Expert: liznarr - 2/13/2008

Question
My Husband & I are planning to buy a home in the very near future, however...we feel completely lost in the process! We don't even know where to begin. We already have approx. $20,000 saved for a down payment, & we are hoping to buy a $200,000 home. My husband is the only one working, so we don't make a great deal of money, but we feel that perhaps we could be approved for the loan, due to the amount of the down payment. Is this a realistic goal? Also what should be the first step, in this whole process? We really don't even know where to begin! And how should we go about finding a decent lender? We are really excited about the process, but we are also a bit overwhelmed, & unsure about how/where to begin! We know the approx. area that we would like to live in...the Southern area of western NC, or the northern area of SC, since the home would need to be close enough for my husband to commute to work every day. We are wondering if you could offer any advice, in terms of how to go about this the right way, & the best way to ensure that we might acquire a loan that would allow us to buy a $200,000 on a modest income. Thanks so much for your time!

Answer
Hi Jennifer,

If every first-time or inexperienced buyer would just ask the questions you did, they could avoid many unpleasant experiences in house-hunting.  You are so smart to educate yourself in advance of your purchase.

If your credit is good, $20,000 would be a ten percent down payment on a $200,000 home … and, yes, this is a very realistic goal.

In shopping for a lender, be VERY wary of online lenders.  A reputable major bank or mortgage company in your area would be a good place to start.  Let each one know you will be comparing rates.  

I would suggest going ahead now and getting pre-approved for a mortgage amount.  This way, when you find a suitable house and are ready to make an offer, your lender can provide you with a pre-approval (or possibly an APPROVAL) letter to accompany any offer(s) you make.  This will go a long way in giving a Seller a warm, fuzzy feeling that you will be able to close your loan and go through with a purchase as offered.

Don’t let a lender sell you on any “service” after your loan is closed as an inducement to do business with them.  All you need do after your closing is make your payments, on time.  Therefore, it’s important to shop different lenders’ RATES, FEES, RATE LOCK PERIODS, ORIGINATION FEES, and POINTS (if any points are applicable) to make sure you are comparing apples to apples.  With rates having been so good for a few years now, I have not seen any points charged on loans in quite a while.

Origination fees are typically 1% of the LOAN amount (NOT the sales price), and many lenders will negotiate the origination fee, possibly to ¾ of 1%.  You have to ASK, as this will never be volunteered.

Some pitfalls to look out for with lenders could be:

1.   “WHEN” your rate is locked in:  You make this decision, not the lender.  As information, when you decide on a particular home and have a binding Contract of Sale, then is when the decision of “when” to lock should be made.  You can lock in for 30 days, 45 days, or 60 days.  The longer the lock period, the higher the rate.  

Make sure your lock period will take you several days beyond your closing date...in case of unexpected delays.  If you were pre-approved for your loan, your lender can advise you how much time they would expect to need in order to fund your loan.  Otherwise, you might have to relock and take whatever rate is available at the expiration of your initial lock … which could be higher or lower.

2.   Make absolutely certain that you understand your loan:   What is the term of the loan, 15, 20, 25 or 30 years?  Is it fixed?  Is it adjustable?  With rates as low as they are now, adjustable loans or ARMS (adjustable rate mortgages) with a lower initial rate which can adjust up or down on the one, two, or three-year anniversary date of the loan, are not necessary.  

ARMS are a vehicle used, for the most part, when interest rates are high and people who expect to be in their home only for, say, three years, want to take advantage of the initial lower rate of the ARM—knowing that they expect to be moving and selling the home and paying off the ARM, near the time their note rate might adjust.

Recent college graduates also are good candidates for ARMS, as they expect their salary to increase in the first few years of working.

Make sure you know what your NOTE rate will be.  Your NOTE rate is the interest rate you will be repaying over the term of your loan.

A truth-in-lending statement will be provided to you by a lender and will outline your annual percentage rate (APR), which is different from your note rate.  The APR takes into account all the COSTS of the loan for the first year and shows a higher rate.  Many uninformed buyers may not understand that this is a disclosure required by the Federal government and mistakenly think this is their NOTE rate, but not so.  It is simply a disclosure on the actual first year’s interest rate, taking into account lender fees after they are factored into your note rate.

Here’s a site that explains APR for you:  http://www.americanloansearch.com/info-apr.htm

3.   Ask each lender to detail ALL their junk fees.  Junk fees could be underwriting fees, processing fees, document prep fees, and others.  Many lenders might have an underwriting fee, and anything much over $300 in my area would be considered excessive.  Ditto for the other fees.  Most lenders charge “some” junk fees to keep their note rates lower.

The next step is to find a good, reputable Realtor.  Ask family and friends who they might have used.  Ask what they liked/disliked about a particular Realtor, and whether or not they would use him/her again.

When you work with a Realtor, and BEFORE signing a Buyer Agency Agreement (an agreement to buy from a particular Realtor/agency – which ensures loyalty from both sides), make sure the Realtor understands exactly what you want in a home.  Let him/her know that you expect to be updated on a daily basis via email of any new listings fitting your criteria so that you can act quickly if the perfect home becomes available.

When it comes time to make an offer, the following issues are critical for you:

1.   You should have the opportunity to conduct a home inspection.  If the home inspection is unsatisfactory to you, you should have an “out” in the Contract to be able to void the Contract.  Ditto, if defects are found and the Seller refuses to repair at his expense.  Defects that you should expect a Seller to correct are water damage, plumbing and electrical repairs, structural damage, and any other repairs that you consider a major expense that you were not aware of at the time your offer was made.

If you note any water damaged wood prior to your home inspection, write into your Contract that it be repaired.  If the Seller agrees now, he does not have the option to try and refuse this correction after the home inspection.

2.   Have a new survey done to make ensure that what you “think” you are buying will actually be “what” you are buying (unless a recent survey has been done in the last year).  Walk the property boundaries with your agent in advance of making an offer, and attach any recent plat as an Addendum to the Offer.

3.   Have inspections on the heating/air conditioning systems done.  Ditto for wood-destroying insect infestation and moisture/water damage.  Any damage disclosed by these inspections should be corrected by the SELLER at the SELLER’S expense.

4.   Ask for copies of any Covenants and Restrictions.

5.   If your home is on or near water, make sure you know whether or not the footprint of the home itself is in a flood zone.  If it is, you will probably be required by your lender to carry flood insurance, which is an added expense for you each year.

It sounds like a simple process; and when working with a good, experienced Realtor, it can be.  A bad licensee can turn the experience into a nightmare.

Good luck to you, and write again if you have additional questions.

Regards,
Elizabeth