Another great reason to get quaified as early in the process as possible is to insure the fastest closing possible. If there are multiple offers going in on a home, you may be at a disadvantage if you are not able to secure financing quickly. Don’t wait until the last minute!

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The specific amount required can vary from one lender to the next. It can also vary by state but the general range is between 5% and 20% at a minimum. What first-time home buyers may not know when they are struggling to come up with the money, is that it is possible to use ‘gift’ money if they have a family member with sufficient financial resources.

Gift Down Payment Guidelines

The specific regulations for the use of gift money do vary by state. However, the basic guidelines are as follows:

• Money can be provided to buyers by family or friends. However, it must truly be a gift and not simply money loaned. Often, mortgage lenders will require the person giving the gift to sign a notice guaranteeing the money is a gift. Sometimes, the source of those funds must be proven as well.
• The individual providing the gift does not have to pay taxes on the gifted amount, provided it is under the state mandated maximum.
• Often, the mortgage lender will require that the gift money be available to the buyer 30 days before closing.

Taking some or all of your down payment as a gift can help you get to the first rung on the property ladder. However, it is very important that you only use gift money when it is legitimately that – a gift. If you try to take advantage of this system and claim a loan as a gift, you are not only engaging in fraud, but you may find that you are in over your head financially even if you do obtain the loan.

Step One: Applying and Getting Pre-Approved for a Mortgage

In order to shop for a home, you need to know how much you can afford to spend. The mortgage pre-approval process gives you that estimate, but it also gets a lot of the legwork out of the way. You will need to bring proof of income, and other appropriate documentation when you get pre-approved for a mortgage. This is only needed once, so when you actually need to finalize your mortgage, your lender does not need to go through that part of the process again.

Step Two: Finding and Assessing the Home

Once you find the right home, there is a step in the mortgage process that must take place. Your lender must approve the mortgage and they want to ensure that the value of the home is worth their loan. This means that a property appraisal will be done. Depending on the lender, arranging it may be up to the home buyer or they may take care of it. In either case, the home buyer often has to assume the cost. Provided the home is valued as high as the bank is being asked to lend based on your offer price as a buyer, the loan should be issued.

Step Three: Closing On Your Home

If anything changes between the time you have put an offer on your home and closing, a lender can choose not to honor a loan. Substantial changes in income, major purchases and more can all be problematic if it may impact a buyer’s ability to afford the home according to lender’s requirements. Home buyers should be aware of this so they proceed cautiously with their finances before closing as nothing is final until that pen has been put to paper.

Home Warranties: If It’s Not Broken…

For new houses or homes with new appliances, heating and air conditioning systems, or with other recent repairs, the probability of a catastrophic failure occurring is very low. In these cases if something does need repair or replacing, it’s usually covered by a manufacturer or installer’s warranty. If this is the case, a secondary home warranty might not be necessary.

On the other hand, if there is less than a year on any particular warranty when you purchase the house, it might be a good investment. At the very lease it would be something to consider asking the seller to pay for as part of the purchase price. Should you decide to take the home warranty though, understand the process of making claims and what exactly the policy covers.

Read the Fine Print of a Home Warranty

Like all insurance policies, there are stipulations as to how you can use a home warranty. Some policies will only cover repairs versus full replacements, and some policies will only pay for replacements that fall in a certain price point. Find out if your policy allows you to choose the repair service, or requires you to go through the warranty company.

A home warranty can have its benefits for both buyer and seller, as long as you’ve done the research and know what to expect.

Get Your Finances in Order

As gung-ho as you may be to start the home search, if you don’t know your budget, you’ll likely waste time looking in the wrong price point. A good first step in home buying is to talk to a lender about financing, and decide if it’s the right time for you to buy. Getting pre-approved for a home loan isn’t mandatory, but it allows you to not only know your budget, but can also help show you’re a serious buyer when the time comes to purchase. In other words, getting pre-approved is highly recommended.

Identify the Extra Costs Affecting Your Possible Home Purchase

Extra costs are a major part of the home buying process. It’s important to factor the possible costs of insurance, closing fees, and taxes into your budget. If you choose a house in a neighborhood that’s governed by a homeowners association, there will likely be extra HOA fees each month. Even extra costs for repairs should be factored into your budget, especially if you choose a home that needs a lot of work. Ask questions to be sure you are fully understanding the costs involved with a possibly transaction.

Home Inspections Are Mandatory!

Even if your seller makes it clear that they will not foot the cost of repairs, getting a home inspection is vital. You’ll be able to see if there are health and safety issues with the house, and you’ll know what needs to be fixed immediately instead of leaving it to chance. A home inspection is one of the smartest choices you can make in the home buying process.

Annoy your agent, and he or she may want to wash their hands of you as quickly as possible. Work with them and they will be happy to help place you in the right home.

Buyer Actions That Realtors Don’t Appreciate

Real estate professionals do not appreciate it when buyers do the following:

• Keep Them in the Dark – If you have a strategy as a buyer, tell them. Don’t spring any surprises on your agent as you want them to be able to appropriately advocate for you the whole time.
• Waste Their Time – If buying a home is not in your immediate future, do not monopolize your agent’s time. If you just want to get a feel for homes in a certain area, for example, let your agent know that is your intention. Most will be more than happy to show you a few properties, but they won’t spend additional time doing too much in-depth research and work if buying may not happen for a couple of years.
• Never Make an Offer – An agent can only spend so much time with you exploring the option of a home before an offer needs to be made. If you have a longer time frame in which you plan to make an offer, communicate this to the agent. Agents will be much more willing to work with you if they consider you an legitimate candidate to purchase a home. They can help you with questions you may have but it is important that you don’t misrepresent yourself as a potential buyer in the long run if that is not in fact the case and you don’t intend to make an offer.

Following these simple steps can help you negotiate for your potential future home more smoothly with a stronger advocate for your offer in your agent.

Doing Your Homework is A Must

Do your due diligence before you purchase so you know if you and your family are truly well-suited for the home. The following will help you ensure you make the right decision:

• Scout Out the Neighborhood – To get a feel for the neighborhood, you can tour the area and take advantage of new technology that can give you more information to work with. Google Maps now offers a ‘street view’ feature that allows you to see satellite images up close. By looking at the street view you will be able to see how well the neighbors take care of their homes (which can affect your property value), if there are neighbors with pools, and more. These are things that you may not see when simply taking a quick tour of the area in person.
• Verify the Sound Levels – If your prospective home is near a busy street, visiting at various times per day will help you determine just how noisy it will be. Remember to open the windows, particularly in the bedrooms. Sometimes in the excitement of looking at a beautiful home, obvious steps like this can be overlooked.
• Speak to People That Live Nearby – Typically, new neighbors will tell you everything you need to know about the area and more once you move in. They may be equally as open if you just try to initiate a conversation before you purchase. If you don’t feel bold enough to approach the neighbors, visit local stores and speak with the staff.

Scouting out the area and doing some homework before you make an offer is the closest you can get to trying before you buy, and it can ensure that you are satisfied with your decision for the long-term.

The Offer Process

In many ways the offer process is straightforward. You determine a price you’d be willing to pay, add any conditions or requests you’d like the seller to consider, and then allow your agent and possibly a lawyer to review it before it’s submitted. If you’re submitting an offer without having secured financing, there are other actions you need to take, including showing proof of income.

Once your offer is accepted by the seller, there are only a couple of reasons why you’ll be allowed to back out of the deal. Some purchases are contingent on financing, while some are contingent on the results of a home inspection. If neither party backs out, however, you go to closing.

What is Closing?

Closing is the name given to the time when your home purchase becomes final. In order to close your mortgage needs to be approved, and you must officially turn in your down payment and checks for closing costs. Sometimes you’ll be able to sign the final contract early, but often that step has to wait until closing day. Your closing day is the day you receive your keys and your house is officially in your name. That’s the day when your home search is truly over.

Need Help With Your Home Purchase?

We can help you pre-qualify for a mortgage and help you understand what mortgage rate you would qualify for. More importantly, we can help you establish how much home you can afford. Since rates are near or below 2011 lows, now is the time to lock in extremely low rates before they are gone, which is not a question of if, but when.

Whether you’re applying for a mortgage for the first time or are looking at purchasing a new home and will be increasing your mortgage amount, it’s essential to understand how much you can afford. You may think that any number that fits within your monthly budget is comfortable and sustainable, but your mortgage lender may say otherwise. In order to determine what you can truly afford, there are some guidelines that mortgage lenders insist you abide by and they can ensure that you don’t get in over your head with your home purchase.

How Mortgage Debt Ratios Determine Affordability

You might think that if you make $4,000 per month that $2,000 per month to carry your mortgage is quite affordable but it’s not quite as simple as that to a mortgage lender. What they look at is a few essential debt ratios that ensure you’re taking on a mortgage well within your means with consideration to your other debts and expenses.

Gross Debt Service Ratio (GDS)

The gross debt service ratio looks specifically at the affordability of your housing costs, and it requires that they are not higher than a fixed percentage of your household income, which can vary by program and lender.

The way the GDS is determined is by calculating the monthly mortgage amount + property taxes + condo fees, and then that sum is divided by monthly income. In the case of the $4,000 income and the $2,000 mortgage payment, with this equation, that is not an amount that a mortgage lender would provide a borrower as the ratio is far too high without even considering the other housing costs.

Total Debt Service Ratio (TDS)

Your total debt service ratio is also considered to ensure that you get a mortgage amount that is easily affordable. The same calculation for the TDS applies, but with this debt ratio, all debt obligations are considered whether it’s a car loan, student loan or minimum credit card payments for outstanding balances as well as your housing expenses. This debt ratio can be no higher than 40%-42% on some programs, but this number can vary by program and lender.

Ensuring Your Mortgage is Always Affordable

While it may seem as though the mortgage amount that you’re approved for based on the debt ratios is much lower than what you believe fits into your budget, this is a realistic amount for a number of reasons:

• As a general rule, having your total debt expenses total no more than 40% ensures you have enough cashflow for savings, investments, household repairs, day-to-day living expenses and more.
• When you take on a fixed rate mortgage for 2 or more years, there’s potential that in that time period your situation or income could change. With a GDS of 32% or under, it’s more realistic to expect that if that happens, it’s more likely you’ll be able to continue to pay your bills.
• You never want to become house poor or you’ll begin to resent your investment. When you don’t over-spend on your home, you’ll still have opportunity to live your life.
• When you first buy your home, you may have fewer expenses than you would if your life changes. For example, when you make your purchase you may only be a couple and if later you have children, your variable expenses may change greatly.

The Mortgage Application Process

1. Discuss your needs and your finances with your mortgage professional - While this is not a step that you are required to take, even before you begin shopping for a house or a mortgage, it’s a good idea to go over your finances with a mortgage representative that can provide further advice on saving for your down payment or which debts you may want to pay off in order to qualify for the mortgage amount you’re hoping for.

2. Get Pre-Approved - Before you begin shopping for a house, you want to get pre-approved so you know what your lender will allow you to spend. In order to do this, you will need to need to complete a basic mortgage application and provide information about your income, debts and expenses.  Your mortgage professional will look at all of this information and will advise you on the best mortgages for your needs, and provide a guideline as to how much you can spend on your home.

3. Commit To a Mortgage - The specific process depends upon your lender, but typically once you’ve made an offer on your home, you will have to provide a few further details about you that way your mortgage application can be formally processed. You will receive a mortgage commitment, but there may be some conditions attached.

4. Fulfilling Your Mortgage Conditions - It depends upon your state and lender, but often you will be asked to prove that you have your down payment and even some of your closing costs in place 30 days before you’re set to close on your  home.  If some of your down payment will be coming from a family member as a gift, you may also be asked to provide a gift letter. Your lender wants to ensure that you aren’t borrowing your cash assets that you’re using for your home purchase.

5. Sign Your Closing Papers - This may happen before your closing date or on your closing date depending upon your lender and where you live.  You will then confirm the frequency of your mortgage payments and arrange a payment method for your mortgage premiums.

The above outlines some of the main components of the mortgage application process, though some of the finer details will depend upon your lender and the state you live in!