the guide to buying a home€¦ · page 1 of 29 guide to buying a home ho chunk community...

of 29 Guide to Buying a Home

Ho Chunk Community Development Corporation 10/8/2014

The Guide to Buying a Home

Basic Steps for the Prospective Home Buyer



Table of Contents Prologue ........................................................................................................................................................ 5

Should You Even Buy? .............................................................................................................................. 5

Buying Advantages .................................................................................................................................. 6

Building Equity in Your Asset ........................................................................................................ 6

Stable Payment .................................................................................................................................. 6

Tax Breaks ......................................................................................................................................... 6

You Could Rent Out Your Home .................................................................................................. 6

Aesthetic Freedom ............................................................................................................................ 7

Buying Disadvantages ............................................................................................................................. 7

Limits Mobility .................................................................................................................................. 7

If It Breaks, You Fix It ................................................................................................................... 7

Property Taxes ................................................................................................................................... 7

Your Home Could Lose Value ......................................................................................................... 7

The Down Payment ............................................................................................................................ 7

Renting Advantages ................................................................................................................................. 8

You Don’t Pay for Maintenance ....................................................................................................... 8

You Can Be Much More Mobile ...................................................................................................... 8

Disadvantages to Renting ........................................................................................................................ 8

Your Monthly Payment Can Increase ............................................................................................. 8

No Equity ............................................................................................................................................ 8

No Tax Benefits .................................................................................................................................. 8

Big Aesthetic Changes Are Out ........................................................................................................ 9

How To Make A Rent Or Buy Calculation? ............................................................................. 9

Get Pre-Approved ......................................................................................................................................... 9

How to Get a Pre-Approval Letter ............................................................................................................ 9

What Is a Pre-Approval Letter? .................................................................................................... 9

What Do I Need for a Pre-Approval Letter?................................................................................ 10

Most Popular Mortgages ............................................................................................................................ 10

Fixed Rate Mortgage ............................................................................................................................. 11

Benefits: ............................................................................................................................................ 11

Who should get a fixed rate mortgage? ..................................................................................... 11



Adjustable Rate Mortgages (ARMs) ..................................................................................................... 11

Benefits: ............................................................................................................................................ 11

Who should get an ARM? .............................................................................................................. 11

Non-Traditional Mortgages .................................................................................................................. 12

Jumbo Loans .......................................................................................................................................... 12

Balloon Mortgage ................................................................................................................................. 12

VA Home Loans ................................................................................................................................... 12

The major eligibility categories for a VA home loan ..................................................................... 12

How do I apply for my VA Home Loan? ........................................................................................ 13

Federal Housing Administration Loans (FHA).................................................................................. 14

Section 184 Loans ................................................................................................................................. 15

A loan program for Native Americans. .............................................................................................. 15

Flexible underwriting makes it easier to qualify. ........................................................................... 16

No mortgage insurance on the HUD 184 loan results in substantial savings. .................................. 16

The Lending Process .................................................................................................................................. 18

Find a Home ............................................................................................................................................... 19

What Type of Home Do You Want? ..................................................................................................... 19

The Offer to Buy a Home .......................................................................................................................... 20

How to Decide What to Pay .................................................................................................................. 20

The Deposit ............................................................................................................................................ 21

What Is a Contingency? ......................................................................................................................... 21

Home Appraisal Contingency ........................................................................................................ 21

Home Inspection Contingency ........................................................................................................ 22

Financing Contingency ................................................................................................................... 22

Personal Contingency Story ........................................................................................................... 22

Work Together With an Attorney and an Agent ............................................................................... 22

Contents of the Offer to Buy a Home ....................................................................................................... 23

What Happens Next? ................................................................................................................................. 23

Get An Inspection ...................................................................................................................................... 24

Securing Financing .................................................................................................................................... 24

Closing ........................................................................................................................................................ 25

What Documents Are You Signing? .................................................................................................... 25



Loan Documents ............................................................................................................................... 25

Home Closing Documents ............................................................................................................... 25

What Should You Bring to the Closing?....................................................................................... 26

Supplemental Questions .......................................................................................................................... 27

What Can Go Wrong at Closing? .......................................................................................................... 27

What Are My Closing Costs? ................................................................................................................ 27

What Is an Escrow? ............................................................................................................................... 27



Prologue

The American Dream, t o own your own home, put down roots and be responsible for your

own little corner of the world. This is the case for most people, but if the 2008 financial

crisis has taught us anything about home ownership, it is that owning a home is not

for everyone. Here are a few other facts about home ownership proven during this period:

• Home values do not always go up.

• If a lender says you do not have to document your income, RUN!

• Not everyone can, or should, own a home.

• Your monthly payment is not the only cost of owning a home. Despite this period, or maybe because of it, millions of people are confused about how to

navigate the complex world of home ownership.

These people have real questions: How much house do I need?

How can I really afford a house?

What are my ongoing costs? Should I use a realtor?

What is an escrow?

What should I look for during an inspection?

In this home- b u y i n g guide, I will take you through the basic steps of buying a home and

attempt to answer many common questions nervous homebuyers ask every single day.

Should You Even Buy?

So all your friends are buying a house, and your mom says it is a good investment. What

else do you need to consider before making the leap? Before getting into the pros and cons

of home ownership, generally speaking, there are a few universal factors to consider before

committing to purchasing a home.

• Time frame. Buying a home usually is not a good idea if you are likely to

change jobs or want to move within the next 7-10 years.

• Down payment. You usually need to come up with roughly 20% of the purchase

price in cash before financing.

• Costs beyond your mortgage. Most people do not factor in additional costs

like property taxes, maintenance, and upkeep and repairs. These expenses are

all additional costs a renter does not have to think about, and they can be

significant.



Pros and Cons: Buy vs. Rent The advantages or disadvantages to buying a home greatly depend on your goals and

values. This list is not exhaustive, but it captures some of the very important differences

between buying and renting. Again, your age, lifestyle, goals, and priorities will make certain

factors on this list more important than others.

Buying Advantages

Building Equity in Your Asset

Part of your monthly payment when you own a home goes to paying the bank

interest, and part of it goes to paying down the balance on your loan. When this

happens, the amount of your home goes up. Over time, your equity value (your

home's value minus the mortgage balance left) increases.

If home prices stay stable, this process acts like a savings account. If you bought a

$300,000 home, you'll likely pay $60,000 in cash at the time of closing. If you sell

your home after 30 years of payments, you would have $300,000 in cash (minus

any fees)! Historically, homes have risen in value over time, so your equity value

could be even more.

Stable Payment

If you choose a fixed rate mortgage (explained later), the amount you pay to the

bank will never increase. Rent, on the other hand, is subject to increases over

time at the discretion of your property owner. These increases are usually

dependent on inflation and rental demand in your area.

Tax Breaks

Homeowners can deduct their mortgage interest payments and property taxes at tax

time. Depending on your income and tax rate, if you pay $15,000 to the bank in interest

and $5,000 in property taxes, for instance, you could reduce your taxable income by

$20,000! If you are in the 25% tax bracket, this could net you $5,000 in savings.

Furthermore, take that $5,000 in savings and divide by 12. This equates to about a

$417- per-month savings. Therefore, if you were deciding between two identical

homes, one you could rent for $2,000 per month and the other you could buy with a

monthly mortgage payment of $2,000, you might want to buy the home because doing

so would save you $417 per month. Of course, still take into consideration other

factors like down payment and maintenance.

You Could Rent Out Your Home



If you buy a home, you can choose to rent it out and generate income. This works

best in an area where rents are higher than your mortgage payment. You should try

to make enough over and above your expenses because you still have to pay for

maintenance issues that come up.

Aesthetic Freedom

If you own your own home, you can change it to suit your preferences and tastes.

Laws and homeowners' association rules do place some limitations on what you

can do, especially to the exterior. However, interior remodels, paint, wallpaper, or

anything else can be altered to your liking.

Buying Disadvantages

Limits Mobility

Selling a house is very different from selling stocks or bonds. If you ever need to sell

for any reason, you may not be able to sell your home as quickly as you would like

or for as much money as you need.

If It Breaks, You Fix It

As a homeowner, you are responsible for all expenses and repairs to your home

(unless it is covered by insurance). This means the true cost of your home is much

more than your monthly payment. I f y our refrigerator breaks in the middle of the

night? $700. If your water heater goes? $2,000. If you need new windows? $7,000 and up.

Do you get the picture? You need to budget for these items in the future and come up

with a plan to pay for them.

Property Taxes

In addition to your principal and interest payments, you are also responsible for paying

property taxes. Property taxes can and will increase over time. This could make your home

less affordable. Make sure you always consider property taxes when comparing monthly

costs of buying vs. renting.

Your Home Could Lose Value

Before 2008, the assumption was that home values always go up. However, as

anyone who bought a home in 2006-2007 has learned the hard way, there is no

guarantee your home will increase in value over time.

The Down Payment



The tough pill to swallow for prospective homebuyers is coming up with the cash to satisfy

a 20% down payment. If you save up and use the money for a down payment, that cash

will not be available for other uses, including emergency funds. There are some ways to

put as little as 3% down, but these options are usually more expensive.

Renting Advantages

You Don’t Pay for Maintenance

Normal wear and tear on the unit or house you rent is the responsibility of the owner.

If the toilet breaks, you do not get the bill. If your roof leaks, the owner pays.

You Can Be Much More Mobile

If you do not envision living in the same city or area for at least the next five

years or more and then rent. This is especially true if you are not settled into your

career. Unloading your house is much more difficult and costly than getting a sub-

letter.

Furthermore, our interconnectedness allows many people to work from anywhere.

Many people choose to travel or move around to experience different cultures or

countries. This lifestyle is not conducive to owning a home.

Disadvantages to Renting

Your Monthly Payment Can Increase

Rents are driven by demand and inflation. In much of the country, rents are on the

rise or at all-time highs. When your lease ends, your property owner can and will

raise your rent if they can. It is very possible that, over a long period of time, your

rent could increase significantly over the cost of owning that same property.

No Equity

When you rent, you will not build any ownership in a property you could eventually

sell. When you pay rent, that money is gone, whereas if you buy, a portion of your

payment goes to the principal reduction on your loan. This increases the ownership of

the home and acts somewhat like a savings plan.

No Tax Benefits

Renters cannot deduct any portion of their rent from their taxes the way homeowners can

deduct their interest paid.



Big Aesthetic Changes Are Out

You will need permission for any changes you want to make to your rental. Most property

owners are OK if you want to paint, but you still need to get approval. Any other changes to

carpet, appliances, fixtures, etc. need to be negotiated with the property owner.

How To Make A Rent Or Buy Calculation?

Many people have tried to distill the make-or-buy decision down to a purely financial

calculation. While it is true that many numbers are involved, it is difficult to put a price on

certain aspects that homeowner’s value. For instance, let us say you may live in an area

with the best schools, access to parks, and absolutely no comparable rentals to the type

of homes in the neighborhood. How do you value getting your kids into the best school

district? How do you value the quality of home you live in when there are no

comparable rentals?

Therefore, while this is not an exact science, there are many online tools to help you

compare the potential cost of owning a home to the potential cost of rent you will pay

for a similar home. The New York Times has a great tool that helps you visualize the

different components that go into the decision and gives you a monthly price at which

you should consider either buying or renting. While it is not fully comprehensive, it is

one of the best.

Get Pre-Approved Therefore, you have decided to buy. Before you go out looking at million-dollar

mansions, you need to get an idea of what you can afford and how much you can borrow

from a bank. If you have gone through the buy/rent decision, you may have a good idea

of what monthly payment you can afford.

This is a good starting point, but as I pointed out earlier, there are many more costs

involved with the purchase of a home, and all of these play into your financing decision.

The most significant cash outlay is a down payment - this is usually 20% of the

purchase price.

What you do not know at this point is how much money a bank will lend you. Therefore,

your first step toward financing a new home is to get pre-approved.

How to Get a Pre-Approval Letter

What Is a Pre-Approval Letter?

In a pre-approval letter, the bank commits in writing that you, the buyer, qualifies

for a certain dollar amount the bank will lend to you if everything you have shown

and stated to the bank checks out.



This letter does two very important things:

1. Tells you how much house you

could buy. 2. Signals to sellers that you are a serious buyer.

This letter does not do the following:

1. Tells you how much house you should buy

2. Tells you what interest rate you will receive

3. Guarantees that you receive your loan

What Do I Need for a Pre-Approval Letter?

In order to obtain a pre-approval letter, you need to contact one or more lenders. You

do not need to select any of these lenders as your final choice. All lenders work off

similar formulas, so your number will be in the same ballpark regardless of whom you

end up choosing. If you do not like what you are getting from one lender, try another

but no more than three, as this could negatively affect your credit rating.

To get the most accurate pre-approval possible, you will need to hand over several

documents, including:

• Your W2 earnings statement from your job

• 2-3 months of current pay stubs

• 2 years of tax returns

• 2-3 months of bank statements (checking, savings, brokerage, etc.)

• Your business tax returns for the past two years if you're self-employed

In addition to these documents, your lender will pull your credit report as part of the

process. Your credit score and history are big factors in your pre-approval process. It is

often a good idea to know your credit history in advance so that you are not surprised

by any negative accounts or transactions. Identity theft is a rising problem that often

goes undetected until your credit history is pulled.

Most Popular Mortgages

In most financings, there are two types of mortgages: fixed rate mortgages and

adjustable rate mortgages (ARM). The main difference is that, in a fixed rate mortgage,

your interest rate does not change over the life of the loan, whereas with an ARM your

rate is fixed for a period but can vary with market interest rates.



This difference has far-reaching consequences. For instance, fixed rates are usually

higher but are most appropriate for people who will be in their home for a long time.

With ARMs, you take a gamble that rates will remain the same or go down.

Fixed Rate Mortgage

With a fixed rate mortgage, your interest rate is fixed for the duration of your loan. The

most common duration of a fixed rate mortgage is 30 years. This means t h a t if you

make every payment, you will have your house paid off in 30 years. Other terms are

available, with 15 years being the next most common, but your lender may even offer 40

or 50-year loan terms.

Benefits:

• Level payments

• You benefit if rates rise

• If rates fall, you can always refinance

• No need to worry - your rate is locked in

Who should get a fixed rate mortgage?

In the current rate environment, almost everyone should get a fixed rate mortgage. If

you intend to be in your home for 15 or even 30 years, this is the way to go. You may

end up paying slightly more in the short term, but you will be sitting pretty if rates rise

significantly.

Adjustable Rate Mortgages (ARMs)

With ARMs, your interest rate is fixed for a period, and then it will fluctuate with

market rates. For instance, a five-year ARM keeps your interest rate set for five

years. After that, it could go up or down depending on where long-term rates go.

Rates are generally lower when compared to fixed rate mortgages, but this is not

always the case. There have been periods, such as 2008, where ARM rates were

above fixed rate mortgages.

Benefits:

• Initial rates are lower than those of fixed rate mortgages

• Lower your initial payments

• May be able to qualify for a higher loan amount

Who should get an ARM?



ARMs were popular in the early 2000s when people were "flipping" houses. While I

do not recommend living in your home for fewer than seven years, an ARM could be

the way to go for those who are not expecting to stay in a home for long. Another

reason would be if you expect to refinance soon. Perhaps your credit is less than

perfect but you expect it to get much better in the near future. You could get an

ARM and refinance at a better rate a few years later.

Non-Traditional Mortgages

Jumbo Loans

The conventional mortgages above usually need to conform to Freddie Mac and Fannie

Mae guidelines. Right now, in most markets the maximum loan that can be securitized

is $417,000. In areas like New York City and other large cities, this limit is $625,500.

Jumbo loans exist so that people can obtain a larger loan for a home. These loans

usually require a higher down payment, better credit, and a higher interest rate.

Balloon Mortgage

In a balloon mortgage, you have a fixed rate for a period, but your principal is not

completely amortized during the period similar to an ARM. How it differs from an ARM

is that the entire balance of the principal is due as a balloon payment at the end of that

period. While this type of mortgage can lower your monthly payment, it forces a

refinance or payoff at a specific point in time. You should have a real clear picture of

how you will pay off the balance when the balloon is due; otherwise, you may be forced

to refinance at a disadvantageous time.

VA Home Loans

If you are a veteran, you may be eligible for a VA loan. The VA does not give you the actual

loan for your home; rather, they simply guarantee a loan made to you by private lenders (such

as banks, savings and loans, or mortgage companies). If your lender approves a home loan,

VA will guarantee a portion of the loan to the lender. There is technically no maximum VA

loan, but lenders will generally limit the total amount of a VA-guaranteed loan to $417,000.

VA actually guarantees up to 25 percent of the $417,000 loan limit. While not a down payment,

the guarantee often satisfies the lenders’ requirement that a portion of the home price be paid

for up front (i.e., the down payment). This can save the homebuyer the burden of making a

down payment. The loan maximum itself may be up to 100 percent of the VA established

reasonable value of the property, though generally it may not exceed $417,000. In addition,

certain funding fees and closing costs apply, and you must be able to pay a portion of these

fees up front. Generally, these fees range from 1.25 percent to 3.3 percent of the total loan.

The major eligibility categories for a VA home loan include:



• Veterans and service members who have served 181 active-duty days during

peacetime, unless discharged or separated from a previous qualifying period of active-

duty service

• Veterans who served during World War II, Korea, or Vietnam, if they served for 90

days and were honorably discharged

• If you have served for any period since August 2, 1990, you can also qualify if you

have served 24 months of continuous active duty, or the full period (at least 90 days)

that you were called to active duty

• Those who have completed a total of six years in the Selected Reserve or National

Guard

• An un-remarried spouse of a veteran who died while in service; or from a service-

connected disability; or a spouse of a service member missing in action or a prisoner of

war (note: A surviving spouse who remarries on or after attaining age 57, and on or after

December 16, 2003, may also be eligible for the home loan benefit) This loan does not

require a down payment, and the VA guarantees the loan for lenders.

How do I apply for my VA Home Loan?

There are four basic steps in the VA home loan application process. The first step is to find a

lender or lending institution that provides home loans. At this stage, you should also gather

the documents you will need when applying for the loan. The second step involves getting a

purchase agreement for your new home and asking VA for a property inspection or appraisal.

For the third step, you will need to submit a VA home loan application. In the fourth and

final step, your loan is approved, the funding is confirmed, and you can close on your new

home.

Step 1: Selecting a Home – Select a home and discuss the purchase with the seller or selling

agent. Sign a purchase contract conditioned on approval of your VA home loan.

Step 2: Select a Lender – A lender can help you review your financial situation and credit

history and determine the loan amount you qualify for. Choose a lending institution that is

VA approved and can handle home loans.

Present your Certificate of Eligibility (if available) to the selected lender and complete a loan

application. You can also get your Certificate of Eligibility from your lender through the

Automated Certificate of Eligibility (ACE) system. This Internet-based application can

establish your eligibility and issue an online Certificate of Eligibility in a matter of seconds.

However, not all requests can be processed through ACE – only those veterans for whom the

VA has sufficient data are eligible for this streamlined process.

Step 3: Submit the Application – The lender will Process the Required Loan

Documentation and develop all credit and income information. They will also request VA to

assign a licensed appraiser to determine the reasonable value for the property. A Certificate

of Reasonable Value will be issued.



NOTE: You may be required to pay for the credit report and appraisal unless the seller

agrees to pay.

Step 4: Loan Approval, Funding, and Closing – The lender will let you know the decision

on the loan. You should be approved if the established value and your credit and income are

acceptable.

You (and spouse) attend the loan closing. The lender or closing attorney will explain the loan

terms and requirements as well as where and how to make the monthly payments. Sign the

note, mortgage, and other related papers.

To finalize your transaction you need these legal binding documents:

• Promissory note indicating amount borrowed, interest rate charged, and terms of

repayment

• Deed of Trust placing the property as security against the loan and note

• HUD-1 form (pages 1 and 2) itemizing all fees incurred for obtaining the loan

Once your loan documents have been prepared, signed, and returned, the funding process

begins. After a final check of all signed documents is completed, the lender funds the loan.

Usually through an electronic wire transfer, the money you borrowed is given to the escrow

or closing attorney for disbursement.

The last step is the issuance of your HUD-1, which often takes place on the same day as the

recording of your loan. The recording is considered the true closing of the loan.

By law, a VA loan user must pay a funding fee (usually around 2 percent of the loan), but

VA can lower this fee if the borrower makes a down payment of at least 5 percent. You may

also be exempt from this fee if you fall under one of these categories:

• You receive VA compensation for service-connected disabilities.

• You are a veteran who would be entitled to receive compensation for service-

connected disabilities if you did not receive retirement pay.

• You are a surviving spouse of a veteran who died in service or from service-connected

disabilities.

This loan is offered exclusively to veterans and does not require mortgage insurance to

be paid by the buyer. Beware: The rate you receive maybe higher than conventional loans

or FHA loans.

Federal Housing Administration Loans (FHA)

The Federal Housing Administration is an agency of the federal government that insures

private loans issued for new and existing housing... Today the mission of the FHA includes

helping borrowers get amounts they qualify for, and assisting lenders by reducing their risk

in issuing loans. If you have had credit problems in the past, the FHA recommends a



Consumer Credit Counseling program to avoid being denied an FHA loan. The FHA asks for

a lot of information on your FHA loan application. You will need to provide the FHA with a

wide range of details. The 203(b) FHA Fixed Rate Mortgage Loan Program is the widely

used FHA home loan, especially among first time homebuyers. FHA loans do not come

directly from the FHA. The FHA guarantees home loans, reducing the risk to lenders and

offering increased borrowing power to qualified applicants. To pre-qualify for an FHA loan,

you should be able to demonstrate employability, job stability and reliability. One major

mistake potential homebuyers can make when applying for an FHA home loan is to make a

major credit purchase. Do not cloud your debt-to-income ratio with a big purchase before

applying for your loan. If you have a poor credit rating, work to establish payment reliability

over a period of at least one year before starting your FHA loan paperwork. An FHA loan is

government-subsidized, so you can get into a home with as little as a 3.5% down

payment. This is often a good option for first-time homebuyers or people with less than

perfect credit. The catch is that FHA loans require mortgage insurance to protect the

lender. This can be expensive, so make sure you factor it into your monthly payment. If

you can afford 5% down or more, you may have better options with conventional

mortgages.

Section 184 Loans

The Section 184 Indian Home Loan Guarantee Program is a mortgage product for American

Indian and Alaska Native families, tribes Alaska Villages or tribally designated housing

entities. Congress established this program in 1992 to facilitate homeownership in Native

American communities.

A loan program for Native Americans.

In 1992, Congress established the Section 184 Indian Housing Loan Guarantee Program.

Commonly referred to as the HUD 184 Home Loan Program, it offers home ownership and

housing rehabilitation opportunities for eligible Native American individuals, families and tribes.

The HUD 184 Home Loan Program has several features that make it easier for Native Americans

to obtain home loans. These include:

Very low down payments and closing costs. The HUD 184 Home Loan Program requires a

low minimum down payment, compared to 3.5% for FHA or 5% for conventional loan

programs.

No private mortgage insurance. Unlike FHA and Conventional loan programs, the HUD

184 Home Loan Program does not require monthly mortgage insurance payments.

Competitive interest rates. The HUD 184 Home Loan Program offers standard fixed rate

loans with no prepayment penalties. Rates are competitive with other loan programs and

you do not have to worry about the sudden jumps in interest rates that can happen with

variable rate loans.

Ability to finance homes on fee simple land or tribal-trust land. Most loan programs will

only finance loans on fee simple land. The HUD 184 Home Loan Program allows for

properties located on native trust land and fee simple land in approved areas.



Multiple options. The HUD 184 Home Loan Program can be used for refinancing,

purchasing an existing home or new home construction. It applies to traditional frame built

construction, modular and manufactured homes.

Flexible underwriting makes it easier to qualify.

When you apply for a conventional loan through a bank or mortgage lender, the

parameters are set by an automated, software-driven underwriting mechanism. If you do

not fit into the pre-determined "box," you do not qualify for the loan.

The HUD 184 Home Loan Program has certain basic criteria that must be met in order to

qualify for a loan. But the program also makes generous allowances for lack of credit

history, past credit problems, or other circumstances that don't fit normal lending

parameters.

More important, each loan application is considered on a case-by-case basis, and is

personally underwritten by a HUD 184 Home Loan Program representative. This allows

many Native Americans who would not qualify for conventional loans to obtain a HUD

184 Home Loan.

No mortgage insurance on the HUD 184 loan results in substantial savings.

Mortgage insurance (MI) is an insurance policy which compensates lenders or investors

for losses due to the default of a mortgage loan. MI is typically required when down

payments are below 20%.

Although the HUD 184 has a low down payment requirement, the loan currently does not

require MI. The resulting savings can be significant.

MI rates can range from 0.5% to 6% of the principal of the loan per year based upon loan

factors. For example, FHA charges a MI equal to 1.25% of the principal of the loan per

year (1). To calculate the annual saving simply multiple your loan balance by 1.25%. The

saving can easily amount to several hundred dollars per year or more.



The Lending Process

Now that you have an idea of how different types of loans work, you need to prepare for

the least exciting part of home buying: the lending process. Either this process can go

very smoothly, or it can be a bit nerve-wracking depending on your lender and your

ability to quickly gather all the required information. To make this process as pain-free

as possible, here is what you should expect.

Qualify and Select a Lender

The lender you choose can have a big impact on your financing process. Most people

just look at the rate and choose the best offer based on that. However, you should

determine whether or not your lender will also service your loan, or if it will be sold to a

third party.

Additionally, it is very important to deal with a lender that can manage your

expectations appropriately. To get final approval, the financing process will likely take

you all the way to a couple days before closing. At this point, you technically have a

contract on a house and have passed all of your contingency windows but have not been

fully "approved" for your mortgage. This can be scary. A lender who can walk you

through this ahead of time and provide check-ins along the way will give you more peace

of mind.

Be sure to do your research and ask for referrals or references. Online resources can be

helpful to get an overall feel for a bank's reputation and if they are easy or difficult to

work with. Just make sure to take anonymous online comments with a grain of salt since

every bank will have some people that just cannot stand them!

Down Payment: What It Is and Where to Get It

As stated previously, a down payment is a cash payment that goes toward the cost of

your home and reduces your mortgage. A down payment of 20% of the home's value is

usually required when applying for a traditional mortgage. The lender wants you to have

a significant stake in your home from day one.

Here are some legitimate sources for your down payment:

• Bank accounts

• Stocks

• Bonds

• Brokerages accounts

• Other sold real estate

• Gifts



What Banks Look For

Banks want to make sure the sources of the money are yours. Banks ask for your

banking statements for at least three months. Among other things, the banks use these

statements to look for unusual transactions, such as large deposits. They do this to

guard against a practice where people have friends transfer money into their account

so it looks like they have more. You will have to explain these deposits to ensure they

are not coming from any other sources. I have had transactions for less than $1000

flagged it just depends on your lender.

Find a Home

Now for the fun part. Finding a home can be an incredibly exciting and emotional

experience. Enjoy it. However, remember there are many variables, w h i c h are out of

your control and can prevent you from getting the home you fall in love with - so try

to tread lightly!

Home Search Tools

The initial home search can now be easily conducted on the Internet. There are a

number of fantastic websites that list all the homes for sale in your area, complete with

pictures and important information. Here are the top three:

• Zillow

• Trulia

• Realtor.com

While Internet searches are great, many times you will want to use a realtor with good

connections to find that true hidden gem. Because realtors are often apprised on homes

that are about to come on the market, you can get a glimpse into a home that nobody

else has seen. This is very helpful in a competitive buying market.

What Type of Home Do You Want?

There are many different types of homes to look at, each with their own considerations:

• Old charm vs. new reliability

• Own space with a yard vs. condo with low maintenance

• Investment property vs. single-family home

• Foreclosures and short sales

Many of these trade-offs come down to preferences, but it pays to research many options.

Talk to some people who own the type of home you are looking into for details on the

pros and cons.



Home Buying Considerations

If you are not sure what type of home you want, look at lots of them. Take your time.

This is most likely the biggest financial purchase of your life. Once you do know what

type of home you want, continue looking at lots of homes.

Doing this serves two main purposes. First, your measure of relative value will evolve. As

you see more homes, you will be better equipped to compare home features and prices to

hone in on what is most important to you.

Second, you will likely need a fallback plan. Once you make an offer, much of the home

buying process is out of your control. Sellers may stick to their guns on price, other

buyers may be interested, or sellers could pull the house off the market. Try to avoid

falling in love with one home and create options for yourself. I know, easier said than

done!

The Offer to Buy a Home

You now have a home you would like to buy. Congratulations! In this next step, you will

be making your best "offer" to purchase the home from the seller. You are not actually

purchasing the home, but you are agreeing, in principle, to purchase the home provided

certain contingencies are met.

There will likely be some negotiation back and forth on price and other various

aspects of the offer, so be prepared by committing to your max price and other

elements you're unwilling to part with. Then stick to them!

How to Decide What to Pay

Deciding what to pay is more art than science. Home prices are driven by what the

seller wants, what you are willing to pay, and what comparable homes have sold for in

the recent past. That said, there are a few things you can do to make a good deal.

• Use Zillow ONLY as a starting point. The algorithm behind it is highly inaccurate

because prices are determined by market forces rather than mathematics.

• Have your realtor prepare a Comparative Market Analysis (CMA), otherwise

known as "camps." This will include comparable homes of the same size and

finishes to the one you are looking at.

• Decide on a max price and stick to it. Walk away if you cannot get the seller down.

o There are plenty of homes out there.

The CMA is your best source of real data. A CMA report should compile information

from the camps you should already have seen and include properties that have recently



sold, are pending, or are active listings.

A comparables analysis will let you quickly compare important features of homes near

you, like square footage, age, number of bedrooms and baths, and the size of major

rooms and amenities, such as fireplaces and swimming pools. It should also list other

important information, such as property taxes and school districts.

Here is where the art part comes in. Starting with the asking price, you and your agent

can make adjustments based on how it stacks up to the comparables on certain

features. If the market value you come up with is realistic, and it fits within your

comfort zone, you can put that price in the offer.

The Deposit

When you make an offer, it is customary for the buyer to place a deposit with the

realtor. The amount may vary from location to location, but the deposit is designed to

disincentivize a buyer to renege on an accepted offer without incurring some loss.

If you deposit $5,000 when your offer has been accepted, and you back out of the deal

for any reason other than the reasons laid out in the offer (usually called

contingencies), you will forfeit all or part of the $5,000.

What Is a Contingency?

According to Realtor.com, “A contingent offer is pretty standard. It means an offer on a

home has been made and the seller has accepted it, but the finalized sale is contingent

upon certain criteria that have to be met. These criteria, or contingencies, typically fall

under three major categories: appraisal, home inspection, and mortgage approval."

Usually, these contingencies allow a buyer to back out of the deal and keep their

earnest money deposit if everything is completed and responses are in by the

designated dates. Generally, the fewer contingencies, the stronger your offer looks, but

we do not recommend waiving any of these main contingencies.

Home Appraisal Contingency

Your lender will hire an appraisal company to evaluate the fair-market value of the

home. If the appraised value comes back as less than the sale price, the appraisal

contingency lets you back out of the deal. This is because 1) you do not want to

overpay, and 2) your lender will only want to lend on the appraised value, meaning you

will likely need to come up with more down payment.

For example, you waive the Home Appraisal Contingency on a $350,000 purchase

price, and your appraisal comes back at $300,000. You planned to put down 20%, or

$70,000. Now your lender will only lend you 80% of the appraisal value, so you now



need to come up with (350,000-(300,000':'0.8)), which is $110,000!

Home Inspection Contingency

A seller has all the information about what may be wrong with the home. Fortunately,

a home inspection contingency gives the buyer the right to have the home professionally

inspected. This protects the buyer in two ways: If something is wrong, you can request it

to be fixed or, if it is big enough, you can back out of the sale completely.

Use a good home inspector- the more critical the better. It is in your best interest to

have the most thorough inspection possible. Many realtors do not like good home

inspectors because they can derail a deal, so take your realtor's recommendations with

a grain of salt.

Financing Contingency

The Financing Contingency is a double-edged sword since it can potentially let either

side out of the deal. Under this contingency, the buyer has a specific time to obtain a

proper mortgage loan. If the buyer cannot get a lender to commit to a loan, the buyer

has the right to walk away from the sale and receive their earnest money back.

The dates here are very important. If a lender delays the process and approves your

loan after the time, the seller can technically back out of the deal as well. Some lenders

are notoriously slow. Your best bet is to stay very active in the financing process to

ensure the loan is approved before the Financing Contingency window is closed.

Personal Contingency Story

In 2013, I tried to purchase a home with a damaged roof. The seller said he would fix it,

but he was very vague. I specifically wrote in a contingency on the roof, laying out

exactly how I wanted it repaired in accordance with the Insurance Report from when

the damage occurred. This dragged on through the inspection contingency, and I kept

getting a worse and worse feeling about the property each time I interacted with the

seller. The seller was supposed to respond with remedies to the inspection but failed to

do so by the required date. I used that violation (and a stern letter from an attorney) to

get out of the deal and have my deposit refunded.

Work Together With an Attorney and an Agent

Negotiating the offer is where an agent can add some value, especially for first-time

homebuyers. Agents can guide you on what to put in the offer based on their

experience and their view of the market. However, it's always advisable to include a

real estate attorney in the process. In some states, only attorneys are allowed to prepare

real estate contracts. In others, real estate agents may prepare such contracts using

state-approved, pre-printed real estate forms.



Real estate attorneys are not as expensive as you may think. Most have set fees to work

on all documents for your real estate transaction. If your real estate agent supplies pre

approved forms, it's very important to have your attorney craft the specific language in

the contract because it may contain points that aren't in your best interest.

Additionally, the terms of the contract may involve many different points besides the

purchase price, including financing, contingencies, title work, and closing date.

Remember my story about the roof? This is an example of where I got out of a bad

situation specifically because I had an attorney draft the offer.

Contents of the Offer to Buy a Home

• Specifies the amount of your offer, and a date and time when the offer expires. A

typical expiration period is one or two days, but it could be any amount of time

you wish.

• Terms of your offer, such as how you propose to finance the purchase, closing

date, home inspection, and any other conditions that must be satisfied for

your offer to hold.

• Any other contingencies you specify.

What Happens Next?

Once you have created your best offer, your agent sends it to the seller's agent, who

then delivers your offer to the seller. If the seller accepts the offer as written, they will

sign it and get the document back to you within the specified time limit. Congrats! You

are now legally bound by its terms and are on your way to buying the house. You will

then send a check or money order that is your good faith "earnest money" deposit.

At this point, the seller can completely reject your offer. However, if the offer is close,

the seller will likely counteroffer by modifying a number of clauses. They may not like

your price, want a different closing date, or any number of things.

If a seller counter offers, you now have three options. First, accept and sign the

counteroffer as written; second, reject the counteroffer and walk away from the home;

or counteroffer yourself. You can counter offer as many times as you want until you

reach an agreement or one of you rejects the current offer.

The signing of an agreement triggers several tasks that must be completed in the period

laid out in the contract. Most of these tasks are for you, the buyer. Among these tasks

are:

• Seller must make full disclosure of anything defective on the property.

• Buyer must get the loan process started with the lender.

• Lender will then order an appraisal.

• Buyer must schedule a home inspection.



Congratulations! You are off and running. What comes next is mostly a lot of

waiting and answering questions.

Get An Inspection

Remember the home inspection contingency? Now is when you implement it.

Most sellers want a fast turnaround on an inspection, so get moving quickly. Find

the best inspector you can. Take recommendations from your realtor, but

remember that some of the best, most critical inspectors are considered "deal

killers" by realtors, so perform your own research to find one. You want the most

thorough inspection possible.

Plan to be present during the inspection. You want to walk through the entire home

with the inspector so you can get a good feel for everything in the home as well as

what major issues need to be addressed and why.

If the inspector finds any major issues with the home, you can amend the contract

by requesting that those issues be fixed. If you and the seller cannot agree on the

proper remedies, you can use the inspection contingency to back out of the deal.

You can use this as negotiation leverage since, now that the seller is aware of a

major defect, they are compelled to disclose this to any other interested buyer. If

they have to fix it, they might as well fix it for you.

Always remember that the specific dates in the contract matter so get the

inspection done and respond by the dates specified.

Securing Financing

It is a little nerve-wracking to be this far in the home buying process and still not

know for sure if your bank will come through with financing, but that's exactly

the situation you’re in right now! You have a contract, your appraisal is good,

you have passed the inspection phase, and now you are waiting for your banker

to say: "APPROVED!"

Here is where it pays to be very, very proactive. You have already provided all of

the information requested by the lender, but this is when lenders get very picky,

as they are actually looking through all of your information to identify any red

flags. There is not much you can do at this point. Just be aware that, in many

cases, lenders will make last minute requests for information they may have

overlooked, such as:

• Written verification of certain deposits

• Proof of insurance

• Copies of agreements

• Additional months of bank statements



• Canceled checks from certain transactions

This can go on right up to your closing date. If your lender does not get their act

together, you may miss your closing and have to reschedule. You might have

movers coming or other services scheduled that will also be affected. While this

interruption is rare, it does happen from time to time.

Closing

The closing is where the action is. This is where you sign every document and get

the keys to your new house. Most people want to rush through this and get into

their new home, but there are many people involved and everything must be in

order. Problems do occur, so leave plenty of time.

At closing, you may be face to face with the seller but, in some regions, you can

appoint an attorney to handle the closing. If you use an attorney, make sure you

are available to answer any questions that may come up.

What Documents Are You Signing?

When you buy a home, you actually have two separate closings. First, you sign all sorts

of documents to close your loan. Second are all the documents related to the

purchase of your physical home?

Loan Documents

Depending on your region and lender, the number of documents for you to

sign will vary. Here are the main ones:

• Promissory Note: This document states you promise to pay back the money you

are borrowing. It usually shows your installment plan, rate, and other important

provisions, such as what the bank can do if you fail to pay.

• Truth In Lending Statement: This paper is mandated by the federal

government. It shows your interest rate, annual percentage rate, the amount being

financed, and the total cost of the loan over its life.

• Mortgage or Deed of Trust: This document pledges your new home as collateral

for the loan you now owe. The lender puts a "lien" on the property.

• Monthly Payment Letter: This document shows your monthly mortgage

payment and how much of it goes toward principal, interest, taxes, and insurance.

Home Closing Documents

Here are the documents that make the home yours.

• HUD-1 Settlement Form: This document itemizes the buyer's and



seller's closing costs separately. Make sure all the fees are accurate.

• Warranty Deed or Title: This contains the legal description of the property

and transfers the title on the home from the seller to you, the buyer.

• Statement of Information: Sometimes called a Statement of Identity,

this document is used by the title company to eliminate any confusion

between you and anyone with a similar name.

• Declaration of Reports: This document states that you have seen and

signed off on all the inspection and survey reports done on the property.

• Abstract of Title: This lists all recorded documents affecting title to the

property.

• Certificate of Occupancy: If your home is new construction, you might see

this one.

• This document is issued by the building department and allows buyers of new

construction to move in.

What Should You Bring to the Closing?

• Photo ID. A driver's license or current passport is sufficient.

• A certified or cashier's check if you have not wired the money to the closing

company yet. The amount of the check will have to cover the down payment plus

the closing costs, which are 3% to 5% of your home purchase price minus your

earnest money deposit. It is a good idea to make the check out for more than your

costs just in case. You will receive a check back for any overpayment.

• Proof of insurance. Your lender will require you to buy a homeowner's

insurance policy. The closing agent needs to see proof that you have the home

insurance in effect on closing day.

• Your sales contract. Have your original contract to reference in the event

there are any details or costs you need to double check.

• Your attorney. It is a good idea to have someone who can understand the

documents and knows the process. They can let you know if something is off.

• Your agent. He or she will want to be there anyway to

get paid.

Congratulations! Now go enjoy your new home.



Supplemental Questions

What Can Go Wrong at Closing?

So much is involved in a closing that things do go wrong. Here are the most

frequent reasons:

• Document errors

• Money - you didn't come with enough of it

• Lender fails to deliver the loan package in time

• Title problems - outstanding liens or other issues

• Last-minute requests from your lender

What Are My Closing Costs?

Here are many of the buyer-paid closing fees. These costs can run between 1% and

3% of your home price.

• Loan origination fee

• Loan discount or "points"

• Application fee

• Appraisal fee

• Credit report fee

• Inspection fee for lender

• Mortgage insurance if applicable

• Attorney fee

• Prepaid interest

• Home insurance

• Property taxes

• Title search

• Title insurance

• Document preparation

• Recording fee

• Transfer tax

What Is an Escrow?

Escrow means that funds are being held by a third party to ensure some

payment later. The most commonly used version of this is with your lender.

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Your lender may set up an "escrow account." This process takes the portion of your

mortgage payment that goes toward property taxes or insurance and holds this money

in an account, then automatically pays those bills when they are due.

The other way escrow is used is at closing. You deposit funds with the closing agent to

pay all the necessary closing costs. This money is held "in escrow" until everything is

finalized with the closing. Then, the "escrow" is closed. When this happens, the funds

that have been held will be returned to you in the form of a check along with a

statement detailing the use of funds and what is owed to you.

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