home. While getting pre-qualified is important, it does not guarantee a loan approval. In order to get approved, the borrower’s credit and job history need to remain at the point they were when they pre-qualified or better.
Determining the Down-Payment
The down-payment plays a large role in getting approved for a mortgage because the more money that can be paid upfront, the more comfortable the lender is going to be approving the loan. Most conventional lenders require at least 20%, but there are loans available that can be approved for less money down. Paying more than the minimum down-payment can also help a borrower afford a larger home than they are pre-qualified for.
Locking in an Interest Rate
Interest rates on home loans fluctuate on a daily basis. Locking the interest rate in is important for protecting your rate from going up between the application and the approval. A borrower can lock in their interest rate simply by paying an upfront authorization fee if the lock period is longer than 90 days. If the lock period is less than 90 days, then no upfront fee is required.
Applying for the Loan
When completing the mortgage loan application form, a borrower must provide all of the requested information, including their personal and financial information, and the property they looking to buy. During the application process, the lender will provide the borrower with a Loan Estimate (LE), which outlines the closing costs of the loan. The borrower must review and approve of the Loan Estimate before the application can be processed.
Loan Processing and Property Appraisal
Once the LE is approved by the borrower, the lender will collect the documents and information required to process the loan. Also during this phase, there will be a required appraisal of the property, which lets the lender know the property’s true value.
Mortgage Loan Approval
During this step, the lender carefully reviews the application and the applicant’s credit history. All of the financial information will be verified and the level of risk evaluated. If everything is accurate and in good standing, the lender will proceed to loan approval.
Preparing Escrow and Title Documents
Escrow is a certain amount of money that the borrower needs to provide to the Title Company to hold until all of the conditions of the loan approval are met. This process is also commonly called the “pre-closing.” The Title Company conducts a title exam during this time to ensure that the property’s title is clear. The Mortgage Note and Deed are also prepared at this time.
The closing is when the borrower signs the loan documents for the property being purchased. The down-payment is also made at this time, including all of the other related costs associated with closing, like title insurance, the cost of the title exam, appraisal fees, settlement fees, credit report fees, and the application fee.
The title transfer is the last phase of the home buying process. The contract gets verified, all of the closing funds are collected, and the purchase funds are given to the seller. Finally, the keys are then handed over to the new homeowner.
What’s the Best Advice for a First-Time Mortgage Applicant?
First-time home buyers can quickly get overwhelmed by the home buying process because there are so many moving parts, and they really have no control over most of them. This is why good, sound advice is so important for the first-time buyer. The following tips will help first-time buyers avoid many of the pitfalls suffered during the process of buying a home.
Know the Full Monthly Cost of the New Home
A first-time buyer can be led astray by some of the online real estate websites. These sites provide detailed information about the properties, but they also include the average monthly mortgage amounts for the homes. This information can be misleading because a new home buyer often uses that figure to determine whether or not the home is in their affordability range.
The problem is that the number being provided doesn’t take into consideration all of the other costs of owning the home. To have the best idea of how much the home will realistically cost, the buyer should take into account expenses such as property taxes, insurance fees, average utility expenses, maintenance costs, and anything else that might be needed to maintain the home on a monthly basis.
Research the Selling Prices in the Area of Interest
Some sellers may slash the prices on their homes if they need a lot of work. Other sellers may set their prices high if they are looking to get more out of the home than it’s actually worth. The only way a buyer can be confident that the home is priced accordingly is by researching the past selling prices for homes in the area where they are interested in buying. Buyers should especially look at the recent past sales of homes that are similar in style and size, referred to as “comps.”
Review Credit History
Although lenders will at times be more lenient or more strict in their loan qualifications, the quality of the borrower’s credit history remains a make-or-break factor. Therefore, a first-time home buyer is going to want to obtain copies of their credit reports from the three credit reporting agencies (Trans Union, Equifax, and Experian), at least three months before applying for a loan. This will give the borrower time to review the reports and dispute any incorrect information or illegitimate data with the bureaus so when it comes time to apply for the loan, their credit report is as good as it can be.
Gather All of the Required Documents Before Applying
A new home buyer needs to have all of their personal and financial documents collected, organized, and ready for the lender before they apply for their loan. Don’t wait to do this because some of these documents may be difficult to track down and missing just one document can cause a delay in the loan’s processing. The information a borrower is going to need includes but is not limited to:
- Pay stubs
- Bank account statements
- Last two tax returns
- Loan and credit line statements (if any)
- Names and addresses of all former landlords for the last two years
Get Pre-Qualified for a Mortgage Loan
Having a letter of pre-qualification from a lender is a strong negotiating tool for the first-time home buyer. It proves to sellers that the buyer is serious about purchasing a home. In addition, it helps a first-time buyer get a better idea of just how much home they can realistically afford.
Don’t Give Up
If a conventional lender denies the buyer’s loan request, they shouldn’t give up hope. There are other ways to get a mortgage. For instance, FHA loans have more relaxed qualifications than conventional loans, and they also don’t require as much money down (3.5% vs. 20%). If the borrower is active duty military or a veteran, then they can also look to a VA-approved lender for a loan. VA loans can be obtained with no money down and competitive rates in a lot of cases.
Home Financing Checklist
Having all of the required information and documents collected, organized, and ready for the lender at the time the application is submitted is essential for keeping the loan approval process moving smoothly. This cannot be stated enough. Here is a checklist that will help ensure you don’t miss a thing.
- Full legal name
- Driver’s license and/or government-issued photo ID
- Social security number (have your card available in case the lender requires a copy)
- Phone number
- Primary email address
- Residential mailing addresses over the last two years
- Primary and secondary income amounts and sources (pay stubs for the last 30 days will be required)
- Monthly debt obligations
- Values of bank, retirement, investments, and other assets (the most recent two months’ statements for each will be required)
- Name, addresses, and phone numbers of all employers over the last two years
- Information about the property being purchased, including the address, year built, purchase price, and estimated down-payment amount
- Estimates of the annual property tax, homeowners insurance, and homeowners association fees (if any) for the home being purchased
- W-2s for the last two years
- Federal tax returns for the last two years
- IRS Form 4506-T — Request for tax transcript, completed, signed and dated
- Written explanation if employed less than two years or if an employment gap exists within the last two years
Additional Income Verification for Self-Employed
- Federal tax returns (personal and business) for the last three years
- List of all business debts
- Year-to-date profit and loss statement
- Written credit explanation letter for any late payments, collections, judgments, or other derogatory items in credit history
- Judicial decree or court order for each obligation due to legal action
- Payment history for public utilities, phone, cable TV, car insurance, and other expenses (if the applicant doesn’t have a traditional credit history)
- Bankruptcy/discharge papers for any bankruptcies in credit history
- Homeowners insurance information, including agent’s name and phone number
- Purchase contract signed by all parties
Buying or refinancing a home is a big decision, so it is important for the borrower to be fully aware of the financial responsibility they will be taking on. Therefore, before making the final decision, there are several things to consider, including:
- Buying vs. Renting
- How Much Can You Afford?
- How to Calculate the Mortgage Payment You Can Afford
- What to Expect When Refinancing
Throughout this portion of the guide, you will find helpful tools that will be instrumental in providing you with the figures you’re looking for.
Buy vs. Rent
Choosing between buying a new home and continuing to rent is something that just about every homeowner has to consider at some point in their life. It can be tempting for a renter to make the jump to homeownership, but before they do, they need to be in the right position, both personally and financially. Here, we provide borrowers with expert advice on how to know when to buy versus staying in a rental.
When Does It Make Sense to Buy?
Every individual has a different personal and financial profile, so there is no simple and direct answer to this question. Some buyers are persuaded by rising interest rates or low housing prices, while others may not even want to start looking for homes until they have enough money saved for a down payment.
Ultimately, knowing when it is the right time to buy a home should be driven by the buyer’s circumstances and life goals. For instance, if a renter is getting married and wants to have children, then their apartment may be too small to support a growing family. Or, a renter may have a goal of owning their own home by the time they reach 30 years old. Whatever the case may be, there are five key factors that a renter should meet before they buy a house. These include:
- The Savings Are There: Most lenders are going to want the borrower to have anywhere from 10% to 20% of the home’s selling price saved for the down payment. FHA loans require less (3.5%), but no matter what type of mortgage the borrower is applying for, they need to prove to the lender that they can save money.
- Stable Lifestyle: If a borrower is looking to start a new career or their partner loses their job, then now is not the time to start looking at homes. Owning a home requires the buyer to have a stable lifestyle and consistent income. If a couple is expecting one of them to be laid off in the coming months, then they need to ensure that whatever mortgage they are applying for, they can afford to pay with just one income if necessary.
- More Affordable to Buy Than Rent: Rent rates in a lot of areas are just as high as mortgage payments, if not higher. Therefore, if the renter is going to have to pay more money to rent than buy, then they might want to start considering buying a home. An added benefit is when a renter becomes a homeowner, their monthly payment will be going toward equity in the home.
- Good Credit Rating: The stronger the borrower’s credit history, the lower the interest rate will be on their mortgage loan. So, this is an important factor to meet when deciding between renting and buying. Conversely, if the borrower’s credit is poor, then they should wait to apply for a mortgage, and instead focus on improving their credit.
- External Factors: There are several factors that a borrower has absolutely no control over, but these can still affect their decision. Declining or increasing interest rates is one such factor, while the state of the current housing market (buyer’s or seller’s) is another.
Tips on Savings to Prepare for Buying
As stated earlier, having enough money saved to put down on a home is important for a few reasons. It proves to the lender that the home buyer is financially responsible and capable of saving money. It also helps the buyer save money on their monthly mortgage payment because the more money that is put down, the lower the mortgage will be.
But, saving money isn’t always the easiest thing to do. Here are ten tips that can help you save the money you need for your down payment.
- Save your tax returns
- Save any bonuses or raises from work
- Set up automatic transfers from your checking to your savings account
- Refinance your student loans
- Keep your car when it’s paid off and deposit the payment into a savings account or refinance your car payment if you still owe money on it and transfer the savings to your savings account
- Any time you receive $5 as change for a purchase, put it in your savings account
- Use cash rewards credit cards and transfer the cash back into your savings account
- When your checking account is a few bucks over a round number, transfer the excess to your savings account
- See if your bank has a program that rounds your credit card purchases up to the nearest dollar and deposits the extra into your savings account
- Any time you receive “windfall” money, such as lottery winnings, birthday gifts, and others, deposit that money into your savings account
Each of these tips on their own makes for a slow but steady means of saving. But, by staying committed to your goal, you will gradually see your savings account grow.
How Long Do You Plan to Stay Where You Are?
Another factor that needs to be considered when deciding between renting and buying is how long you are expecting to remain in the area where you currently live. If you are planning on making a life-change within five years or you don’t particularly like the area in which you live, then remaining a renter may be a better idea than being restricted by a monthly mortgage obligation. On the other hand, if you love where you live and you plan on staying in the area for several years, then buying a home and putting down roots is a solid option.
Should I Rent or Buy?
If you are still unsure about whether you should rent or buy or your credit score is keeping you from getting approved for a loan, then there is another option that can be considered – leasing a home with an agreement to buy. Here’s a brief review of how this works.
How Does a Lease Option to Buy a Home Work?
The lease-to-buy option typically has fewer requirements than getting approved by a lender, and a lot of the terms are negotiated between the landlord/seller and the tenant/buyer. The down payment is also lower, with it essentially being the same thing as a security deposit.
A lease-to-buy option happens when the tenant leasing the home from the landlord states their intent to buy the property. A lease agreement is created to dictate the terms, including the rental rate and length of the lease. The tenant is also given the legal right to purchase the home on or after a certain date and at a certain price.
How Does Buying a Home Affect Taxes?
Unlike with renting, buying a home can benefit the buyer at tax time. In fact, there are five ways that buying a home can put more money in the buyer’s wallet through their tax returns.
- Mortgage Interest Deduction: The mortgage interest deduction allows a new homeowner the benefit of writing off interest on (up to) a $500,000 loan if they’re a single tax filer, or on a $1 million loan if they’re a couple filing jointly. Additionally, if they’re a couple filing jointly, they can also deduct the interest paid in home equity debt up to $100,000.
- Points Deduction: It’s not uncommon for a buyer to pay “points” on their mortgage in order to get a lower interest rate. One point is equal to 1% of the loan value and that money is tax deductible, either immediately or over time, depending on how many points are paid up front.
- Property Tax Deduction: When a home is purchased, the amount of property tax that is paid is tax deductible. So, the higher the property tax, the larger the deduction. The only requirement is that the deduction must be claimed the year the payments were made.
- PMI Deduction: Private mortgage insurance, or PMI, is usually required on home loans in which the buyer was unable to put at least 20% down. The amount paid to PMI is typically between 0.5% and 1% of the loan’s value and that money can be tax deductible if the buyer’s income qualifies them for the benefit.
- Home Office Deduction: If the buyer is self-employed or works as a freelancer out of the home, then they could be eligible for a home office deduction. The IRS allows a portion of the expenses required to conduct a business from home, like the cost of Internet service, electricity, etc. When filing their taxes, the buyer will need to figure out what percentage of living space the home office takes up.
How Much Home Can I Afford?
A home is the largest investment most people ever make. And, depending on how much the buyer can afford versus how much home they buy, their new home can either be a blessing or a curse. For this reason, it is very important for a buyer to fully understand the realities of the purchase they are about to make – and it all begins with knowing how much home you can afford.
How Much Do You Currently Pay in Rent Every Month?
If you currently rent and are able to pay your monthly rent comfortably, then the amount you are currently paying is a good starting point for determining how much home you can afford. However, there are certain costs associated with owning a home that aren’t included with a rental.
As a result, collecting all of your sources of income and your monthly expenses and debt obligations, and working out the numbers is a process that needs to be done.
Know Your Numbers
Once you have found the home you want to buy, you need to estimate the monthly home payment to make sure you can afford it. You can use a mortgage calculator to help you determine this information. A mortgage calculator will provide you with a monetary figure, but in order for it to be used as a guideline, it needs to include the following:
- Principal and Interest
- Mortgage Insurance
- Property Taxes
- Homeowners’ Insurance
- HOA or Condo Fees (if applicable)
Next, take the number the mortgage calculator provided and estimate what percentage of your income will be dedicated to paying the mortgage. The standard rule for lenders is 28%. If the mortgage payment accounts for more than 28% of your income, you will either have to find a way to increase your income or purchase a less expensive home.
Lastly, you will have to determine how much money you will have left after paying your monthly mortgage. To determine this, you add together all of your monthly income sources and subtract from that the amount of your mortgage. What is left is what you have to work with. Once you have this number, you will need to subtract each of your other fixed and variable monthly debt obligations, including:
- Car Payment and Insurance Costs
- Student Loan Payments
- Credit Card Payments
- Living Expenses (food, utilities, entertainment, clothing, etc.)
Once you go through the math, is the amount that’s left over enough for you to still be able to save? You do not want to get into a situation where you are working solely to pay your mortgage. Make sure the mortgage you are applying for is something you can comfortably afford or else you may wind up regretting your decision.
What Is My Monthly Mortgage Payment Going To Be?
You can determine your monthly mortgage payment, including taxes and insurance, by using our home loan calculator. Simply enter the price of the home you want to buy, the amount of your down payment, and the other requested details about the home loan. You will then be provided with a mortgage payment breakdown, payment schedule, and more.
How to Calculate the Mortgage Payment You Can Afford
Our home loan calculator can give you a good idea of how much of a mortgage payment you can afford. The calculator is easy to use and will require the following information:
- The area in which you are buying a home
- Your annual household income before taxes
- The amount of your down payment
- Total minimum monthly debt obligations
- Approximate credit score
- Additional information and details
Find out how much you can afford – use our mortgage payment calculator today.
Considerations When Refinancing a Home
If you currently own your home and are thinking about refinancing, there are certain considerations that need to be kept in mind, in particular, knowing how much your home is actually worth in the current market and what to expect when you get a second mortgage.
What Is My House Worth?
The housing market fluctuates almost daily, so knowing how much your home is worth at the time you want to refinance is essential for determining whether or not now is the right time to do it. For instance, if home values are trending low, your home is going to be worth less and will therefore have less equity. This will make it less profitable for the property to be refinanced. But, if home values are on an upward trend, then it is likely a good time to refinance your home.
You can find out how much your home is worth simply by using our home value estimator tool. In just minutes, you can have the information you need to make the right decision for your home.
Getting a 2nd Mortgage
A second mortgage can be taken out on a home when it has a significant amount of equity. For instance, if your home is valued at $300,000 and you have $120,000 left on your current mortgage, then you have $180,000 of equity in your home. If you wanted to take a second mortgage out, the lender may allow you to borrow as much as 80% of your equity, which in this case would be $150,000.
Second mortgages can be a good way to build wealth or they can be used to pay for substantial purchases, like a child’s college education, a luxury vacation, an in-ground swimming pool, a new car, or a major home improvement. But, in order to get the most value out of your home, you need to determine whether or not it is valued where you need it to be.
When you get a second mortgage, you need to be careful because if the market should flip, you could wind up being upside-down in your mortgage, which means you owe much more on your home than it is actually worth.
The best way to determine if taking out a second mortgage on your home is a good idea in the current housing market is by using our home value estimator tool. You can find out how much equity you have in your home and whether or not it makes good financial sense to use your equity by taking out a second mortgage.