When you purchase a home, you may, as a first-time buyer, be overwhelmed by all the paperwork and fees involved! Understandable. Your home purchase will probably be the single largest financial transaction you will ever be involved in! There are numerous federal and state laws that must be obeyed, and many of those laws are actually designed to protect home buyers from unscrupulous sellers and lenders.
This article will walk you through the basic steps in purchasing a home and discuss paperwork and fees you will encounter.
First of all, when you begin to shop for a home, especially for your first home, you may wish to get pre-qualified or pre-approved for a loan from your lender or mortgage broker. Pre-qualified means you have stated to the broker or lender your income, credit scores, list of outstanding debts and assets, etc. , and based on those figures they have helped you figure out how much house you can afford and how much they would be willing to lend you. Pre-approval takes the process a bit further, the lender will contact your employer, run credit checks, ask for proof of income, tax returns, etc. And then they will, for a period of time, commit to a loan at a certain interest rate and for a certain amount. This is a more definite commitment than a pre-approval but cannot always be arranged, depending on the lender. Some want a sales contract in hand first before they go to the time and expense of reviewing a borrower for a loan. Others will charge a small fee, that can be credited back at time of closing.
Either way, you look to sellers like a more serious buyer and this can help you in negotiations. Realtors as well will be more willing to spend time with you.
Needless to say, do not, during the home hunting and buying process, go out and change anything in your financial picture - change jobs, buy a new car, etc. Those actions will affect and possibly damage your ability to actually get the loan you have been promised. Also, if you are only pre-qualified, the loan amount is somewhat flexible, but if you are actually pre-approved for a certain dollar figure, do not house shop over that figure, because the lender will probably not increase the loan they are willing to make and you will have to make up the difference in cash paid as down payment.
What does a lender need to know about you? Here is a general list of what you will be asked:
- Employment- where, length of time there, income, W-2 or 1099
- Present debts - auto, credit cards, student loans, other real estate or loans and how much you pay monthly on this debt
- Cash in bank - how much will you have left after you pay your down payment at closing?
- Down payment - how much; is it your own saved money or a gift from parent, s government or other source?
- Will you live in this property? Or is it an investment, second home, etc. Is it a single family residence or a condo or duplex?
Within 3 days of loan application, by law a lender must provide you with a legal document known as a Good Faith Estimate of Closing Costs (GFE) and a Truth In Lending Disclosure (TIL). These documents detail the closing costs associated with your loan, item by item. The costs basically fall into 2 categories:
- Origination fees - charged by the lender or mortgage broker:
- Discount fees - these are extra points you pay up front to get a lower interest rate. You may not have this fee if you did not set this up with your lender. Generally for every 1/8th of a point you pay up front you can reduce the interest rate on the loan by 1/2 a point.
- Property appraisal - you or the seller may have already paid for this or the lender may have.
- Credit report
- Inspection - not always done but some lenders require this
- Mortgage broker fee
- Tax-related service fees - vary by state
- Application fee - may not be one
- Commitment - if you asked to be pre-approved for a loan while you house shopped
- Rate lock fee - if you asked to “lock" your rate for a period of time beyond the pre-approval period some lenders charge this fee
- Processing - bank fee
- Underwriting - bank fee
- Settlement/closing/escrow fees
- Title abstract/search/examination fee
- Document preparation
- Attorney - not required in all states
- Title insurance
- City/county tax stamps and recording fees
- Survey - may not be required
- Pest inspection
- Condominium or homeowners association application fee
- Prepaid mortgage insurance, property taxes, homeowners insurance, flood insurance, etc.
TIP: Because mortgage payments typically are due on the first of the month, you can avoid a lot of the pre-paid interest charges by closing on or towards the end of the month.
The Truth In Lending Disclosure will state the actual APR - Annual Percentage Rate of the loan versus the simple interest rate quoted. The APR can vary depending upon which fees a lender includes or can by law choose to exclude from their APR calculation, so read carefully. So unfortunately this document does not always provide the “apples to apples" comparison it is meant to provide to borrowers.
My next article will provide an in-depth look at the Appraisal and Home Inspection process and the Underwriting phase of getting your mortgage loan approved.
As always, you are strongly advised to work with a mortgage professional, and a realtor, both of them can answer many questions and guide you through this process, all the way to rejoicing with you as the keys to your new home are handed to you across the closing table!
James Hussher is a Certified Mortgage Planner and licensed in all 50 states. Please visit James at http://ezmortgages123.com for all of your residential and commercial mortgage needs. Apply online, check current offered rates and loan programs and more! Many free articles and educational resources may be accessed at http://swifthussherrealestate.com which James also runs!