Homeownership is not an easy task. It needs planning, commitment, resourcefulness, and knowledgeable partners. It is like any other successful project: you have to put in the right amount of components to make it work. So here are the 10 most common steps to the homeownership that you should follow:
It is prudent for the home buyers to go through pre-qualification first before you even start looking at your first possible house. This will give you a clear idea how much house you can afford and how much your mortgage payments are going to be. In addition, the process will force you to look clearly at the picture early in the process and decide how long you are planning to stay in this house and, based on that, what are the minimum and maximum criteria for the house should be.
In this step you will identify the source of your loan, which can be a loan broker or a direct lender, such as you bank [See related article], and discuss your best options based on your loan eligibility criteria, as well as expected length of staying in the house. Average time most people spend in the same house is five to six years, however, most borrowers are asking for a 30 year fixed mortgage. Go with a short-term fixed rate (5/1 or 7/1 ARM, for example), and you can save almost .5% off your interest rate. [See related article]
To get your loan approval, you need to be prepared. Bring with you copies of your tax returns for two years with all W-2’s, and 1099’s, three months of all your bank statements, investment and retirement accounts, one full month of pay stubs or other forms of income, letter verifying any gift money for your downpayment. It is quite possible that not all of these documents will be used by the lender, but let the loan officer decide which combination of the supporting docs will help you get the best deal. After you complete the loan application, the lender might verify your employment, assets, and mortgage/rent payment history. This usually takes a couple of days. The more complete is your application package, the faster the lender can get you a formal pre-approval letter. Now you are ready to go to the next step:
If you spend some extra time on deciding what kind of house you want and in what neighborhood, as well as narrowed down your other criteria, you can start shopping for a house now. Some people prefer to do the search themselves, go to every open house and search through the classifieds section in the local newspaper until their eyes hurt. It is much smarter to use a qualified real estate agent to help you with the search. It will save you a lot of time, money and headaches. Unless you hire a buyer’s broker, a new category of real estate agents who get paid by the buyer directly, most of the real estate agents that work with you are getting paid part of the commission of the selling agent. You don’t pay them! Even though the agent represents you, the buyer, the agent is still getting paid from the commission of the seller’s agent. That’s how the market works without getting too deep into the detail, so use it to your advantage as a smart buyer. Ask your friends for referrals, talk with several realtors, find an agent that you feel comfortable with and work with this person.
Once you find the house that you like, act fast. If you are working with an agent, have an agent pull up “sales comps”: the history of comparable properties sold in the neighborhood in the last six months. This would help you decide on the maximum price that you are willing to pay for the property. Once you decided on the price, have your real estate agent prepare a purchase offer, which will outline your terms of the purchase. Always, include contingencies of inspection of the property and termite clearance! If you don’t, watch Tom Hank’s movie "Money Pit" to refresh your perspective on this issue.
Once your offer or counteroffer is accepted, your lender will order an appraisal. It is required on all home sales. If the appraisal comes in too low, your option is to counteroffer again at a lower price to reflect the appraised value of the property, or to increase the downpayment to keep the loan. Do not go for an artificially high appraisal that would stretch the price of the property to the higher level just so you could get into this house. It will hurt you in the long run: you will keep making payments for many years to come without accumulating any real equity in the house, and the appreciation that you were hoping for may never come.
Once the escrow is opened, the title company will do a title search to identify any unpaid liens against the property that need to be cleared before you take possession of the property. The liens can be of different types: loan liens, tax liens, judgment liens, mechanics liens, and so on. Make sure that ALL these liens are paid off and REMOVED by the title company at the time of closing the escrow. Do not expect the lien holder to record removal of the lien off your title, once they get paid, your title paperwork moves from the top of their list of priorities to the very bottom, so make your title company earn its money!
Title insurance protects you from liens on the title that were not discovered during the escrow time as well as many other things. the funny thing is that the title insurance is the only type of insurance that protects you from things that have already happened. Still, this insurance is the money well-spent, and it is required by lenders to fund the loan.
It is a must to inspect the property thoroughly by yourself and with your real estate agent! It is true even if you are buying a fixer, unless you like surprises and you have money to burn. Vast majority of buyers are not qualified to do a professional inspection and need to have a real pro, a licensed inspector conduct a house inspection on your behalf. The inspection is normally scheduled by the buyer’s agent, costs approximately $300 and is paid for by the buyer directly to the inspector. This is one of the best investments in this process that you will make. Even if you are a seller, I recommend doing an inspection prior to putting the house on the market, it will save you a lot of headache later in the process.
Termite inspection is done and traditionally paid for by the sellers. The inspection report will have two sections that will describe actual or potential damage to the property. Section 1 deals with actual damage to the subject property due to termites, pests, fungus, etc. and normally is taken care of by the sellers prior to close of escrow. Insist on having the sellers complete all Section 1 repairs and on obtaining a Clearance report with a complete re-inspection by a licensed termite or pest control company prior to the close of escrow. Section 2 of the pest report deals with potential damage or preventative maintenance of the property and is normally taken care of by the buyers. For example, a branch of a tree that touches the roof of the house can eventually become a source of termites, and it is up to the buyers to cut that branch to prevent such damage in the future.
Once all contingencies are satisfied, the downpayment money is transferred to the escrow, you are ready to close escrow. You will go to the escrow company or your lender’s office where you would sign a stack of papers under a watchful eye of a licensed notary. These papers will give a green light to the lender to fund the loans, to the escrow company to pay off the sellers or sellers’ lien holders, disburse money to the real estate and loan agents, and for the title company to record a new title in your name. Congratulations, now you are an official HOMEOWNER!
it is time to start packing. This is the time when we manage to find things we thought we had lost forever and would never recover, we question our judgment for buying certain things and promising ourselves that we would never make another unwise purchase like this again (ha-ha!), and eventually wonder if with all this staff we should have bought a house twice its size. Recommended tape for listening: George Carlin’s "Stuff".
The time for the move can be very stressful, as very often things do go wrong during the move. Discuss with you family the situation up front, identify the signs of growing irritation and don’t let the stress of the move to be taken out on your family. If you feel irritation, take a break, concentrate on another chore, if you can’t see an immediate solution, let it rest for a minute and come back to the situation after you calmed down. The move can be turned into a fun experience that makes your family feel stronger together.
Well, here you are on your own, but I do want to be invited (even if I had nothing to do with your real estate or a loan transaction!) Return to the home page for my contact information J
The same 12-months rule applies to the expenses as well: the expenses need to be payable in the 12 months or longer to be included into the debt ratio. For example, if your car loan has only 11 months left, it doesn’t need to be included in your debt calculations. The same thing with the charge cards that you use for your company expenses and then pay them off every month, but you have to show the history of these monthly payoffs with the credit card statements.
Another point to consider: if you get too much money back from the IRS every year because of your mortgage interest deductions, it is time to bring up the issue with your accountant at work. Your accountant can reduce your withholdings by an appropriate amount to account for the mortgage deductions. No matter what loan you opt for, you always need to remember that regardless of the DTI ratio, the mortgage loan should not be an impossible financial or psychological burden. Mortgage loan is an important financial commitment, and before you make this commitment to the lender, you need to make a serious commitment to yourself and your family to improve your financial planning skills and leave your life debt free.
Alex Lisnevsky
Mercury Capital Group Inc.
(760) 757-5070