Welcome to our home buying series where we’ll be looking at the 10 steps involved in purchasing a home. Today we’re looking at step 1 which is the loan pre-qualification process.
Unless you’re planning to purchase using cash only, step one in the home buying process is speaking to a lender and getting pre-qualified. Now, what does all that mean? It means speaking with a bank, credit union or mortgage company in order to see how much house you can buy.
Selecting a lender – It’s often advisable to comparison shop between a couple of lenders. This way you can compare closing costs and interest rates. If by that time you’re already working with a Realtor, your agent will be able to recommend a lender that is competitive and reliable and tried and tested already by your agent for previous buyers.
Providing Information – When working with the lenders, you’ll be providing them with important information regarding your credit, debt, work history, assets and residential history. They’ll also require your social security number. This will help them determine how much of a monthly payment you qualify for. They will then translate this to a maximum price up to which you can purchase.
Budgeting – It is important to make sure at this early stage that you are confident that these monthly payments are going to fit comfortably into your budget and that you are also comfortable with the funds that you will be required to bring to the closing table. We like to liken this to shopping in a grocery store. You would not put items in your cart if you were not confident that you will be able to pay for them at the check out. And when you are shopping for a home this is even more important as you are talking about a lot more money being necessary than when grocery shopping.
Your monthly payment is frequently described by the acronym PITI which stands for principal, interest, taxes and insurance.
• Principal – the payment towards the loan amount
• Interest – the monthly interest charged on your loan
• Taxes – the annual property taxes
• Insurance – your homeowner’s insurance
Your payment will also include a fee called PMI (Private Mortgage Insurance), unless you are putting at least 20% as a downpayment.
We mentioned closing costs a minute ago and sometimes it can get confusing between all the new and different terms you’ll be introduced to when going through the home buying process. Things like escrow, closing costs and down payment can seem interchangeable, but they’re actually very different.
The escrow deposit (also referred to as the initial deposit, the escrow funds or simply the deposit) – Is something that you’ll need to be mindful of as it is typically required within three days of your offer is accepted. In our central Florida market, it’s typically around 1% of the offer price so for the average home in our market, it’s between $2000 and $3000. Generally this deposit is a check or wire sent to the title company that will be in charge of closing the purchase. The escrow deposit is refundable for a number of reasons that will be covered on the contract and also in a future video. The deposit will count as a credit towards your total amount of funds due on the day of closing.
Closing costs – These are the fees charged in association with getting your loan. Included are loan fees, the appraisal fee, survey fee, etc. These costs are due at closing. Included in the closing costs is often your down payment.
Down payment – This is a percentage of the purchase price and is money that your lender requires you to bring to closing, in addition to your loan closing costs. Common down payments amounts are 3.5%, 5%, 10% and 20%.
Beginning your home search – It’s highly recommended that you work with your lender to get pre-qualified before you begin house hunting. Pre-qualification will tell you how much home you can afford and can help you move faster, and with greater confidence, in competitive markets.
Getting pre-qualified is one of many steps that will show home sellers you’re serious about buying, and it’s rare that a seller would entertain an offer without the buyer being pre-qualified and having a pre-qualification letter from their lender to present with their offer.
Thanks so much for watching/reading! We hope you’ve found this information helpful! Feel free to reach out to us should you have any questions about buying and make sure look out for the next video in this series which will provide important information on how to choose a Realtor!
See you next time!