This guide will help take some of the confusion and uncertainty out of the home buying experience. Review this information and follow the steps and you’ll be on your way to being a homeowner.
- A Mortgage Loan Checklist so you know what to have ready and expect every step of the way when you apply
- The Home Loan Toolkit (pdf) from the Consumer Financial Protection Bureau offers step-by-step instructions and advice.
As you consider purchasing a home you should become familiar with the types of mortgages that are available. While a lender can assist you with the specifics later in the process, it’s a good idea for you to do a little research on your own.
- Fixed-rate mortgages - Conventional Fixed-Rate Mortgage Loans are typically available in terms of 15, 20 and 30 year terms. Choose a fixed-rate mortgage if you prefer the certainty of a fixed monthly payment without the risk of the interest rate changing. Fixed-rate ensures that your payment principal and interest remains the same each month, which can make budgeting a lot easier. However, if your loan has an escrow account that is collecting for taxes and or insurance, that likely will change over time and cause your total monthly payment to change annually.
- Bi-Weekly Program - This program offers the same certainty of the interest rate over the life of your loan as the Conventional Fixed-Rate Mortgage, except your mortgage payments are billed and collected on a bi-weekly basis. Instead of 12 payments per year, you are paying 26 bi-weekly payments per year. This is an effective way to build equity faster in your own. This program does require an Automatic Payment.
- Low down payments - Historically, the standard down payment for mortgages has been 20%. Today many lenders realize how difficult it can be to come up with such a large amount of cash, and will help buyers with special loan programs. Conventional Fixed-Rate Mortgages have a down payment option for as low as 3% for first-time homebuyers.
- Designed to meet the needs of borrowers who have strong credit and employment profiles but cannot make the standard down payment
- Funds for down payment, closing costs, and/or prepaid items may be obtained from the buyer's own funds, gifts from a family member or grants from an employer, non-profit, or government agency.
- Homeownership Opportunities Program (HOP): We partner with the Federal Home Loan Bank of Indianapolis to offer HOP grants. Qualifying first-time home buyers who can provide at least $1,000 of their own money toward the purchase of their home, could receive up to $10,000 in grant assistance.*
- We’ve also taken the extra step to develop a unique mortgage option that can be used in combination with the HOP grant to help qualifying individuals and families with low to moderate incomes make their first home a reality. Not everyone will qualify for these special financing programs, and some may need to develop a more realistic time frame to achieve their goal. Wherever you find yourself financially, our team offers the advice, education and tools to help put you on the path to home ownership. Request more information here >
- FHA - The Federal Housing Administration insures this mortgage. The required down payment can go as low as 3.5%. Customers like FHA loans because they have more liberal qualification requirements. This is a fixed interest rate, monthly payment loan option. Your monthly payment will include monthly payments towards collecting for taxes, insurance and monthly mortgage insurance premiums that likely will change over time and cause your total monthly payment to change annually. In addition, FHA allows all of your down payment to be a gift from a family member, relative, or non-profit organization.
- VA - VA loans are guaranteed by the U.S. Department of Veteran Affairs and is available to veterans, active duty military, reservists and for those that are an eligible family member of a former service member. This is a fixed interest rate, monthly payment loan option with little or no down payment. Your monthly payment will include payments towards collecting for taxes and insurance, that likely will change over time and cause your total monthly payment to change annually. VA loans share similar liberal qualification requirements to FHA and often with lower closing costs. You can purchase your new home or refinance your current VA loan using the program.
Getting the best interest rate - One way to get a better interest rate is to pay what are known as "points." A point (short for discount points) is prepaid interest assessed at the time of closing by the lender. Each point is equal to 1% of the loan amount and a portion is tax-deductible that year.
Lock in - While you're in the process of shopping for a home and mortgage, interest rates can change. Ask your mortgage lender if you can "lock in" to the current rate being offered. It's good to lock in when rates are rising, but not when they're dropping. The lock in lasts for a specified period and will expire if you haven't closed before then.
When you apply for a mortgage, the lender will look at your entire financial picture to determine how much money they will let you borrow. Lenders use income and debt ratios to determine how much you will be able to borrow. Ratios are nothing more than comparing your income against the amount of debt you owe.
They'll use several guidelines including one called the Debt-to-Income Ratio. This ratio compares your total debt to your total gross income (including your spouse's) and is important when determining someone's ability to repay a loan. Total debt includes your mortgage plus any auto loans, credit cards, and loans of any other kind.
An important component in determining how much you can afford to pay for a house is the down payment, which usually comprises 20% of the total cost. Purchasing a home that is selling for $98,000, for example, would require a down payment of $19,600. If you don't have 20% down, don't give up. There are many ways to accomplish your goal.
To avoid paying PMI, many young people purchasing their first house get help from their family for the down payment in the form of a monetary gift. This is acceptable, however you must produce a letter from your benefactor stating that the money is a gift and no repayment is required. But if this isn't an option, you still won't have to pay PMI forever. Once you've sent in enough payments that the principal paid and down payment together reach 20% equity, you should no longer be required to pay for Private Mortgage Insurance. So it's to your advantage to pay as much as you can, as often as you can, above and beyond your minimum payment.
When you decide to buy a home, you're definitely going to need two things: a down payment and the ability to make monthly payments. Do you know how much money you can afford to spend on a new house? To figure this out, you'll need to take a good hard look at your current financial situation.
If you've never worked out a formal household budget, now is the time to start. This is the only true way to know how much you have coming in, how much is going out, and what's left over each month. Making a budget is a good opportunity to improve the management of your money and cut down on debt.
- Collect information on how much you spend - Two good resources for tracking expenses are your checkbook register and credit card statement. For a complete picture, also save all receipts for two or three months when you pay cash.
- Categories - Once you know how much money you spend and where it goes, you are ready to group your expenses into categories. Use our Budgeting Worksheet to decide what categories apply to you.
- Income - Determine what you can realistically expect to earn on a monthly basis. If your income varies from month to month, as a sales person's might, look over last year's income and figure out a monthly average. Try to be conservative when projecting, and be careful about including overtime, bonuses, and commissions that may not happen.
- Project your expenses - Using our Budgeting Worksheet, determine how much money should go into each category to meet expenses. For those expenditures that only occur once or twice a year, like auto insurance, figure out how much money you need to hold back each month so you'll have enough when those bills arrive. Don't forget to anticipate future expenses such as auto repairs.
- Balance your budget - If you think you have a pretty good idea of what's going out and what's coming in, now comes the moment of truth. Use our Current Spending Analysis Worksheet to find out whether you make more than you spend or spend more than you make. If your income is greater than your expenses, fantastic! Now is the time to set up a regular savings plan. If your expenses are greater, don't panic, your situation can be improved by adjusting some spending habits.
- Fine tuning - One of the biggest benefits of the budget process is finding out where you're spending your money. Realize that your newly created budget will have to be adjusted - maybe spending a little less here and there for the first few months until you get things where you want them. Even then, you'll want to review your budget periodically to make necessary adjustments.
Once you’ve determined your budget, you’ll want to determine how much money to spend on a new house. To help answer this question and simplify your home buying experience, 1st Source Bank offers several simple and easy to use calculators to help provide answers to the following questions:
- What will my payments be for a fixed rate loan?
- What will my payments be for an adjustable rate loan?
- What will my payments be for a balloon loan?
- Should I rent or buy?
- Which is better for me, fixed rate or adjustable?
- What will I save if I make extra payments?
- How much house can I afford?
Before you begin the search for a new home, it’s best to obtain pre-approval for your mortgage. By getting pre-approved, you'll know exactly how much you're able to borrow, and may be able to lock in to current interest rates. Secondly, being pre-approved puts you in the driver's seat by showing the buyer you're ready to make a serious offer. In fact, some sellers and real estate agents require pre-approval before they will show a home.
Don't confuse "pre-qualified" with "pre-approved." There's a big difference. Getting pre-qualified gives you a general idea of your borrowing power but does not provide actual approval. Once you've been pre-approved, all you need to complete the transaction is agreement with the seller and an appraisal. Basically, when you've been pre-approved all you need is the house!
You should note that a pre-approval is based on your personal circumstances at the time of application. Should any of those circumstances change, your approval may be affected negatively. Also be aware that your approval will expire after a specified period if you haven't purchased a home.
At 1st Source Bank, you can apply for a mortgage online from the convenience of your home or office. You can also meet with one of our experienced lenders who will guide you through the process.
Preparing For Your Loan Application
To help you prepare for your mortgage loan application, 1st Source has prepared a check list of documents and information you'll need to take with you when you meet with your lender. This information is used to verify your income, assets, and debt. Preparation before hand makes the process easier, and increases your chances of being approved.
Be sure to bring:
- Copies of the purchase and sales agreements (if you’ve already made an offer).
- Pay stubs for the past 30 days.
- W2 forms for the past 2 years.
- If you're paid on commission, copies of 2 years' signed tax returns including all schedules.
- If you're self-employed, the past 2 years' signed tax returns (personal and business) including all schedules and a signed year-to-date Profit and Loss Statement.
- Bank statements for the past 3 months.
- Divorce Decree, if applicable: If you receive alimony or child support, you'll need documentation verifying the past 12 months support you've received.
- Proof of additional income such as dividends, interest, child support, or income from a rental property.
- Bankruptcy, if applicable:
- Notice of Discharge
- Schedule of Debts
- If you are receiving a gift from parents or relatives for the down payment, you'll need a signed gift letter. The letter must state that the money is truly a gift and no repayment is required.
- Credit explanations, if applicable.
- Your checkbook.
Meeting with a Lender
Once you’ve gathered all of the required documentation, it’s time to make an appointment with a lender at 1st Source. The meeting will probably take 1 to 1 ½ hours so plan accordingly.
During the appointment you will have the opportunity to ask questions about all aspects of the process including terms, types of mortgages, the appraisal, and anything else that needs clarification. The lender should explain the different types of loans, current interest rates, and offer you advice on what may be best for you. When you are approved, you will receive an approval letter you can show to real estate agents and prospective buyers letting them know you are a serious shopper with approved financing.
Some banks use automated systems that decrease the amount of time it takes to review and approve a loan. 1st Source Bank uses a system like this that streamlines the application process.
After your meeting, you'll have a lot of information you didn't have before:
- The size of your expected down payment
- An estimate of the closing costs
- What additional documents are required, if any
How To Increase Your Borrowing Power
If you are disappointed with the amount of money you're able to borrow, it's possible that you'll have to come to terms with buying a less expensive home. Before you do though, consider some options that can increase your borrowing power.
- Reduce your existing debt by paying off current loans. Now is not the time to buy a new car.
- Wait until your household income increases, then apply for a mortgage.
- Search for financing options that require a lower down payment and smaller monthly payments.
- Put together a larger down payment to reduce the amount you need to borrow.
- Keep your eye on the housing market and wait for interest rates to drop.
If Your Loan Application is Denied
If your loan request has been denied, your first question will be "why?" Here are the primary reasons mortgages are denied and what might be done to correct the situation.
- Poor credit rating
- If your request is denied because of a poor credit history, you should obtain a copy of the report and challenge any errors it may contain. If the report is accurate, you may have no choice but to work on correcting the problems before you can apply again. If you have a non-traditional credit history (payments to landlords, utility companies, etc.), you may be able to approach a non-profit housing group to help you present this information in a more positive light.
- Insufficient income
- In this case, the formulas the lender uses for qualification have shown that you simply don't earn enough to afford the mortgage payments. If there are extenuating circumstances, point them out to the loan officer. If you are in line for a raise at work, ask the lender if a letter from your employer would help.
Whatever you do, don't give up. Make plans to correct any problems and pursue your dream. There are credit and housing organizations that can help you with your plans for home ownership. Remember, there are also programs that can help the low to moderate income homebuyer. These alternative approaches may aid you in overcoming some common hurdles and obtain quality, affordable housing. Ask your lender if you qualify for any of these programs.
These programs include:
- Community home buyer's programs
- Housing finance agency programs
- Subsidized second mortgages
- Lease-purchase mortgage loans
- Community home improvement mortgage loans
- Community land trust mortgage loans
Choosing where you want to live is another big decision when buying a house. Do you want to live in a neighborhood in town or would you rather locate in the suburbs? If you have children or are planning on starting a family, the school district you live in will be an important factor in your choice of neighborhoods.
All of these decisions point out the importance of determining your priorities from the beginning. Knowing what's most important to you in a home and location before you start window-shopping can save you loads of time. But remember, the "perfect" house is difficult to find. Decide where you are willing to compromise and where you're not.
Choosing a Realtor®
Most people who buy or sell a home use the services of a real estate agent. While you can purchase a home without a Realtor®, using one can simplify your search for the perfect home.
Here are some of the advantages to using a Realtor®.
Use MLS as a powerful search tool - About 90% of all homes for sale are listed on the MLS (multiple listing service) and a Realtor® has access to all of that information.
Help narrow your search - Give them your "wish list" and they will be able to narrow your search by zeroing in on the homes that meet your needs or, at least, come the closest. They know the area and its neighborhoods, and have access to all kinds of information.
Familiar with the community - Realtors® know real estate values, property taxes, utility costs, schools, municipal services, pending zoning changes, and more. If you have a question about any of these, your Relator® will find the answer for you.
Provide due diligence - Depending on the area, this may include inspections for termites, dry rot, asbestos, septic tank condition, faulty structure, etc. They will help you find qualified companies to carry out these inspections.
Help with transaction - Your Realtor® will help you through the complicated transaction including negotiation of the price. They will make sure that everything is ready for closing and will work with the mortgage company to set up appointments.
For example, you've made no secret of your enthusiasm for a particular home, the agent is bound to communicate that to the seller. If, on the other hand, the seller has told the Realtor® how low they are willing to drop the price, the agent is under no obligation to tell you and will not offer the information. Who the agent represents though, is not as important as their business ethics. They are not out to cheat anyone and they hope your experience is positive so you will use their services in the future.
The very best way to find an agent is to ask your friends, relatives, neighbors, and co-workers. They may have first hand knowledge of Realtors® they've worked with in the past and can share their experience with you.
Some people enjoy the challenge of negotiating the purchase price of a home while others do not. If you are one of those who don't, you'll be happy to know the realtor will handle all negotiations. Here are some things to keep in mind.
Most sellers anticipate a low initial offer and add a 5% "cushion" to the sale price right from the beginning.
The offer includes: the price, amount of down payment, legal description of the property, the amount of earnest money, list of items the seller has offered to leave behind that you would like to keep, length of time the offer is valid, proposed closing and occupancy dates, and the stipulation that your obligation to buy is contingent upon the successful negotiation of the contract.
To help you decide what your offer should be, review the prices of similar homes for sale in the area. Negotiating items other than selling price may include property the seller offers to leave behind (appliances, gardening equipment, etc.), the amount of earnest money, and possession date.
The seller will accept your offer, reject it, or (most likely) make a counter offer. This process takes place until the buyer and seller come to a price they can both agree on. If the negotiations go on too long however, hard feelings may arise and bring the process to an end.
An offer is a document proposing a certain purchase price under specified terms and is presented to the seller by the realtor. Preparing an offer provides a good opportunity for you to talk to your realtor about why you want to offer a particular price. Along with the offer you will provide earnest money, which indicates to the seller you are serious about purchasing their home. There is no particular sum required and your realtor will be glad to advise you on customary amounts. The amount of earnest money you pay will be applied to your down payment. The check needs to be made out to the real estate agent and will be deposited in the escrow account. If the seller doesn't accept the offer, the money is returned to you. If the seller accepts and you back out later, you forfeit the money.
At a minimum the offer should contain the following:
- Complete legal description of the property
- Amount of earnest money
- Offering price
- Size of down payment and how the house will be financed
- List of items the seller offered to leave with the house that you would like to keep
- Proposed occupancy and closing dates
- Length of time offer is valid (normally five days)
- Stipulation that your obligation to buy is contingent upon the successful negotiation of the contract, satisfactory inspection reports, and approval for financing
Once your offer has been presented, the seller will accept it, reject it, or make a counter offer. If a counter offer is made, don't feel pressured to make a decision right away. The realtor may insist you act quickly because "other buyers are waiting." This is a common sales ploy and may or may not be true. Whatever the case, the decision to purchase a new home is too important to rush. Any changes made to your original offer by the seller constitute a completely new offer. This is not binding until you accept it in writing by initialing any changes made on the original offer.
At this time you have the same three choices you had the first time around: accept, reject, or make another offer. If you make another offer, you might be asked to increase the amount of earnest money held in escrow. The same items contained in the first offer need to be included in this one as well.
This process can take place again and again until you and the seller arrive at an agreement you can both live with.
Within three days of submitting your application, your lender is required to send you a "Good Faith Estimate" that lists all closing costs. This is just an estimate and the actual costs at closing may be a little higher. If this document includes charges you thought were going to be waived, let the mortgage lender know immediately. Be certain the Good Faith Estimate is correct and in your possession before you sign the letter of commitment.
Following the approval of your mortgage you can expect to receive a letter of commitment from your lender. This is a formal offer that states the loan amount, the term (20 yr., 30 yr. etc.), the origination fee, annual percentage rate, points, and monthly charges which include principal and interest.
It's alright to contact your mortgage lender with questions between application and the closing. If there are any changes in your financial situation during that period (job change, etc.) they may require further documentation. Be sure your financial institution has all of the documents it needs to finalize the loan so there are no delays. In addition, if your lender hasn't already asked you for a copy of the sales agreement, make sure they get one.
Protect Yourself With a Home Inspection
Having a prospective home inspected provides an informed opinion from a third party regarding the condition of the house. After the inspection, one of three things will happen:
- You'll have greater peace of mind because the inspector has given the property a clean bill of health.
- You'll learn there are problems and you head back to the negotiating table.
- You walk away completely and look for a different house.
It's not a bad idea to go through the house with the inspector. Doing this will help you learn a great deal more about the home. Remember though, the inspector can only inspect what he can see so there is no absolute guarantee he will find every little problem.
Finding a good inspector is a lot like finding a good real estate agent. Ask friends, coworkers, and relatives who they used when they were buying their homes. Your real estate agent will also have names of inspectors he or she recommends. However, if you're using the seller's real estate agent, you may want to choose your own inspector. Remember, in this situation you aren't the agent's client - the seller is. And when selecting an inspector, make sure they have a membership in the National Association of Home Inspectors (NAHI) or the American Society of Home Inspectors (ASHI). Both organizations encourage their members to improve performance and ASHI uses guidelines for home inspections that can be particularly helpful.
What the Lender Does To Close Your Loan
While you wait for the closing date, your lender is working hard to investigate and verify many aspects of the property you are purchasing. Here is a description of what's going on behind the scenes.
- Your lender will order an appraisal of the house to make sure you are not paying (and they are not lending) more than the property is worth.
- Title Search and Insurance
- A search will be performed to make sure the seller is indeed the legal owner of the property, and determine if there are any liens against the home. If there are, these must be settled before closing. Your lender will help you buy title insurance to insure you have clear title to your property.
- This is most often ordered by the lender and paid for by the buyer. The survey will confirm that the property's boundaries are the same as those described in the sales contract. You may be able to save a few dollars by requesting an "update" from a surveyor who has surveyed the property in the past.
- Termite Inspection
- Houses in many locations must be inspected for termites before they can be sold. If everything is OK, the termite company will issue a certificate stating that the home is free from visible signs of termite infestation and termite damage. Usually the real estate agent orders this inspection and the seller pays for it.
- Septic and Well Certifications
- If your home is located in an area that does not have public utilities you will need to have the private water source and septic system certified before closing.
- The lender will create an agenda for the closing and will work with the real estate agent to set a closing date.
Just Before Closing
Soon you'll be closing on your new home so it's time to nail down some last minute details:
- You may need to present identification at closing. Make sure you find out what is needed.
- Personal checks are usually not accepted when paying closing costs. Find out what method of payment (money orders or cashier's checks) is required.
- Confirm the actual date you take possession and can move in. You'll also need to make arrangements to get the keys.
- Request a copy of the appraisal. In most cases you paid for it and it's a good idea to keep this in your files for future reference.
- An escrow account will be set up to pay for things like property taxes, homeowners insurance, etc. These need to be paid at the time of closing so verify what those costs will be.
- Make one last phone call to your real estate agent and lender to determine what else, if anything, you need to bring to closing.
This is it! The big day has arrived! It's time to close on your new home and make it official! If you've never gone to a closing before, it's quite an experience. Just take it slow, pay attention, ask questions if you need to, and everything will go well.
Don't go to the closing unless you have someone there who is looking out for your interests. That means your real estate agent or lender. There is so much going on you'll need an expert to help you keep an eye out for mistakes and they do happen occasionally. Remember, this is the last chance to make sure everything is correct. If you think something is wrong, speak up! Once you sign (and you'll do a whole lot of that), it's a done deal.
Sometime during the process you'll be given instructions regarding your mortgage payments. Your lender will let you know when your first payment is due, where the payments need to be sent, and instruct you regarding late payment penalties. Finally, you'll get the keys to your house. Believe it or not, real estate agent's say this is one item sellers most often forget to bring. When you get the keys, make sure you're getting all of them for the house, garage, or anything else that locks.
Things to Do After Closing
Congratulations! It's exciting to move into a new home, especially if it's your first! With all of the house hunting, negotiations, and closing behind you, it's time to set up housekeeping. An important part of that housekeeping should include setting up files to keep track of everything pertaining to your house.
- Setting Up Files
- Setting up a file system requires a bit of work but will pay-off big in the future. You'll have easy access to all information pertaining to the purchase (closing documents), maintenance, and improvement of your house in one handy place. Also, should you sell this house in the future, the new owner will appreciate getting this information and you will present yourself as a someone who took good care of the house.
- Track Expenses
- Begin to track all expenses that increase the value of your home. When you sell your home you may be able to deduct some of these expenses when reporting a gain from the sale on your taxes.
- Tax Exemptions
- Now is the time to file tax exemptions that may lower your tax bills. Your lender can provide specifics such as the type of exemptions, filing dates, and where you need to go to file.
When you purchase a home, whether new or used, you assume a great deal of responsibility. This responsibility includes care of the house, payment of the loan, and accountability to the public. If fire or severe weather damages your house, or if someone is injured on your property and holds you liable, a good policy will protect you.
An insurance policy is an agreement between yourself and the insurance company that spells out each party's obligations and benefits. It specifies exactly what is covered by the policy and what payment is expected in return. If you are going to have a mortgage, the financial institution will require you to have homeowners insurance prior to closing. Also, depending on the location of the property, you may also be required to purchase a flood policy.
When you begin shopping for a homeowners policy, keep a few things in mind:
- There are a lot of insurance companies selling homeowners policies and their pricing can vary a great deal. Get at least three quotes.
- Make sure you compare apples to apples by evaluating similar policies.
- Pay attention to price, limits of liability, and deductibles.
- Compare policy terms and conditions among different companies and evaluate coverage, exclusions, and the reputations of various firms.
- Be certain the company you deal with is solid financially. If you ever have a claim, you'll want to know the company is still in business to pay your claim.
- The insurance company you choose should handle your claims fairly and answer all of your questions as quickly as possible.
Types of Coverage
- The structure of your home
- This part of the policy pays to repair or rebuild your home if damaged by fire or natural disaster. Protection against floods or earthquakes is not included in the standard policy and must be purchased separately. Make sure you have enough to cover the cost of rebuilding.
- Personal belongings contained in the home
- Most companies provide coverage of 50% to 75% of the value of your home. For example, if your home is worth $100,000, you could receive from $50,000 to $75,000 to replace personal belongings should they be stolen, lost in a fire, or damaged by natural disaster. Items included are furniture, clothes, and other personal items. Coverage of some belongings, like jewelry and televisions, is limited. You may want to purchase additional coverage for special valuables.
- This provides protection from claims or suits brought against you for accidental damage to someone else’s property or accidental bodily injury to others caused by you, a residence employee, or one of your animals. Liability insurance usually provides $100,000 to $500,000 of coverage but some people feel safer with more.
- In the event a friend or neighbor is injured in your home, they are able to submit their medical bills directly to your insurance company. Coverage limits are usually between $1,000 and $5,000 but will not cover you or your family.
- Additional Living Expenses
- If your home is damaged and considered uninhabitable until repairs are made, this coverage will provide money for hotel bills, meals and other living expenses. The average policy pays up to 20% of the insured value of the home but additional coverage is available if desired.