A True Story From a First-Time Homebuyer
Owning a home is supposed to be part of the American Dream, but the buying process can seem more like a nightmare at times. As my husband and I prepared to buy our first home last year, I was shocked by how little I knew about it and how few definitive answers I could find online. As I bumbled through the process, learning on the fly, I developed a new understanding of the saying, "You don't know what you don't know."
SET UP FOR SUCCESS BEFORE YOU BEGIN
Before I started the process, I researched meticulously — or I tried to, at least. I looked into traditional and Federal Housing Authority (FHA)–backed mortgages, finding out the down payment amount and minimum credit score we'd need for each program.
My husband and I made sure our credit scores were above 580, the minimum for the FHA program that we hoped to use. We paid down credit cards in order to make our debt-to-income ratio more appealing to lenders. As soon as we met the minimum requirements, we made an appointment with the bank — and we were sorely disappointed.
First, we learned that many individual banks have their own requirements on top of the regulations that the FHA put in place. In our case, the federal program required a score of 580, but the bank and mortgage agency that we spoke with required minimum scores of 600 and 620, which can be a significant difference when you're working hard to repair credit.
We also learned that underwriters want to see that your deposit and closing costs have been in your account for at least two months, to track where the funds have come from and to confirm your ongoing financial stability. This was a hindrance to an impatient buyer like me.
FIND A LENDER FIRST
When we began meeting with real estate agents, they always asked if we had approached a lender. When we met with lenders, their first question was always whether we had a property in mind. This left us totally confused.
So what's the right plan? "Potential homebuyers should always meet with a lender before they start their home search," says Peter Jennings, a lender with Merrimack Mortgage in New Hampshire who has worked in the industry for more than 30 years. This helps you decide which mortgage program is best for you. Mortgages are originated either by mortgage brokers or traditional banks. Because the industry is so heavily regulated, it doesn't really matter who you choose for your mortgage — the qualifications will be largely the same, Jennings says. However, small banks are likely to offer fewer mortgage options, while larger lenders usually offer more.
When you're ready to buy a home, you can strengthen your offer with either a pre-qualification or a pre-approval letter from your lender. A pre-qualification, where a loan officer reviews the applicant to make sure that they meet the minimum requirements, is the most common, Jennings says. If your income and credit qualifications are well above the minimum range and your employment history is steady, many lenders will feel comfortable providing a pre-qualification letter. "In the industry it's known as a slam-dunk borrower," Jennings says.
However, if your application is on the cusp of qualifying because of credit or income issues, you may choose pre-approval. "The file is actually formally approved subject to the borrower finding a home," Jennings says. "I do these on occasion when I don't feel comfortable signing off on a pre-qualification letter." Although a pre-approval takes longer up front, it can actually cut time between your offer being accepted and closing, because much of the review is already done.
GET AN AGENT: IT WON'T COST YOU
Once you know that you qualify for a mortgage, it's time to start shopping. At first my husband and I searched on our own, reaching out to listing agents on properties we were interested in. But once we realized that a buyer's agent is actually paid for by the seller when a home is sold, without any out-of-pocket expenses to the buyer, we got an agent immediately.
Not realizing that there is no out-of-pocket expense for a buyer's agent is common, says Liz Murphy, an agent with Berkshire, Hathaway, Fox and Roach Realtors in Jenkintown, Pennsylvania. "Usually the conversation goes faster once the buyer realizes they don't pay the buyer's agent," she says. "The home-buying process is so daunting, and then you're thinking, 'I have to pay this person too.'"
Real estate agents streamline the process by finding properties that may not be listed online and helping buyers navigate regulations and laws. When our buying process was interrupted by unexpected hiccups, including an issue with the home's title, our agent explained to us exactly what was happening and advised us on what to do.
Emotional support is no small part of a buyer's agent's job, Murphy says. "You want someone who can work with you through the ups and downs, and carry you emotionally through the process."
UNDERSTAND THE MARKET WHEN YOU MAKE AN OFFER
Once you find a home you like, your agent should help you to put together an offer that will be formalized in the purchase and sales agreement, a binding contract between you and the seller.
Consider how aggressive you want to be in negotiations and how competitive the market is (after all, until your offer has been accepted, the seller can take other offers). If you're hoping to conserve cash, then consider making a stipulation that the seller contribute to closing costs — the amount varies depending on the type of mortgage and down payment amount, but can range from 3 to 9 percent of the sale price.
Also decide whether you want your offer to be subject to the home passing inspection, and what type of inspection. A traditional home inspection covers any flaws in the property so that you know exactly what you're getting into. You can also include a pest inspection, radon testing, and a bunch of other options.
I was prepared for an endless back-and-forth with the seller (maybe I watch too much TV), but our negotiation was short. We made an offer, the seller countered, and our agent advised us to come back with our "best and final" offer to let the seller know that we were done negotiating. They accepted.
DON'T MAKE ANY MAJOR LIFE CHANGES IN THE FINAL STAGES
Next comes the waiting. Typically it takes about 35 days from when your offer is accepted to when you can close on the house, although it could be longer, according to Neena Vlamis, president and co-founder of A&N Mortgage Services in Chicago. The wait can seem arbitrary and feel frustrating, but things are happening the whole time behind the scenes.
After your offer is accepted, the application enters the Attorney Review Period, Vlamis says. This is when the buyer does due diligence by getting an inspection and making any requests for repairs or closing cost credits. "This is the time to make sure this is the property you thought it was," Vlamis adds.
After that, it's time for the buyer to take a back seat and let the mortgage agent do their job. "Validation is the No. 1 process that's happening during that time period," says Vlamis. "It's very important." During the time that your application is in review, the lender is making sure that all the documentation you've provided, from tax returns to pay stubs, is truthful and accurate.
Because the mortgage industry is so heavily regulated, the bank takes many steps to make sure that the information it has received from the buyer is correct. The bank sends the tax transcripts to the IRS to make sure that they match what the IRS has on file. It also confirms employment information and pay before sending the application to underwriting, where everything is confirmed again, in greater detail.
This is also when the lender will appraise the house to make sure that the value of the property matches or exceeds the sales price. If you go with a federally backed FHA mortgage, the appraisal must be done by an FHA-certified appraiser.
During this time, you probably have more money in your account than you've ever had, but it's extremely important not to make any financial changes during the time that your application is in review. Credit and employment are confirmed again at the end of the application process just before the financial commitment is made, and it's crucial that there are no major changes, which could delay the process or jeopardize your chances of being approved. "Don't switch banks, make big purchases, or change jobs," Vlamis says. If you do, you could compromise your debt-to-income ratio, which lenders use to determine the likelihood that you'll be able to make on-time payments. (During this time, my husband and I mostly stuck to the necessities — paying bills and shopping for groceries.)
DOT YOUR I'S AND CROSS YOUR T'S
Once everything has been approved by the bank, buyers will receive a financial commitment letter. "That is saying that you have the 'all clear' for your financing," Vlamis says. "Everyone, start packing."
However, the waiting often continues — with about a week between the financial commitment dates and your closing. "That time allows the preparation of your closing package, you to do final walk-through, cashier's checks to to be ordered, or a wire organized for closing costs, the deed to be prepared, etc," says Vlamis.
When it finally is time to close, you'll likely be able to breathe easy. You will sign a massive stack of papers, exchange checks and keys, and be on your way as a new homeowner.