Buyer’s Guide
We have designed this guide to assist you with the purchase of your new home. We understand the many questions and concerns of homebuyers and know this information will be helpful. Since purchasing a home is the largest single investment most people make, we want to assure you that it is our goal to offer the most professional and informative service available.
These are some of the areas we will be covering:
- Financing options
- Lender selection and loan application
- Selecting neighborhoods and viewing potential homes
- The Contract
- Earnest money deposit
- Title insurance
- Home inspections and/or engineer’s inspections
- Warranty services and radon testing
- Closing procedures and closing costs
- Possession of the property
Step 1 – Financing
The first step you want to achieve is the ability to finance the property you want to purchase. Unless you are a cash buyer, getting pre-APPROVED for a mortgage is a must! This first step will enable you to know exactly how much you can afford, what your monthly payments will approximately be, and how much cash you will need to complete your home purchase!
There are many mortgage lenders around and some are very good, but some are not! Be very careful with whom you choose to do business. ByOwnerColorado has established relationships with some very reputable and competitive lenders in the area.
Click HERE to go to the ByOwnerColorado preferred lender page.
First, a preliminary information form is completed with a loan originator. The loan originator’s goal is to expedite all the necessary paperwork and information as quickly as possible, including ordering a credit report and appraisal of the property. You will need to furnish the lender with the following information:
1. Account numbers of creditors (including existing mortgages)
2. Names and addresses of creditors
3. Bank accounts (both checking and savings)
4. Source of down payment
5. Employment history (two years minimum)
6. Annual income
7. If a veteran, VA Certificate of Eligibility
The information you provide the lender is strictly confidential. The application generally takes place at the lender’s place of business or can also be done online. Everyone who will be on the title as new owners should be present. The application normally takes about one hour and normally you will be required to pay in advance for your credit report. The credit report is ordered through a credit-reporting agency and will cost between $15 and $50. Your FICO score is the largest factor involved with your ability to obtain a loan. The Higher the FICO score the less stringent the lending institution will be with the rest of your loan qualifications. The only other lender fees to be collected before closing are for an appraisal. An appraisal shouldn’t be ordered until such time as you have contracted to buy a property and the inspection of the property has been completed. The appraisal is required by the lender to determine that the amount of the loan does not exceed the appraised value of the property and normally ranges from $300 to $400. These are the only charges required by the lender prior to closing. Payment for home inspection, engineer inspection, and radon testing may be required at the time they are completed. All other fees are collected at the time of closing.
Your loan originator understands your concerns and is there to help with the approval of your loan. Feel free to ask any questions at loan application about anything that you do not understand. Also, you will receive a “Good Faith Estimate of Closing Costs” at this time, so you won’t have any “surprises” at the time of closing.
What does the lender look for?
A Mortgage lender looks for your overall financial picture. The main items of importance are current employment status, current income, and your ability to manage credit, as well as the amount and availability of a down payment. In most cases the most recent two-year period of time is used as the primary focus on your ability to obtain a loan.
When processing your loan application, the lender will obtain all of the necessary information and then verify this information for accuracy. In particular;
VOD – Verification of Deposits. The lender will verify with your banking institutions the funds you state are available to close. In addition your bank statements are used to verify the amount of income you claim.
VOE – Verification of Employment. The lender will verify with your employer the facts of your employment as stated in your loan application.
VOR – Verification of Rent. The lender will verify with your current landlord or mortgage company the fact of you making your payments as agreed upon.
Another portion of your qualification for a mortgage are the ratios of your income to your monthly mortgage payment. There are two ratios that your lender will evaluate you on. First, the front-end ratio is the amount of your mortgage payment in relation to your gross monthly income. Second, is the back end ratio. The back end ratio is the amount of your mortgage payment in relation to your monthly income minus any monthly obligation you may have (car payment, credit card payment, student loans, alimony, child support, etc.) Different types of loans have different qualifying ratios involved. Typically FHA insured mortgages are 29% and 41% while conventional loans are 33% and 36%. However, with good credit, you can stretch these ratios.
How Long Does This Take?
The whole loan pre-approval process can take anywhere from a few days up to a couple of weeks. The full approval of your loan won’t happen until such time as you have a property under contract and an appraisal has been done.
After the pre-qualification and meeting with a lender, the fun begins. Now armed with a realistic price range, you can begin your search for a new home.
The first step in this process is to do a wants and needs analysis. The simplest way to do this is to imagine the perfect home for you. Then jot down a list of items that describe that home. (Location, no more than 15 minute commute time, 4 bedrooms, 3 baths, large yard, two-car garage, air conditioning, etc.) If there is more than one person who will be making the home buying decision, each person should jot down his or her own list separately, then compare and refine the lists down to one. Once you have your “Dream List”, break it down, item by item and determine if it is a WANT (something you really would like) or a NEED (something you absolutely will not do without).
Now that you have your “Shopping List”, you need to start looking for your next home! The age of the Internet has dramatically changed the way people shop for and purchase homes. In the past, the most efficient way was to hire a real estate agent. Now you can save money by doing it yourself!
To find the property for you to buy, don’t leave any stone unturned. The ByOwnerColorado property search will put you into contact with many properties for sale by owner or FSBO properties. A property for sale by owner is an opportunity for you to save money, because neither you nor the seller will be paying the 6%-7% commission usually charged by a Real Estate agent. The newspaper is also a very good way to locate both FSBO and real estate agent listed properties. The vast majority of agent-listed properties can be found on the Internet. A couple popular sites are:
www.realtor.com and www.homeadvisor.com.
Another, often overlooked, procedure is to simply drive around neighborhoods that are appealing and look for the “For Sale” signs. This method quickly allows you to recognize the price range of specific areas and you will soon be able to guesstimate the approximate value of a home before you even look at the brochure. The final method is to simply ask anyone you know, friends, family, co-workers, etc. if they may know of anything available in the neighborhoods in which they live!
Once you have identified a specific property or group of properties you may be interested in, you obviously need to look inside. With the ByOwnerColorado system, and with most other FSBO properties, you simply need to contact the owner of the property and schedule a time that is convenient for you.
Now that you have one (or more) places that fit well within your price range, and substantially fulfill your “Shopping List”, you need to do some research. Make sure that the home is priced fairly, and you make an intelligent offer. This is accomplished by checking public records and comparable sales in the neighborhood. Most counties have websites where you can check property and surrounding property tax records. These tax records usually indicate the previous selling prices of homes.
Having done your research, you can then negotiate to enter into a contract to purchase your new home. Although price is usually the largest negotiation, other items such as dates and deadlines are equally important. Typically, the dates for Closing, Possession, Inspections, and Title Insurance Commitment are also a part of the negotiation. Don’t worry; the Seller of the home will be able to communicate what dates and deadlines need to be addressed. The contract itself can be handled a number of different ways, typically the seller will already be prepared with a means to enter into a contract. ByOwnerColorado offers a contract preparation option, for minimal fees (typically split between buyer and seller.) An important note to contracting on your home is the fact that “Earnest Money” must accompany any contract to be binding. The amount of Earnest Money is totally negotiable and there is no standard amount.
Once the contract has been agreed upon, signatures placed and earnest money deposited, you will then begin the process of your due diligence. This is the time for you to do all your inspections including a general inspection, structural inspection, radon testing, lead based paint testing and the like. These inspections are not required but are always recommended for your protection. After closing on and moving into a property is not the right time to find out that the home needs some repairs. This due diligence period allows you to find out everything you can about the home and make informed decisions as to how to handle any problems. Most of the time a resolution to any problems can be reached between buyer and seller, however the time to do these negotiations is before closing, not after! There are many property inspection companies, and structural engineering companies around, please visit the preferred vendors of ByOwnerColorado to locate potential inspectors. In addition to the physical inspections of the property on your behalf, some other things to consider are, the traffic and noise levels of a property, proximity to schools, bus lines and shopping.
Additionally, this is the time when your lender will have an appraisal done on the property, as well as, finalize the financing of your new home, and a title company will issue a title commitment which will confirm the ability for clear title to be transferred to you.
Ideally the due diligence goes smooth and takes place in a fairly short time frame. Then you get to sit around for a few weeks and plan for closing and the move into your new home. The closing usually takes place at the title companies office and the closer will prepare and explain the documents you will be signing. However, closings are sometimes handled by an attorney. Whatever the form of your closing the closing is typically a two-part process. The first part is the legal transfer of the real estate into your name and the second part is the signing of all the documents required for your financing. The whole process is usually completed in about an hour and you will walk out with the keys to your new home.
Note: Possession Time: The time when you can move into your new home was negotiated and part of your original contract. This time frame is usually at the time of closing or at some time within a few days of closing.
Congratulations
There are many pieces to the puzzle of homeownership. However, proper education and the use of good service providers for your lending needs, inspections and title work will help tremendously. The providers listed on the ByOwnerColorado website are all highly recommended. Please visit them, and take the guess work out of the process!
EARNEST MONEY DEPOSIT: So you will not be placed in an uncomfortable position when you purchase a property, an understanding of the earnest money deposit is of the utmost importance. At the time a written offer is initiated, you will be required by the seller to include earnest money in the form of a personal check, cashier’s check, or cash. The amount is deposited into the closing agents (Title Company or Attorney) escrow account upon acceptance and will remain in escrow until the time of closing. This amount is credited to the buyer as partial down payment and represents your intent to purchase the property. If the offer is not accepted, this amount is returned to you. Also, in the event that you do not qualify with a lender for a new loan, the earnest money is refunded to you provided the sellers are given notice regarding the lender’s disapproval within the time limits specified in your contract.
TITLE INSURANCE: When property is being sold or refinanced, the lender and the buyer need a preliminary title commitment that will indicate exactly what recorded liens and encumbrances and recorded easements are currently in effect on the property. The title commitment will also indicate the vested owner of record and any restrictions on use of the subject property. Title insurance covers you in case someone makes a claim against your property, and is normally a seller’s cost. However, the buyer is required to also furnish the lender with a lender’s policy showing the lender as a lien holder on that property. These charges will be incurred at the settlement as a part of your closing costs. When the sale or loan of the property is final, the title company records the necessary documents and then will issue a title insurance policy to the new buyer and the lender showing clear title to the subject property.
APPRAISAL: An appraisal is required by the lender and is used to give an impartial, third party opinion as to the value of the property. The cost is typically around $300-$400 and is collected by your lender at time of application. STRUCTURAL INSPECTION OR ENGINEER’S REPORT: If you are purchasing a resale property, you may consider having a structural and/or engineer’s inspection. This inspection will determine the condition of the structure and foundation and any defects that may need to be corrected. The cost of this service generally runs from $300 to $500 depending on the size of the home.
HOME INSPECTION: Another type of inspection is a “home inspection”. Included in this type of inspection are: appliances, water or plumbing lines, electrical, heating and ventilating, bath and kitchen fixtures, crawl spaces, basements, garages, roofs, attics, and general maintenance of the home. The cost of a home inspection is typically $150-$300 depending on the size of the home.
WARRANTY SERVICE: Either the purchasers or the sellers may buy a home warranty policy that will protect against repairs or replacement of certain appliances, heating, plumbing or electrical items. As with most insurance companies, the coverage can vary and you may want to consult with a warranty services company to determine exactly what is covered and the cost of the policy. Normal costs are approximately $300 to $350.
RADON TEST: Radon is a radioactive gas that naturally occurs in nature. You cannot see, smell, or taste it. Exposure to radon increases the risk of developing lung cancer. Special equipment is needed to detect radon, and testing normally runs from $100 to $200, with an inspection. This testing is recommended to be done in all cases.
ADJUSTABLE RATE MORTGAGE (ARM): A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also known as a variable rate mortgage.
APPRAISAL: An estimate or opinion of the value of the property, made by a qualified professional called an “appraiser”.
ASSUMPTION: The act of acquiring title to property which has an existing mortgage, and agreeing to be personally liable for the terms and conditions of the mortgage including the payments. Assuming a loan can usually save the buyers money since this is an existing mortgage debt, unlike a new mortgage which closing costs and possibly higher market interest rate charges will apply.
CLOSING: The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement.
CLOSING COSTS: Usually includes an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. Normally, the costs of closing will be 3% to 5% of the mortgage loan amount.
CONVENTIONAL LOAN: A mortgage not insured by FHA or guaranteed by the VA or Farmers Home Administration (FmHA).
CREDIT REPORT: A report documenting the credit history and current status of a borrower’s credit standing.
DEED OF TRUST: In many states, this document is used in place of a mortgage to secure the payment of a note.
DISCOUNT POINTS: See points.
EARNEST MONEY: Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.
EQUITY: The difference between the fair market value and current indebtedness also referred to as the owner’s interest.
ESCROW: Refers to a neutral third party that carries out the instructions of both the buyer and seller to handle all of the paperwork of settlement or “closing”. Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax and insurance payments.
FHA LOAN: A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderate-priced homes almost anywhere in the country.
FHA MORTGAGE INSURANCE: Insurance, paid by the borrower, which protects the lender against loss if the borrower should default on the mortgage payments and foreclosure should become necessary. This insurance is required on all FHA loans.
GOOD FAITH ESTIMATE: A written estimate of all loan charges made by a lender to a proposed borrower. This estimate is a requirement of RESPA and must be provided to a borrower within three days of receipt of application.
HAZARD INSURANCE: A contract whereby an insurer, for a premium, agrees to compensate the insured for loss of a specific property due to certain hazards, (i.e., fire, windstorm, etc.).
HUD: DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT: A department of the Federal government under whose auspices the FHA is operated. The department provides control over government programs designed to provide housing and the improvement of housing standards.
MARKET VALUE: The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.
MORTGAGE: A formal document executed by an owner or property, pledging that property as security for payment of a debt.
MORTGAGEE: The lender.
MORTGAGOR: The borrower or homeowner.
NOTE: The instrument signed by the borrower promising to pay the debt and secured by the Deed of Trust.
ORIGINATION FEE: The fee charged by a lender to prepare loan documents, usually computed as a percentage of the face value of the loan.
PITI: Principal, interest, taxes, and insurance. Also called monthly housing expense.
POINTS (LOAN DISCOUNT POINTS): Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount. (e.g., two points on a $100,00 mortgage would cost $2,000).
PREPAIDS: Expenses necessary to create an escrow account or to adjust the seller’s existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.
PRIVATE MORTGAGE INSURANCE (PMI): Insurance written by a private mortgage insurer, (rather than by the FHA) which protects against loss caused by a borrower’s default. Normally required when the down payment is less than 20%.
RECORDING FEES: Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records. (i.e., warranty deed, trust deed).
RESPA: Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs after application and again prior to or at settlement.
SURVEY: A map of description of land, showing the precise location of any improvements on the site, as well as the location of easements, right-of-way or encroachments.
TITLE: A document evidencing an individual’s right to/or ownership in property.
TITLE INSURANCE: A policy, usually issued by a title insurance company, by which the insuring company agrees to indemnify and protect the insured against loss arising from defects (i.e., forged documents, incorrect legal interpretations, misfiled instruments, etc.). The insuring company also agrees to defend the insured in court against any lawsuits that may arise from these defects.
VA LOAN: A long-term low or no-down payment loan guaranteed by the Veteran’s Administration. Restricted to individuals qualified by military service or other entitlements.
Typical Buyer’s Closing Costs
1. Mortgage title policy and endorsements.
2. Record warranty deed ($10-$20).
3. Record trust deed ($50-$125).
4. Tax certificate ($20).
5. Loan closing fee ($250).
6. Real estate closing fees ($125).
7. State document fees (1 cent per $100 of sales price).
8. First year homeowner’s insurance premium.
9. Tax reserve (1-12 months depending on close date).
10. 2 months hazard insurance premium.
11. Loan Origination and discount fee.
12. Survey.
13. Credit report ($35).
14. Appraisal ($350).
15. Interest on new loan.
16. Mortgage insurance premium.
17. Mortgage insurance reserves.
18. Water and sewer adjustments.
19. Underwriting fee.
20. Lender documentation preparation fee.
21. Miscellaneous loan fees (determined by new lender)
You can expect the total closing cost to be approximately 3%-5% of the purchase price of your home.