HOMEOWNERS, FLOOD & EARTHQUAKE INSURANCE
What is it?
Homeowners insurance pays for losses and damage to your property if something unexpected happens, like a fire or burglary. Note that if you are buying into a multi-unit building, your condominium association’s fees usually include master insurance for the common areas of the building, but you need your own insurance for your specific unit. Lenders require proof of homeowner’s insurance as a condition of your loan and often require you to obtain enough coverage to the replacement cost of rebuilding the home from a carrier that has an A.M. Best rating of B or higher.
In addition to homeowner’s insurance, in some locations it might make sense to purchase flood coverage which is not covered by homeowner’s insurance. Learn more about flood insurance by clicking here. Finally, depending on what part of the country you live in, you may want to consider earthquake insurance, as again, earthquake disasters are not covered in a standard homeowner’s insurance policy. Many lenders provide you the option to pay for the insurance as part of your monthly payment.
Important Considerations on Picking your Policy
• Bundle Discounts – This is your opportunity to save money by potentially bundling your auto and other insurances into one carrier (as most carriers offer bundle discounts).
• Reputation – Consider the reputation of the insurance carrier in how they cover their customers when something happens.
Tip: Compare the cost and coverage amounts by changing around the deductible to find the right plan for you.
The Insurance Process
1. Once you have a quote in hand, show your loan officer the quote and make sure it meets the lender’s requirements for insurance coverage.
2. Your insurance company will then provide you a “binder” (this is simply a document detailing the insurance coverage) to give to your lender showing proof of coverage even though the policy has not been locked in (“bound”) yet.
3. You do not need to ”bind” (lock in) your insurance until the closing day of your loan. Keep your insurance company posted on the status of your loan and give them a few days heads up before the closing. Note that your insurance company should never bind the policy more than a day before the closing date.
# of Months to Breakeven
Lenders will typically quote you the breakeven cost which is the amount of time it will take for the savings from your new monthly payment to exceed the cost of closing the refinance loan.
PMI
Private mortgage insurance is usually required if the down payments is less than 20%, and the cost is typically 0.5% to 2.25% of the loan amount per year.
Cash Out
The amount of your home’s equity you plan to receive in cash. This amount gets added to your new refinance balance.
Monthly Payment goes Down
For example, if you were paying 4.25% previously on a 30 year loan that you started 6 years ago (leaving 24 years left on your loan), lowering the interest rate slightly to 4% will increase the total interest you pay if you take out a new 30 year loan. Even though you are paying less interest each month, you are adding 6 more years of payments. How many years you choose for your refinanced loan can be more important than your new interest rate in determining how much money in total you can actually save.
Interest Rate
The new interest rate you’d like to lock in.
CONVENTIONAL LOANS
PROS
• More streamlined in approval given the government is not involved.
• Because the loan is the most common and is faster to close, you are likely to be a more competitive buyer.
CONS
• Higher credit score requirements than government backed loans.
• Higher down payments generally required over government backed loan types.
POINTS
Points, also known as discount points, are an upfront fee you pay in order to lower your interest rate (you can think of them as pre-paid interest on your loan). The fee is expressed as a number of “Points”. 1 point equals a fee of 1% of your mortgage loan, 2 points equals a fee of 2% of your mortgage loan, and so on. A loan with one point should always have a lower interest rate than one with no points (assuming you are comparing the same loan type from the same lender). It is important to note that a loan with one point from one lender may or may not have a lower interest rate than the same loan with zero points from a different lender; this is because various lenders have different pricing structures, which is why is always recommended you shop around and receive multiple quotes from various lenders.
Tip: Discount points may be tax deductible in certain circumstances. Consult your tax advisor on this.
CREDITS
Lender credits work in the same way as point, but opposite. You pay a higher interest rate in exchange for the lender giving you a credit to offset your upfront closing costs and theoretically allowing you to afford a larger mortgage. Lender credits may appear on lenders worksheets as negative points. Just like with points, the exact increase in interest rate depends on your lender and the type of mortgage. Again, we recommend you shop around to see which lender will be more competitive.
Tip: While lender credits can be provided in exchange for a higher interest rate, note that lender credits are also used as a key tool by lenders to win a loan, especially if they don’t have flexibility to go down on the rate further. It never hurts to ask your lender whether they are offering any promotion / lender credit at the current time. Sometimes loan offers will be able to provide a “free lender credit” to help them win your business.
TYPICAL HOME INSPECTION SCOPE
A home inspection will vary in scope depending on the type of inspector (engineer, architect, licensed or unlicensed inspector) you hire. However most inspections will include the following:
∙ Structural elements such as construction of walls, ceilings, floors, roof and foundation. Key questions should be answered such as does the foundation seem secure? Does the roof leak? Has there been a fire in the attic?
∙ Exterior evaluation including wall coverings, landscaping, grading, elevation, drainage, driveways, fences, sidewalks, fascia, trim, doors, windows, lights and exterior receptacles.
∙ Roofs and attics inspected for framing, ventilation, type of roof construction, flashing and gutters. However, note that many inspectors don’t guarantee the roof condition.
∙ Plumbing including drainage, waste and vent pipes condition. Toilets, showers, sinks, faucets and traps are inspected but not sewers.
∙ Water heaters, furnaces, air conditioning, duct work, chimneys, fireplaces and sprinklers (though not all inspectors will check sprinklers).
∙ Electrical systems including the main panel, circuit breakers, types of wiring, grounding, exhaust fans, ceiling fans and light fixtures.
∙ Appliances sometimes are included, including the dishwasher, oven, garbage disposal and washer / dryers. Whether appliances are included or not, smoke detectors are almost always included.
∙ Garage walls, ceiling, firewall, door opener, lights, windows and roof.
WHAT IS TYPICALLY NOT COVERED?
Asbestos, radon, methane, radiation, formaldehyde, wood-destroying organisms, mold, mildew and fungi, rodents and lead.
ADDITIONAL INSPECTION SERVICES (OPTIONAL)
1. Lead paint inspection – the federal government banned the use of lead based paints in 1978 but homes built after that year may still have lead-based paint.
2. Termite inspection
3. Mold inspection
4. Water / Septic System / Well Quality inspection
5. Environmental inspection – Buyer’s rarely get this but if you believe there are environmental hazards in your area, its not a bad idea to get this done.
DOWN PAYMENT
The down payment requirement depends on the type of mortgage and credit score ranging from 0% to 20%. Down payment, less than 20% may require private mortgage insurance (PMI). PMI may require a premium of 0.5% to 2.25% of the loan amount per year.
# of Months to Breakeven
How many months it will take for the monthly savings to pay for the points.
INTEREST RATE
This is pre-filled with the current average mortgage interest rate. Please enter your quoted rate.
Interest Rate
The interest rate of your loan when you first took it out.
Include Taxes/ Insurance
Your loan may require an escrow impound account to ensure your property taxes are always paid on time and your insurance is always current. This account will pay your property taxes and/or insurance for you by collecting 1/12th of the annual property taxes and/or insurance along with your mortgage payment.
FHA LOANS
PROS
• Lowest credit score requirements of the various loan types
• Least restrictive in terms of who qualifies of the government backed programs (since VA and USDA loans have certain criteria attached to them)
• Outside of VA and USDA loans, FHA loans allow you to place the least down payment
• More forgiving to qualify if you’ve had a bankruptcy or foreclosure in the past
CONS
• Given the lower credit score requirements (and therefore greater risk for the lender), these loans will carry higher interest rates.
• You will have to pay for mortgage insurance which will increase the size of your monthly payments.
• You are dealing with two entities to ultimately get a loan approval : HUD & your lender.
IMPORTANT DETAIL
• Those with less than a 500 score are not eligible for FHA loans.
• Given that the government is doing a favor (doesn’t happen often!), there are limits to the loan amount because they don’t want you going out to buy a mansion.
• Loan limits vary by state and you will want to check here for your state limits.
• Appraisal must be done by an FHA approved appraiser
• Two years of employment at same company (sometimes same industry is fine)
• Property must be primary residence (no rental properties)
• 18 years or older
POINTS
Points, also known as discount points, are an upfront fee you pay in order to lower your interest rate (you can think of them as pre-paid interest on your loan). The fee is expressed as a number of “Points”. 1 point equals a fee of 1% of your mortgage loan, 2 points equals a fee of 2% of your mortgage loan, and so on. A loan with one point should always have a lower interest rate than one with no points (assuming you are comparing the same loan type from the same lender). It is important to note that a loan with one point from one lender may or may not have a lower interest rate than the same loan with zero points from a different lender; this is because various lenders have different pricing structures, which is why is always recommended you shop around and receive multiple quotes from various lenders.
Tip: Discount points may be tax deductible in certain circumstances. Consult your tax advisor on this.
Original Loan Amount
The amount of your loan when you first took it out.
Loan Terms
The term, in years, of the refinanced loan you’re considering (which would replace your current one).
Closing Cost
Typical fees include application fees, loan origination fees, appraisal fees and other (sometimes optional) expenses. You can generally plan on paying about 2% to 5% of your refinance amount in closing costs. We’ve estimated your closing costs as 3% of your refinance amount.
Origination Year
The year you took out your loan.
Origination Month
The month you took out your loan.
Loan Terms
The length of time you originally had to pay back your loan (usually 30 or 15 years).
MONTHLY P&I BASED ON DEBT TO INCOME
This is the maximum you can pay for principal and interest on the loan based on the debt-to-income ratio.
MONTHLY P&I BASED ON FRONT END RATIO
This is the maximum you can pay for principal and interest on the loan based on the front-end ratio.
DEBT TO INCOME RATIO
Typically, lenders require that your total debt (including your mortgage and other debts such as car or student loan payments) should be no more than 36% of your income. Certain loans allow for higher DTIs, such as FHA loans (43%) and VA or USDA loans (41%).
FRONT END RATIO
Typically, lenders require that the mortgage payment (which includes property taxes and homeowners insurance) is no more than 28% of your income.
HOA Fees (monthly)
Enter the average homeowners association dues (HOA fees) of homes you are interested in. Typically, owners of condos or townhomes are required to pay HOA fees to cover shared amenities or services within the property.
HOME INSURANCE
Commonly known as hazard insurance, most lenders require insurance to provide damage protection for your home and personal property; all homeowner’s insurance policies contain personal liability coverage. Costs vary dramatically by location due to the likelihood of natural disasters. Average rate is about 0.35% of your expected home value.
PROPERTY TAX
A typical annual property tax on the purchase price of the home is 1.14%. The property tax will vary by location. Enter the approximate property tax based on your target home value and your local property tax.
ANNUAL INCOME
Include all income for you and your co-borrower before taxes, including base salary, commissions, bonuses, overtime, tips, rental income, investment income, alimony, child support, etc.
DOWN PAYMENT
The down payment requirement depends on the type of mortgage and credit score ranging from 0% to 20%. Down payment, less than 20% may require private mortgage insurance (PMI). PMI may require an initial premium payment of 1.0 percent to 5.0 percent of your mortgage amount, as well as an additional monthly fee depending on your loan’s structure.
MONTHLY DEBT EXPENSES
Include all of you and your co-borrower’s recurring monthly payments for auto loans, personal loans, credit cards and any other liabilities that would show up on a credit report. Do not include current rent or the mortgage you are applying for or other expenses that would not appear on a credit report.
FREE ANNUAL CREDIT REPORT
A 2013 Federal Trade Commission study found that 5% of credit reports contain errors that can erroneously ding your score. It’s always a good idea to check your detailed credit report to ensure your profile is accurate, particularly before applying for a mortgage loan. You are entitled to one free report annually; the official site where you can get your credit report containing data from all three bureaus is annualcreditreport.com
CREDIT SCORES
The three main credit bureaus – Equifax, Experian and TransUnion – create your credit reports, which VantageScore and FICO use to come up with a score. All of your various debts from credit cards, home loans, car loans, student loans, etc. are used to compute this score. Often the credit bureaus have slightly different data from one another, so your score may vary for each bureau. FICO is currently the only tool that is approved for use to evaluate credit risk for government-sponsored loans, while most scores offered for free online are from VantageScore. Fortunately both FICO and VantageScore are very similar in approach and produce a score in the range of each other. FICO discloses exactly what goes into your credit score and while VantageScore doesn’t, it is widely known to be similar to FICO. Note that the old VantageScore went up to 900 (which is why you may see some credit score scales up to 900), but they recently updated it to be on the same scale as FICO. If you want more detail on comparing credit score you can visit a good page on Nerd Wallet by clicking here.
TYPES OF CREDIT (10% OF SCORE)
HOW IT IS CALCULATED
Those with variety of debt (credit cards, mortgage, student loan, etc.) score highly. The scoring companies believe those with a lot of different types of debt are safer borrowers (which doesn’t make sense to us!).
HOW TO OPTIMIZE THIS SCORE
• Bear in mind this is the least important factor of the 5 scores. Over time this factor will likely work itself out for you as most folks will have a mix of debt between their mortgage, car payments, credit cards, personal loans, and other types of installment loans as they progress in their lives.
• There is no stated rule of how many accounts you should have in total but there is some evidence to show those with 10 or more accounts score well in this area.
• Obviously don’t open accounts you really don’t need just to maximize this score. If you do go out and get another type of credit, while this part of your credit score will increase, your “New Credit Opened” portion of your credit score will decrease.
• Our recommendation is to not open new accounts unless you need them, especially when about to apply for a mortgage.
LENGTH OF CREDIT HISTORY (15% OF SCORE)
HOW IT IS CALCULATED
Those with longer standing accounts score highly. The longer your accounts have been around the safer you are deemed as a borrower. Note that they will take an average length of all your accounts to determine this score. The scoring companies do not disclose what constitutes a great score, but it is generally understood if your average length per account is greater than 10 years, then you will score very strongly in this category.
HOW TO OPTIMIZE THIS SCORE
• There is a misconception that closing unused accounts is a good thing; unfortunately this is not true, especially if they are older accounts in good standing as taking these accounts out will lower your average account length. It’s worth keeping that unused account open, especially if it doesn’t carry an annual fee.
• Obviously with new accounts it takes years of having good credit to get a good score in this area so we encourage you to build credit early on and be patient on this one.
• Another interesting way to optimize this score is to become an authorized user on a good friend’s or relative’s card account; once you are authorized, their account shows up on your credit report and you are basically inheriting the good credit history of their account. This is particularly helpful for those that are younger and don’t have a long credit history.
NEW CREDIT OPENED (10% OF SCORE)
HOW IT IS CALCULATED
Those who have not applied for new debt in the past 6-12 months score highly. The scoring companies are trying to determine the risk related to how often you go out to borrow. The more accounts you open recently (or try to open), particularly within the last 6 to 12 months, the riskier you are deemed to borrowers and your score will be penalized. However it is a catch 22 as without opening new accounts you will never have a good line of credit to obtain a strong credit history down the road! Important to note that in addition to opening new accounts, “hard inquires”, which are when you give a lender permission to access your credit history to determine if you are creditworthy, hurts your score slightly for each inquiry.
HOW TO OPTIMIZE THIS SCORE
• If you need to open a new account, we recommend not opening the new account in the same period of when you are applying for a major loan (like a mortgage!). Any new credit you take is going to lower your score so it’s better to open your accounts when you don’t really need a great score.
• If you need to have hard inquiries and you keep the total number to under 2 every six months, it will minimally affect your score.
• The big takeaway: Do not open any new credit lines while you are in the mortgage process and minimize hard inquires into your credit history.
AMOUNT YOU OWE (30% OF SCORE)
HOW IT IS CALCULATED
Those who have the least percentage borrowed of their total credit line score highly. The scoring companies are trying to determine your default risk with this category. Having less debt makes you a safer borrower. At the end of each of your monthly statements they are going to measure how much you borrow as a percentage of your credit line, a measure mostly relevant on your credit card accounts. The lower you borrow, the higher your credit score will be. There are various thresholds published on what this number should be under, but a monthly balance under 1% of your total credit limit will score the highest for this category.
HOW TO OPTIMIZE THIS SCORE
• If you have the financial flexibility, pay down your credit cards in full BEFORE your monthly statement ends. Remember that they measure your utilization based on the numbers from your monthly statement. So set a reminder to do this a few days before your statement closes out each month. This way your utilization ratio on your monthly statement will be 0%, which will lead to a perfect score in this category! Do this for a couple of months while you are searching for your home and then you can go back to your lender when you found your place with a more competitive credit score. You will be surprised how much your score will improve (not uncommon to see a 20 to 30 point increase).
• If you don’t have the financial flexibility to do this, try to keep the ratio under 6%, or worst cast under 30% (two commonly published figures where the score becomes more negatively affected once you cross them).
• Finally another way to reducing your utilization ratio is asking for a credit line of increase. HOWEVER, we do not recommend you do this if you plan to buy in the near term as your provider will likely put a hard inquiry into your credit to determine if you are worthy of an increase, thereby potentially decreasing your credit score in the near term.
PAYMENT HISTORY (35% OF SCORE)
HOW IT IS CALCULATED
Those who have not missed a payment score highly. Payments late by 30 days or more hurt your score, and the later you pay, the greater the damage.
HOW TO OPTIMIZE THIS SCORE
• Obviously pay off any outstanding debt that is overdue immediately and keep your credit free of any missed payments for a few months. Even if your score has been negatively impacted already, it has the potential to go up a bit once you do this. For some folks the extra points matter in qualifying for some types of mortgages.
• If you’ve had an accidental late payment only once, there is a chance the company will remove it from your credit report if you call them and ask. Not guaranteed to work but worth a simple call. This obviously will not work if you have a history of late payments.
• Longer-term, any account that has a derogatory mark will eventually fall off your credit history in 7-10 years, so at least a mistake in the past won’t follow you around forever.
INTEREST ONLY LOANS
These loans do not pay any Principal at all for a period of time (typically 5, 7 or 10 years). Following that period, monthly payments go up significantly because the principal payments then come into play (and given you didn’t pay any principal for the interest only term, you are going to need to catch up for the remaining term of the loan). Interest rates are also adjusted after the initial term to the current rate. Unlike an ARM, there is usually no interest rate cap when the fixed period is over.
PROS
• Monthly payments are low during the interest only term, allowing you to afford a larger home
CONS
• Significant increase in monthly payment after the interest only period; borrower should plan ahead to be able to handle these payments; even if you plan to sell the property, you never know what the market might be like at that point so always best to be prepared.
• No interest rate cap after the fixed period is over
• You are not building any equity in your home during the interest only portion of the loan
• Not available for conventional or government-sponsored loans
GOOD FOR
Those who want to afford a bigger home and know that they will not be there for a long period of time
ADJUSTABLE RATE MORTGAGE (ARM) LOANS
These loans lock in the interest for a period of time but then the rate changes after that fixed period to the current interest rate at that time. Most common are 10/1, 7/1, 5/1 and 3/1 loans. The first number indicates the number of years the rate is guaranteed to be fixed and the second number indicates how often the rate can change after that fixed period. For example, a 7/1 ARM means you have the rate locked for 7 years and every one year after that it will adjust up or down based on what interest rates are at that point. There is usually a fixed cap that protects you in terms of how much the bank can raise the rate each year.
PROS
• Because the rate is only fixed for a period of time, you will get a significantly cheaper rate (roughly 1% cheaper on average to a fixed rate mortgage).
• If you plan to live at a property for only a few years, these are great options knowing you will end your mortgage before the rate lock period is over.
CONS
• If you end up staying at your property for longer than the fixed rate portion of the loan and interest rates rise, expect to pay a higher rate.
• Not available for USDA loans.
GOOD FOR
Those who do not plan to be at their home for a long period of time
FIXED RATE LOANS
These loans have a fixed interest rate for the duration of the loan, allowing you to have the same monthly payment throughout. The most common length is 30 years, though they are available for different lengths of time such as 15 years, depending on how quickly you want to pay off your loan.
PROS
• Great way to lock in a rate during low interest periods
• If you are planning to hold / live in the home for a long time, this is a great option knowing your rate is fixed for the life of the mortgage
CONS
• Since the bank is taking the risk of locking in the rate for the full loan term, these tend to be more expensive than adjustable rate mortgages
• Most banks will require you to have private mortgage insurance if you put down less than 20%
GOOD FOR
Those who plan to be at a home for a long time and do not want to take the risk of future interest rate changes
USDA/RHS LOANS
PROS
• Unless you are a qualified military member for a VA loan, this is the only other option that allows the general public to buy a home with no money down
• More competitive interest rate (up to 40 basis points, or 0.40% less than conventional loans)
CONS
• If you live in a major city or large town, chances are your area doesn’t qualify
• There is a 1% upfront fee of the loan amount plus a small monthly fee
• Must be primary home for one family and not a multi-unit home; can not use for a second home purchase.
• You are dealing with two entities to ultimately get a loan approval: USDA & your lender
VA LOANS
PROS
• Typically easier to qualify than a conventional loan
• Typically competitive interest rate is offered for these types of loans
• Ability to buy a home with no down payment
CONS
• You are dealing with two entities to ultimately get a loan approval : the VA & your lender.
IMPORTANT DETAIL
• If you qualify, you must obtain a Certificate of Eligibility (COE) from the VA. Click here to start the process of getting your COE.
CONVENTIONAL JUMBO LOANS
PROS
• More streamlined in approval given the government is not involved.
• Given loan’s common place and speed of closing, you are likely to be a more competitive buyer.
CONS
• Higher credit requirements than a Conforming loan given the larger size of the loan.
• Higher down payments generally required over government backed loan types.
POINTS VS. CREDITS
POINTS
Points, also known as discount points, are an upfront fee you pay in order to lower your interest rate. The fee is expressed as a number of “Points”. 1 point equals a fee of 1% of your mortgage loan, 2 points equals a fee of 2% of your mortgage loan, and so on. A loan with one point should always have a lower interest rate than one with no points (assuming you are comparing the same loan type from the same lender). It is important to note that a loan with one point from one lender may or may not have a lower interest rate than the same loan with zero points from a different lender; this is because various lenders have different pricing structures, which is why is always recommended you shop around and receive multiple quotes from various lenders.
CREDITS
Lender credits work in the same way as point, but opposite. You pay a higher interest rate in exchange for the lender giving you a credit to offset your upfront closing costs and theoretically allowing you to afford a larger mortgage. Lender credits may appear on lenders worksheets as negative points. Just like with points, the exact increase in interest rate depends on your lender and the type of mortgage. Again, we recommend you shop around to see which lender will be more competitive.
KEY ATTRIBUTES OF A GOOD AGENT
KNOWLEDGE / EXPERIENCE
PERSONAL ATTRIBUTES
Tip: If applicable, be careful with the pressure you may feel to work with a family member or friend who is a real estate agent; remember that this may be the most important purchase of your life so it is important to find the agent that is most experienced for what you are looking for.
RATE LOCK QUESTIONS
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EXTENDED RATE LOCKS
Some common scenarios when buyers consider purchasing an extended rate lock feature in exchange for an upfront fee (essentially it is like insurance) include:
APPRAISAL
A home appraisal is an unbiased report on the worth of a house in the fair market, performed by a trained and licensed appraiser. Lenders want to verify that the house is worth more than you’re borrowing since the house will serve as collateral for the loan — i.e. they can sell the house if you stop making payments. The appraiser must be chosen by your lender to provide a level of independence from the buyer and seller. Most purchase contracts contain a provision (a “contingency”) that if the home does not appraise for the amount you offered to pay, you are not obligated to complete the transaction (click here to go back to the important contract negotiating features).
After visiting the home and evaluating recent sales in the area, an appraiser creates a report with the appraised market value and comparable properties. You’re entitled to receive a copy of that report. If the appraisal identifies major repairs that are needed, the lender may require that the repairs be made prior to closing as a condition of getting the loan or the lender may ask you to put enough money in a special account to pay for the repair immediately after closing.
Tip: If you receive a low appraisal, discuss options with your agent. As a buyer, it is natural for you to want the seller to reduce the price, but there might be other options such as obtaining another appraisal or providing a bigger down payment on your purchase.
IMPORTANT CONSIDERATIONS WHEN PICKING YOUR INSURANCE BROKER
• Access – All insurance brokers get the same EXACT same pricing to sell you insurance from the major carriers, however not all brokers are created equal as many brokers (particularly the smaller firms) don’t have access to all the carriers. Note that there is no price advantage by going directly to the insurance carrier so therefore we recommend using a brokerage firm that has access to the full market. Click here (1) for a quote from JW Terrill, one of the largest insurance brokerage firms in the country.
• Single Broker System – Unlike receiving quotes form multiple mortgage lenders, in the insurance world you can really only work with one broker because once a broker requests quotes from insurance carriers, they automatically block out in the system any additional insurance brokers that may try to represent you with that carrier. This system is designed by insurance carriers to avoid potentially paying two brokers for the same business.
• Honesty – Insurance brokers get an annual percentage of the policy premium you purchase; therefore it is in their incentive to sell you more insurance than you may need. Find a broker who is in it for the long-run and values your relationship to sell you just what you need.
• Customer service – Because insurance brokers receive an annual percentage of the premium after you purchase a policy, their sale is technically done and they have the incentive to focus on looking for new business rather than helping their clients when they have to file a claim. The best agents understand that in order to keep their clients (and the broker’s annual recurring commission) that they need to be there when something happens or to be responsive to answering your questions.
TYPICAL DOCUMENTATION NEEDED
The below is a list of items you can expect to provide to your lender. If you are in doubt whether your lender is going to need a particular piece of documentation, gather it anyway as they likely will ask for it further down the process. Remember, the more organized you are, the quicker your loan process will be completed.
– Pay stub for the last 30 days
– W-2 forms, last two years
– Signed federal tax return, last two years
– Documentation of any other sources of income
– Bank statements, two most recent
– Documentation of the source of your down payment: investment or savings account statements showing at least two months’ history of ownership. If some of the funds were a gift, get a signed statement from the giver stating that the funds were a gift.
– Documentation of name change, if recent
– Proof of your identity (typically a drivers’ license or non-driver ID)
– Social security number
– Certificate of housing counseling or home buyer education, if you have one
Note: Veterans and military members should obtain a Certificate of Eligibility from the VA
MORTGAGE INSURANCE
Mortgage Insurance, or PMI which stands for Private Mortgage Insurance, is a layer of protection lenders require for themselves when you are putting down a smaller down payment (typically less than 20%) as they deem your loan riskier. If the lender requires PMI for your loan, a monthly PMI fee will be added to your mortgage. The PMI amount is typically in the 0.3% to 0.5% of the loan amount but you should check with your lender for exact pricing. Your lender may also give you the option of paying the PMI as one lump payment instead of a monthly fee.
Tip: If your lender requires you to get PMI, keep close track of your loan and call the lender once your loan balance reaches 80% of the home’s original value to ask if they can drop the PMI charge going forward.
FINAL WALK THROUGH
Before you sign any papers, do a final walk-through of the property even if it is vacant. Don’t be tempted to blow off the final walk-through since it is an opportunity to make certain that the property is in the condition you agreed to buy, agreed-upon repairs, if any, were made, and nothing has gone wrong with the home since you last looked at it. If you find a serious issue, address it now before you close. Try to avoid financial arrangements that could change your closing disclosure or your loan documents might need to be redrawn, causing your closing to be delayed.
The below is a list of some important items to check during the final walk through:
• Turn on and off every light fixture
• Run water and check for leaks under sinks (along with checking for leaks from other appliances)
• Test all appliances
• Check garage door openers
• Open and close all doors
• Flush toilets
• Inspect ceilings, wall and floors
• Run garbage disposal and exhaust fans
• Test heating and air conditioning
• Open and close windows
• Make sure all debris is removed from the home
POTENTIAL COST INCREASES
Costs that can increase by any amount
These costs are not controlled by the lender, and therefore have the right to increase by any amount. They are:
1) Prepaid interest, property insurance premiums, or initial escrow account deposits
2) Fees for services required by the lender that you purchased separately (which was not on the lender’s list of providers)
3) Fees for third-party services that the lender does not require
Costs that cannot increase at all
Baring a major change in circumstances, these costs can not change:
1) Fees paid to the lender, mortgage broker, or an affiliate of either the lender or mortgage broker for a required service
2) Fees for required service that the lender did not allow you to shop separately for, when the provider is not affiliated with the lender or mortgage broker
3) Transfer taxes
Costs that can increase by up to 10 percent
If there is no change in circumstances, then the total of these costs cannot increase by more than 10 percent:
1) Recording fees
2) Fees for required services when you have chosen a third-party service provider on the lender’s written list of providers (note if the provider is an affiliate of the lender, the cost cannot change at all)
IMPORTANT STEPS TO COMPLETE PRIOR TO CLOSING
Once the closing date is set, we recommend the following done at least a week before closing:
1. Contact your lender or closing agent (title company, escrow officer, or attorney) to find out who will conduct your closing and where it will be.
2. Ask the person who will conduct your closing (closing agent or title company) what you need to bring and what amount to have ready in certified checks (yes you will need to get bank certified checks for the closing).
3. Request a copy of your closing documents in advance and carefully review for errors (e.g., personal information, terms) and make sure you have a clear understanding of the loan terms before you sign anything. If you encounter unfamiliar terminology ask your agent or attorney to explain it to you.
4. Identify people you can call if you need help during your closing such as an attorney or trusted friend and make sure they will be available during your closing
CONSIDERATIONS ON CHOOSING A CLOSING DATE
• Does your purchase contract specify a particular deadline for closing?
• Is there a specific date when you have to vacate your current home or rental?
• When does your rate-lock expire?
• If there are additional steps your lender needs to complete before the closing date, will they have enough time to process them for the closing?
• Is your closing agent, title company and / or attorney busy with other closings at the same time?
COMMON SCENARIOS WHEN BUYERS CONSIDER PURCHASE EXTENDED RATE-LOCK FEATURES
Some common scenarios when buyers consider purchasing an extended rate lock feature in exchange for an upfront fee (essentially it is like insurance) include:
1. Buying new construction (when you don’t know exactly when the home will be finished)
2. When you anticipate the seller or sellers’ attorney will be slow
3. If you believe you are not organized to comply with the financial information request of your lender on a timely basis
IMPORTANT QUESTIONS TO ASK LENDER ON RATE LOCK
1. When in the process will you lock the rate? What flexibility do I have on the timing of this?
2. How long is the rate lock period for? What is pricing to extend the rate lock period?
3. When is the latest I can decide whether to purchase the additional rate-lock?
4. What happens if the loan is delayed due to lender’s fault?
TYPICAL DOCUMENTATION NEEDED FOR LOAN ESTIMATE
1. Your name
2. Income
3. Social Security Number
4. Address of the home you plan to buy
5. Estimate of the potential home’s value
6. Estimate loan amount (home price minus down payment)
7. We also recommend sharing estimated property taxes and any home owners’ association dues you anticipate (this will allow the lender to get the most accurate estimates and make sure the loan is affordable to you)
BUYING & SELLING SIMULTANOUSLY
There are two ways to do this, either buying your new home first or selling your existing one first.
Buying First
1) Make an offer on a home with a Sale & Settlement Contingency, then list your current home for sale. A Sale & Settlement Contingency means that your offer is contingent upon you selling your current home.
2) Use a HELOC (Home Equity Line of Credit, a loan for a finite period of time with the collateral being your existing home) or a Bridge Loan (short term loan to cover your interval between buying and selling). Since many can’t afford to have two mortgages at the same time, obtaining a HELOC or a bridge loan allows you to obtain the costs of purchasing your new home while you still have the mortgage on your existing home.
3) Sell your old home.
Pros:
– You’ll have a place to live and because you are buying first, chances are you are not rushing to buy a home that isn’t a dream home
Cons:
– You may feel rushed to sell your current home, potentially causing you to take a lower value
– This contingency offer will make you a less competitive buyer, and will often knock you out of the process in a competitive environment
Selling First
1) Put your existing home on the market
2) Put an offer on a home with a Settlement Contingency, which means your offer is contingent on your current home selling by a certain date. If it doesn’t sell by that date, you are allowed to back out of the deal. Obviously, this is going to make your offer much less competitive.
3) After your home sells, find a temporary rental until your new home purchase closes.
Pros:
– You will have the cash in hand to buy your new home (and won’t need a HELOC or bridge loan)
Cons:
– Hassle of finding a temporary place to live in between the sale and purchase
– This contingency offer will make you a less competitive buyer, and will often knock you out of the process in a competitive environment
POTENTIAL QUESTIONS TO ASK BROKER
1) How long have you been in real estate?
2) How long have you lived in this area?
3) What types of homes and price point do you typically represent? How many homes have you represented in my desired area?
4) Beyond the home search, do you typically provide clients information in other areas such as local school advice and contractor recommendations?
5) How involved are you to answer questions for me through the home loan process?
6) Do you have a team, or do you work alone? Is there someone I can call if you are not available?
7) What is your schedule? When can I contact you? How responsive are you? Do you have any vacations planned?
8) If a seller does not pay the buyer’s broker commission, what will be our arrangement?
9) Can I speak with a former client of yours for a recommendation?
LOAN PROGRAM
A Loan Program is the difference between a home’s purchase price and the amount of the mortgage against the property. The down payment must be paid upfront before the home purchase can close.
TYPICAL DOCUMENTATION NEEDED
• Your name
• Income
• Social Security Number
• Address of the home you plan to buy
• Estimate of the potential home’s value
• Estimate loan amount (home price minus down payment)
• We also recommend sharing estimated property taxes and any home owners’ association dues you anticipate (this will allow the lender to get the most accurate estimates and make sure the loan is affordable to you)
TYPICAL DOCUMENTATION REQUIRED FOR PRE-APPROVAL LETTER
• Pay stubs from the past 30 days showing your year-to-date income
• Two years of W2 forms from your employer
• Two years of federal tax returns
• Two months or a quarterly statement of all of your asset accounts, which include your checking and savings, as well as any investment accounts such as CDs, IRAs, and other stocks or bonds
• Any other current real estate holdings
• Residential history for the past two years
APR
Annual Percentage Rate (APR) is an all-encompassing figure that takes both 1) the interest rate and 2) the other costs associated with the mortgage (points, fees and other charges) to compute the effective cost. Therefore the APR is almost always higher than the stated interest rate by the lender. The Loan Estimate is required to provide both figures.
PRE-MOVE IN TIPS
– Complete repairs and painting first; easier to do before you move all your stuff in
– Hire a cleaner
– Change the locks; you never know who else besides the seller had keys
– Set up account with your utilities
– Check in with HOA
– Make a detailed list of your belongings before the movers take them
This is the combined annual income for you and your co-borrower. Include all income before taxes, including base salary, commissions, bonuses, overtime, tips, rental income, investment income, alimony, child support, etc.
The Home Inspection
You should choose the home inspector yourself and plan to pay the inspector directly at the time of service. Expect to spend on average between $700 and $2,000. In some states and certain situations, a home inspection is conducted before buyers make a definitive purchase offer. In other states, a home inspection is a contract contingency where the buyer can freely cancel the contract within a certain number of days if they are not satisfied with the condition that the report conveys. Schedule an independent inspection for the home as soon as possible so that if there are any major problems with the home, you can decide whether or not you still want to buy. Also, if additional inspections are needed, you’ll want to have plenty of time to get them completed.
Important Considerations for Finding a Home Inspector:
• You want an independent home inspector who is accountable to you and will give you a complete inspection and an honest opinion.
• Ask friends, your real estate agent, look online, and check reviews for recommendations.
• Ask to see an example report – comprehensive reports average between 20 and 50 pages and contain color photographs highlighting defects or problems.
• When you interview inspectors, ask upfront about their fees for coming back to re-inspect after a repair (if you are able to get the seller to fix an item identified during the inspection).
• Not every state requires inspectors to possess any licensing or credentials so ask to see credentials and qualifications such as membership in the American Society of Home Inspectors.
Important Considerations for the Home Inspection:
• Always attend the home inspection yourself and let the inspector walk you through the home to point out defects. Use this opportunity to ask questions about which noted “action items” are minor and which are major or address any other questions. Ask if they recommend hiring additional specialists to inspect and why.
• Remember that most purchase contracts require you to take the home “as is”, regardless of what you may find during the inspection. As you find items through the inspection, judge whether the additional cost and time for these repairs still make the purchase worthwhile for you. You could try to renegotiate with the seller, but depending on the terms of your purchase contract and local market conditions, the seller may or may not agree to pay for the repairs. Also keep in mind that if the seller agrees to a repair, they will have an incentive to hire the cheapest contractor so you may want to ask for a lower sales price instead. It’s not unreasonable to ask for an extension on the contingency period for buying while you weigh your options and get bids on repairs.
Title Company Costs
Title services are one of the largest (if not the largest) part of your closing costs and include title insurance, title search, and, in most parts of the country, the fee for the closing agent who conducts your closing. You might not give much thought to it, but fees are generally 1-2% of the loan amount. As previously mentioned, your lender will require you to get lender’s title insurance to protect the lender, not you, against problems with the title to your property, such as someone with a legal claim against the home. Given this is likely your biggest investment, we highly recommend you buy owner’s title insurance to protect you. Both insurance policies are charged as a one-time upfront fee at closing (there are no additional fees to ever pay for either policy and the policy is good for as long as you own your home).
Regulations differ by state on whether insurers can set their own rates but you still may be able to negotiate the costs of add-on fees. In some states, you can get a highly discounted premium for the lender’s insurance if you buy the owner’s title insurance at the same time. Especially in states where premiums vary widely, it might be worth getting a few quotes but make sure you compare the itemized list of fees.
Title Company Key Functions
The most important functions a title company provides is a 1) title search 2) issuing title insurance along with 3) performing other functions.
1. Title Search – The title company will search public records for debts, legal judgments or problems with the deed and will verify that the title of the property you are purchasing actually belongs to the seller and there are no unknown liens against the property. The bank will want to make sure the title company “clears” the title before they move forward with the loan.
2. Title Insurance – While the title search sounds great, unfortunately it’s an imperfect process that largely relies on the title company acquiring affidavits from the seller and checking public records. Regardless of how good your title company is, they are dependent on the information they have reviewed. Therefore, the title company will underwrite an insurance policy to protect your lender, and you as a buyer if you choose to purchase it, from future property ownership claims, surprise liens and other undisclosed defects in the title. Lender title insurance (to protect the lender so any of these surprises arise) is mandatory for you to pay for but buyer title insurance is optional. Given the significant investment you are putting into your own, we always recommend you pay for the owner’s title insurance to protect you.
3. Other Services – Finally, your title company can coordinate other services such as arranging a survey on your new property if desired. A survey is done by a licensed professional to ensure the fence boundaries of your new home are in-line with the land you will own. This is usually optional (though some lenders will require you to get it). If you are unsure about the boundaries of your new home (or those of your future neighbors), you may want to get this done now versus later to ensure you know your land’s exact boundaries. However, this service is not cheap and will typically run you $1,000 to $2,000.
Closing Agent
The closing agent serves as the ”clearing house” to compute the final payments for who owes what on the mortgage closing day along with performing some additional functions related to the closing. Depending on what part of the country you are buying in, any number of entities can handle the closing process, including your lender, broker, real estate attorney or the title company itself. Closing processes can vary widely even within the same state. In most of the country, a settlement agent from a title insurance company conducts the closing. In other states, particularly in the West, the person is known as an escrow agent, and the parties usually sign the documents separately (rather than meeting in person), with the escrow agent releasing funds once both parties fulfill their obligations. Some states, particularly in the Northeast and South, require a closing attorney from each side. Ask your lender or real estate agent what the situation is in your particular state. Click here for a good site we found that summarizes the differences by state; again, verify all information with your agent or attorney
You can learn more about title services and find additional companies in your area on American Land Title Association website.
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PROS
CONS
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PROS
CONS
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PROS
CONS
IMPORTANT DETAIL
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PROS
CONS
IMPORTANT DETAIL
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PROS
CONS
(1) These loans have a fixed interest rate for the duration of the loan, allowing you to have the same monthly payment throughout. The most common length is 30 years, though they are available for different lengths of time such as 15 years, depending on how quickly you want to pay off your loan.
PROS
CONS
GOOD FOR
Those who plan to be at a home for a long time and do not want to take the risk of future interest rate changes
(2) These loans lock in the interest for a period of time but then the rate changes after that fixed period to the current interest rate at that time. Most common are 10/1, 7/1, 5/1 and 3/1 loans. The first number indicates the number of years the rate is guaranteed to be fixed and the second number indicates how often the rate can change after that fixed period. For example, a 7/1 ARM means you have the rate locked for 7 years and every one year after that it will adjust up or down based on what interest rates are at that point. There is usually a fixed cap that protects you in terms of how much the bank can raise the rate each year.
PROS
CONS
GOOD FOR
Those who do not plan to be at their home for a long period of time
(3) These loans do not pay any Principal at all for a period of time (typically 5, 7 or 10 years). Following that period, monthly payments go up significantly because the principal payments then come into play (and given you didn’t pay any principal for the interest only term, you are going to need to catch up for the remaining term of the loan). Interest rates are also adjusted after the initial term to the current rate. Unlike an ARM, there is usually no interest rate cap when the fixed period is over.
PROS
CONS
GOOD FOR
Those who want to afford a bigger home and know that they will not be there for a long period of time
If you want more detail on comparing credit scores: https://www.nerdwallet.com/blog/finance/comparing-credit-scores/
1.
HOW IT IS CALCULATED
Those who have not missed a payment score highly. Payments late by 30 days or more hurt your score, and the later you pay, the greater the damage.
HOW TO OPTIMIZE THIS SCORE
Obviously pay off any outstanding debt that is overdue immediately and keep your credit free of any missed payments for a few months. Even if your score has been negatively impacted already, it has the potential to go up a bit once you do this. For some folks the extra points matter in qualifying for some types of mortgages. Longer-term, any account that has a derogatory mark will eventually fall off your credit history in 7-10 years, so at least a mistake in the past won’t follow you around forever.
2.
HOW IT IS CALCULATED
Those who have the least balance of debt (primarily credit card balance) score highly. The scoring companies are trying to determine your default risk with this category. Having less debt makes you a safer borrower. At the end of each of your monthly statements they are going to measure how much you borrow as a percentage of your credit line, a measure mostly relevant on your credit card accounts. The lower you borrow, the higher your credit score will be. There are various thresholds published on what this number should be under, but a monthly balance under 1% of your total credit limit will score the highest for this category.
HOW TO OPTIMIZE THIS SCORE
If you have the financial flexibility, pay down your credit cards in full BEFORE your monthly statement ends. Remember that they measure your utilization based on the numbers from your monthly statement. So set a reminder to do this a few days before your statement closes out each month. This way your utilization ratio on your monthly statement will be 0%, which will lead to a perfect score in this category! Do this for a couple of months while you are searching for your home and then you can go back to your lender when you found your place with a more competitive credit score. You will be surprised how much your score will improve (not uncommon to see a 20 to 30 point increase). If you don’t have the financial flexibility to do this, try to keep the ratio under 6%, or worst cast under 30% (two commonly published figures where the score becomes more negatively affected once you cross them).
Finally another way to reducing your utilization ratio is asking for a credit line of increase. HOWEVER, we do not recommend you do this if you plan to buy in the near term as your provider will likely put a hard inquiry into your credit to determine if you are worthy of an increase, thereby potentially decreasing your credit score in the near term!
3.
HOW IT IS CALCULATED
Those who have not applied for new debt in the past 6-12 months score highly. The scoring companies are trying to determine the risk related to how often you go out to borrow. The more accounts you open recently, particularly within the last 6 to 12 months, the riskier you are deemed to borrowers and your score will be penalized. However it is a catch 22 as without opening new accounts you will never have a good line of credit or credit history down the road! Important to note that in addition to opening new accounts, “hard inquires”, which are when you give a lender permission to access your credit history to determine if you are creditworthy, hurts your score slightly for each inquiry.
HOW TO OPTIMIZE THIS SCORE
If you need to open a new account, we recommend not opening the new account in the same period of when you are applying for a major loan (like a mortgage!). Any new credit you take is going to lower your score so it’s better to open your accounts when you don’t really need a great score. In addition, if you keep the hard inquires to under 2 every six months, it will minimally affect your score. The big takeaway: Do not open any new credit lines while you are in the mortgage process and minimize hard inquires into your credit history.
4.
HOW IT IS CALCULATED
Those with longer standing accounts score highly. The longer your accounts have been around the safer you are deemed as a borrower. Note that they will take an average length of all your accounts to determine this score. The scoring companies do not disclose what constitutes a great score, but it is generally understood if your average length per account is greater than 10 years, then you will score very strongly in this category.
HOW TO OPTIMIZE THIS SCORE
There is a misconception that closing unused accounts is a good thing; unfortunately this is not true, especially if they are older accounts in good standing as taking these accounts out will lower your average account length. It’s worth keeping that unused account open, especially if it doesn’t carry an annual fee. Obviously with new accounts it takes years of having good credit to get a good score in this area so we encourage you to build credit early on and be patient on this one.
5.
HOW IT IS CALCULATED
Those with variety of debt (credit cards, mortgage, student loan, etc.) score highly. The scoring companies believe those with a lot of different types of debt are safer borrowers (which doesn’t make sense to us!). Those with different types of debt like a mortgage, car loan, student loan and credit cards will score highly here.
HOW TO OPTIMIZE THIS SCORE
Bear in mind this is the least important factor of the 5 scores. Over time this factor will likely work itself out for you as most folks will have a mix of debt between their mortgage, car payments, credit cards, personal loans, and other types of installment loans as they progress in their lives. There is no stated rule of how many accounts you should have in total but there is some evidence to show those with 10 or more accounts score well in this area. Obviously don’t open accounts you really don’t need just to maximize this score. Obviously if you go out and get a different type of credit this part of your score will increase but your “New Credit Opened” score will decrease. Our recommendation is to not open new accounts unless you need them, especially when about to apply for a mortgage.
Pros
Cons
Tip: When getting a quote form a major lender, remember they often operate in a bureaucratic manner. Ultimately you will get the best deal based on how aggressive and how senior your contact is at the bank. Use online reviews to find who these top folks are. We recommend using some of the top folks there for a couple of reasons: 1) Their status in the company usually gives them more leeway to get something done at a preferred rate and 2) Because of the volume they do (and how much they make), they can afford to be more aggressive on pricing and take a smaller commission on a loan knowing they have many more coming!
Pros
Cons
Tip: Given the smaller nature of these firms, we only recommend working with one that is accredited with a strong rating by the Better Business Bureau (BBB). Click here (1) to check an organization’s BBB rating.
3. Community Banks & Credit Unions
Pros
Cons
Tip: If you are a member of a credit union or local bank, ask about their relationship pricing, which is where you get a preferred rate if you transfer in or hold a certain amount of assets with them. Remember that following the closing of the loan, you are under no obligation to keep those assets in place!
4. Mortgage Brokers
Pros
Cons
Tip: We recommend going through the process first yourself and getting some quotes from the different various lenders to see if you can save yourself the mortgage broker commission; yes it is more work, but 1% of your loan amount as a fee is a lot of money!
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Total available funds
– Savings Goals
– Moving Costs
– Renovations / Furniture
– Emergency Cushion Amount
= Maximum available for closing
Tip: For the Emergency Cushion Amount, we recommend you have at least three months of payments, including your monthly expenses, on hand in case of an unexpected event.
