Buying Your First Home - Finding A Lender
Now that you have decided on your Buyer Agent to assist you with your house hunt, the next step is to find a lender to pre-approve you and to do your loan.
Why do you need to get pre-approved? First, you need to make sure that you are looking at those houses and in those areas that you can afford to pay the price for a house that you fall in love with. The last thing you want to do is to see a house that is priced at $250,000 - only to find out you can only afford $200,000 for a house! So you want to make sure that you are looking at the houses that fit into your comfort level price wise! Second, if you do find a house that you want to make an offer on, a strong pre-approval letter from a local lender will help make your offer head and shoulders above the other offers that may be on the table.
So, the first question is - how do you find a lender? You can go to your bank or your credit union to get pre approved. You can ask friends & family who they used. You can do a google search and find online lenders. But are these your best options? Maybe yes - maybe no!
Keep in mind that not all lenders offer the same loan products and each lender will have their own lending criteria. My recommendation would be that you ask your Buyer Agent for a recommendation. If your Buyer Agent specializes in first time homebuyers, they should be up to date on what lenders would be good for you, based on your situation.
So when you go to talk to the lender, you will want to ask some questions. Here are the questions I recommend you ask your loan officer!
Do I Need 20% Down Payment? Most first time homebuyers that I have worked with generally do not have a lot of cash, let alone a 20% down payment in addition to any needed closing costs. On a $200,000 house, that will be $40,000 plus the closing costs. But there are options available to you if you don't have the 20% down payment: FHA loans (minimum 3 1/2% down), VA (100% financing if you are military eligible), USDA (if you are buying rural and the property falls within the targeted areas), VHDA (if you are a first time homebuyer in Virginia), grant programs (offered through several non profits throughout Virginia), even Freddie Mac has a HomeReady loan (with 3% down). So there are options for you. And if you are fortunate enough to get the seller to pay some or all of your closing costs, you could get in for little more than the down payment!
What Do I Need To Submit To You (the Lender)? Usually, your lender will need things like pay stubs, bank statements, investment accounts, tax returns. If you are getting gift funds, you may need a gift letter. The lender may want to see a copy of your lease if you are renting. There may be some things on the credit report that will need a letter of explanation. Now is the time to start gathering these documents.
Are There Any Special First Time HomeBuyer Programs Available? This could include include grant funds and perhaps special loan programs that the bank itself is offering.
If I'm Getting An Adjustable Rate Mortgage, What Are The Details? You will want to know how often it adjusts (1 year, 5 year, 7 year), how much will it adjust by and what index is used to determine the amount of the adjustment!
If I'm Getting Grants, Are There Any Conditions Attached To The Grants? Some grants will want you to live in your house for 5 years before you can sell it, some grants will be tied to the household income, some grants will require you use their inspector and the seller MUST fix all items (no matter how small) that are on the inspector's report!
After I Get Pre Approved, What Should I Avoid Doing? The last thing you want to do is jeopardize your pre-approval. So make sure the lender lets you know what you should avoid doing so you don't lose your pre-approval before closing!
What Is The Difference Between Pre-Approval & Pre-Qualification? Pre-qualification is nothing more than the lender letting you know what you MAY qualify for in terms of house price; however, nothing has been verified by the lender. A pre-approval is definitely stronger in that the lender has already run your credit and has verified information so the letter is now a much stronger lender letter (and makes your offer stronger in the eyes of the seller)
What Is An Appraisal? The lender is going to order an appraisal of the house you will be purchasing to ensure that the value is there.
What Are Closing Costs? In order to get the loan there will be closing costs associated with the loan as well as closing costs to get your transaction closed so you can become a new homeowner! Closing costs will include the costs from the lender, as well as the costs from the attorney who will be doing the closing for you and any state and county charges for your purchase. There will also be prorations for things like taxes and HOA dues!
What Is The Difference Between The Interest Rate & The APR? The interest rate is the rate you will be paying on the note. However, if you are comparing lenders, you will definitely want to know what the APR (Annual Percentage Rate) is. The APR is calculated by taking the interest paid over the life of the loan and adding to it the lender fees charged to get the loan and then dividing it by the term of the loan to get an annual percentage rate.
Is There A PrePayment Penalty? This would be a penalty you would incur if you paid your loan off early. You definitely do not want a loan that has a prepayment penalty!
Do You Have Local Approval? Once the lender has gotten all the documents they need, verified employment, verified assets, gotten a good appraisal back - the loan goes to the underwriter, who will then review the entire package and, if everything looks good, they will issue what is called a loan commitment. If the underwriter is local, your loan officer will be able to handle any hurdles that could potentially occur.
What Are Housing Expense Ratios? Your lender is going to look at 2 different ratios when determining how much house you can afford to purchase. The first one is the maximum mortgage payment you can carry based on your income. The second one is how much maximum debt, including the mortgage payment, you can carry based on your income. So, for example, let's say you have an income of $4,000 per month:
* The first ratio uses a 28% multiplier - so $4,000 x 28% = $1,120/month
This is the maximum mortgage payment (Principal, Interest, Taxes, Insurance)
* The second ratio uses a 35% to 42% multiplier - so $4,000 x 42% = $1,680/month
This is the maximum debt you can carry each month.
* If you have a mortgage payment of $1,120/mo & maximum debt of $1,680/mo then the remaining debt (car payments, credit cards, student loans, etc) cannot exceed $560/month
As you talk to the lender, you may come up with other questions, but these I think should allow you to get a good idea of the loan process and the lender you are considering.
If you are thinking of starting your house hunt or you just have some questions, please don't hesitate to let me know. I specialize in helping first time homebuyers here in the Richmond area.