From The Dream To The Keys: An Outline Of The Home Buying Process
Kevin GrahamOctober 16, 2019
If you’ve decided it’s time to consider buying a home, you probably want to know what’s involved in the process before confronting the issue head on. The good news is that once you walk through the process, it can seem a lot less daunting and more within the realm of possibility.
The goal of this post is to pull back the curtains on the mysteries of home buying so that you’re ready when the time comes. By the time you finish reading, you’ll have a much better idea of what to expect and what to look out for.
Take A Good Look At Your Budget
There are many advantages to buying a home, including the fact that it’s your own place and you can make it into whatever you want. You also build equity, which represents your investment in something you have rather than putting money in a landlord’s pocket.
A home is a huge investment in the sense that it’s the biggest financial transaction many of us will face in our lifetime. That being said, it makes sense to give your budget a good look.
There are calculators you can use to determine how much you can afford. It’s certainly useful to take a look at these because if it’s a good one, it will give you an estimate of what you might be able to afford based on the monthly payment as well as the size of your down payment and savings for closing costs. This can be a somewhat limiting factor because in most cases, you can’t get a mortgage with a down payment below 3% to 3.5% if it’s a one-unit primary property.
If you’re in the saving stage, you’ll want to look through your expenses and determine whether you can hit your savings goal in the time you want to do so. If you’re not getting there as quickly as you wish, you might look at some ways to supercharge your savings. Whether it’s a side hustle or skipping dinners out for a while, there are things you can do to speed up the saving process without living on ramen.
You also may not want to forgo the benefits of having your own home in favor of a higher down payment. While it’s true that having a higher down payment does have its benefits (e.g., avoiding private mortgage insurance, or PMI, on conventional loans and getting a slightly lower rate), it may be worthwhile to have a place of your own. It all depends on you and your goals.
Another thing that's good about really examining your budget is that you'll know your comfort level. When a mortgage lender approves you for a given amount to start shopping for a home, it's based on the absolute maximum amount you can afford based on your debt-to-income ratio (DTI). While this is great for giving you the top end of your price range, you don’t want to wind up giving up every night out or family vacation for the next 30 years, so it makes sense to have a number in your head that you’re comfortable spending.
Check Your Credit
As you’re saving, you’ll also want to be aware of your credit situation and any existing debts. Your median FICO®Score plays a huge role in both your initial qualification for any type of loan as well as the interest rate you receive. In general, you want to keep your debt low and your credit score as high as possible.
Your DTI is calculated as follows:
(Installment Debt + Revolving Debt Payments) / Gross Monthly Income
Installment debt is the kind where the payment doesn’t change every month. This is the case for things like a mortgage, personal loans, student loans and your car payment. Meanwhile, revolving debts are items like credit cards and home equity lines of credit where the payments change monthly based on the balance.
With certain loans, before your DTI is calculated, a housing expense ratio is calculated. Here’s how they look at that:
(Principal + Interest + Property Taxes + Insurance + Homeowners Association Dues) / Gross Monthly Income
In a case where they both have to be looked at, your housing expense ratio is determined first and it can’t exceed a certain percentage of your income that varies based on what loan you qualify for. After that, all of your other debts are added in and your overall DTI is calculated. There are limits on how much debt you can have overall, and this is how your approval amount is calculated.
It’s very important to be aware of what your credit looks like because your lender will get both your credit score and any existing debts you have from your credit report. Our friends at Rocket HQSM offer a free service where you can get your VantageScore® 3.0 credit score and report on a weekly basis from TransUnion®.1 You’ll get personalized tips based on the information in your report on how you can improve your score.
Get A Mortgage Approval
Once you’ve examined your budget and maybe put aside something for a down payment on the home you’ll be buying, it’s a good idea to get a mortgage approval that tells you how much you can afford. Most lenders call these preapprovals or prequalifications. The problem is that lenders often use the terms “preapproval” and “prequalification” interchangeably to mean the same thing. To clear up any confusion around this, our friends at Quicken Loans® have come up with a three-step system known as the Power Buying ProcessSM.
In a Prequalified Approval, Quicken Loans will pull your credit to get a look at your credit report and scores from Equifax®, Experian™ and TransUnion®. The score that counts is the median FICO®mscore. If there’s more than one person on the loan, the lowest median credit score counts for qualification purposes.
In addition to your credit score, the lender also gets a look at your existing monthly debt payments from your credit report. Finally, you give us estimates of your income and assets. From that, we’re able to do a calculation of how much you can potentially afford based on your DTI.
It’s important to note that because your income and asset statements are estimated and not verified by documentation, it’s just an estimate. We encourage all of our clients to take the next step.
A Verified ApprovalSMstarts with a credit pull as well to get both your credit score and a look at your existing debt payments. The key here is that income and assets are verified through documentation, including W-2s, tax returns, pay stubs and bank statements to name a few. Those who are self-employed can use other documents as well.
Sellers and their real estate agents consider an approval with verification of documents to be a sign of a serious buyer. You’ll also know exactly how much you can afford at the top end of your budget. You can be confident that because your documentation was verified, your offer will have strength equivalent to that of a cash buyer because the seller can make sure you’re good for the financing. You should feel confident too. If for any reason your loan doesn’t close after you get a Verified ApprovalSM, we’ll give you $1,000.2
We know that when you’re shopping for a home, you’re thinking about more than just what you can afford. You don’t want to spend more than you have to. Therefore, it makes sense to be conscientious about interest rates.
Many lenders don’t allow you to lock your rate until you’ve found a house and negotiated a signed purchase agreement. The problem is interest rates have the potential to jump around quite a bit between the time you go shopping and when you actually find a place to call home. To help combat this anxiety, Quicken Loans has something they call RateShieldSM Approval.3 Here’s how it works.
You can lock your interest rate for up to 90 days while you shop for a home. If you sign a purchase agreement within that 90-day timeframe, we compare the interest rate you initially locked to the one in effect for the same mortgage option on the day you send us the purchase agreement. If rates are higher, you get to keep your initial rate. On the other hand, if they’ve gone down, you get the lower rate in effect on the day the purchase agreement is sent back. It’s a win-win. Your rate lock then continues to give you time to complete the process and close your loan.
Make A List
Once you have an approval showing how much you can afford along with an amount in your head that you’d ideally like to stick to, it’s important to make a list of features you’d like to see in a house. You can break this list down into needs and wants. It might also be helpful to put these in order in terms of priority.
If you can do this, it’ll be extremely helpful to you and any real estate agent who might be helping you look for a home. After all, you might not be able to find a home that has absolutely everything you want in your price range. Having a list will help you find a home that checks the most boxes.
Find A Real Estate Agent
It’s true that you can find a home on your own without having a real estate agent. Online home search can help with this. However, having a real estate agent can make the process much easier.
Real estate agents have access to something called the multiple listing service (MLS). This is where other real estate agents list homes for sale. You might see homes listed here before they go up publicly online, so an agent can help you cast the widest net possible to find the home you want.
A real estate agent can also help you negotiate a better deal because they understand what homes are actually worth given current market conditions by virtue of knowing the market they’re appealing to and understanding current property values in different neighborhoods. They can also help you make a stronger offer because they know what common deposit amounts are as well as the types of things included in an offer. Some of these items might include:
· What costs are typically paid by a buyer and what’s covered by the seller.
· What contingencies you can include given the market you’re competing in.
· They’ll help determine a competitive offer price.
Making An Offer
Once you’ve found a real estate agent, it’s time to find a house. And when you’ve found the house of your dreams, or at least the best place for you and your family at this time in your life, it’s time to make your best offer.
There are a few keys to making the best possible offer. These will be important when there’s a lot of competition for the home:
· Escalation clauses: You don’t want to lose the home because you’ve been outbid by a few thousand dollars, but at the same time, you don’t want to overpay by throwing out your top bid right off the bat. This is where escalation clauses can come in handy. Your offer has an initial bid, but you also have a clause that says if anyone bids higher than you, you’ll bid $1,000 above their offer up to a maximum amount.
· Sweeten the deal: We’ll get to this more in a minute, but one important thing to keep in mind is that the mortgage company will only give you a loan for the appraised price of the property minus any down payment. Sellers also know this, but in particularly hot markets, they may be more willing to take their chances with someone who can offer them more. If this is the case in your area, you can make your offer more attractive by promising to pay some amount above the appraised price by bringing the cash to closing.
· Minimize contingencies: If you’re looking at homes, there are two common types of contingencies that often come up in purchase agreements. One is an appraisal contingency where you might say you can’t pay more than the appraised price. The other type is a home inspection contingency. These aren’t typically used for minor issues like trimming that needs to be replaced, but if the furnace or roof is about to go, you could get out of the deal. This gives you some protection but if you have an inspection clause, make sure it’s narrowly tailored for major fixes. Remember, sellers want certainty in the deal as much as you do.
· Be flexible: In some cases, willingness to work with the seller will set you apart. If the seller needs you to occupy right away because they want to be done with the house, let them move. On the other hand, they might tell you they need to stay in the house for a while until the kids get done with school for the year. It often helps if you can roll with the punches.
Understanding The Loan Estimate
Once you’ve sent your purchase agreement back to your lender, you’ll be sent a loan estimatewithin 3 business days. If you haven’t locked a rate up to this point with RateShieldSMApproval, this is usually the first time many lenders will allow you to lock your rate. If you choose to let it float to a time closer to closing and make the bet that rates won’t go up, the rate on your estimate will be marked as floating, and the interest rate will be based on current rates. This is important to note because until you lock the interest rate, all of the costs can change.
Once your interest rate is locked, actual lending costs can only change very minimally, if at all, based on strict federal regulations. However, third-party costs such as those for an appraisal, homeowners insurance and title services may change by as much as 10% between your loan estimate and final closing disclosure. You can shop for your homeowners insurance policy as well as title services, among other things. This could help you control your loan cost to an extent.
Once you have a signed purchase agreement, you’ll be given a window in which to complete an appraisal and home inspection. Let’s briefly go over each of these.
A real estate appraisal has two purposes: to make sure the home is move-in ready and to give the home a market value.
An appraiser’s most basic job is to make sure that the property doesn’t have any issues that affect its safety or livability. Do decks and staircases have railings? Are there gigantic cracks in the cement? Are there exposed wall studs or floorboards that can be seen? Are there loose shingles or holes in the roof that might need to be repaired? If it’s an older house, is there evidence of lead paint that needs to be mitigated? Do the utilities work?
Beyond basic move-in readiness, an appraiser has to determine the market value of a home. A lender won’t give you more than a property is worth, because in the event you default on your payments and the house has to be sold, the house has to sell for as close as possible to that value to cut down on lending risk. This also provides a certain amount of protection to you because you’re not overpaying for a property.
If your appraisal comes in lower than expected, you have a few options:
· You can renegotiate with the seller.
· You can bring the difference between the appraised price and the purchase price to the closing table.
· You can walk away from the property. If you go this route, you might lose your earnest money deposit.
Unlike an appraisal, a home inspection isn’t required, but it’s always a good idea to get one when purchasing a home. A home inspector will walk through the home with you and let you know of any current issues or things that may come up in the future.
Most home items are included in a general inspection, but specialized inspections can sometimes be useful to check for issues with a chimney, radon or well and septic system. If there are any issues with the home that you would consider to be a major red flag, you can sometimes get out of your purchase agreement without losing your deposit if the home fails inspection for a specific item listed in the agreement and the homeowner doesn’t want to fix it.
While the appraisal and home inspection are taking place, your lender will simultaneously be performing final underwriting checks. It’s important to be prompt in responding to messages. Make sure to get them any requested documentation as soon as possible in order to make sure everything goes as smoothly as it can and you get to the closing table on time.
Close The Deal
When everything is complete and you’re ready to close your loan, you’re not too far from getting the keys, but there are still things you should be mindful of.
Prior to your scheduled closing, you’ll receive a Closing Disclosure within 3 business days. This substantially mimics the format of the loan estimate, but it’ll give you a chance to review final lending costs. As a reminder, the cost related to your actual mortgage shouldn’t change much between your initial loan estimate and Closing Disclosure. However, fees for third-party services may change by as much as 10%.
Your mortgage company will let you know exactly what you need to bring on closing day, but you should have a certified or cashier’s check for all your closing costs, including down payment, evidence of homeowners insurance and your government issued ID.
Making The Big Move
When you move, there are things people often forget about. Let’s run through a quick list.
· Transfer important services. You want to notify utility companies and cable and internet providers of when you’ll be moving in advance so that you’ll be up and running when the big day comes.
· Change your address. You can change your mailing address with different providers as they come up, but as a stopgap, the Postal Service has a change of address formso that your mail gets forwarded to the proper place.
· Get the house ready. Before fully moving in, make sure to get any immediate and necessary home maintenance taken care of so that your space is ready for you.
· Homeowners insurance checks. Be sure you check on what your homeowners insurance policy covers. In addition, when you’re making the move, this is also a good time to catalog your belongings and take pictures and make notes of everything you have just in case you need to make a claim somewhere down the line.
· Meet your neighbors. Take the time to get to know your neighbors. Not only is it a good idea to make friends and acquaintances, but these are also the people who can tell you if they see anything unusual happening in the area. They might even help coordinate babysitting schedules as well.
Although there’s a lot to think about, you should feel much more prepared for the home buying process now. If you’re ready to get started, you can do so online with Rocket Mortgage® by Quicken Loans®. You can also get in touch with one of their Home Loan Experts at (800) 785-4788.
If you’re looking for a home, connect with a Rocket HomesSM agent today!
1Quicken Loans®, Rocket Homes Real Estate LLC and Rocket HQSM are separate operating subsidiaries of Rock Holdings Inc. Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation, and applicable legal and regulatory requirements.
2Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Quicken Loans’ control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Quicken Loans through a mortgage broker. Additional conditions or exclusions may apply.
3RateShield Approval locks your initial interest rate for up to 90 days on 30-year conventional, FHA and VA fixed-rate purchase loan products. Your exact interest rate will depend on the date you lock your rate. Once you submit your signed purchase agreement, we’ll compare your rate to our published rates for that date and re-lock your interest rate at the lower of the two rates for an additional 40 to 60 days. Quicken Loans reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Quicken Loans. This is not a commitment to lend. Additional conditions or exclusions may apply.
4Rocket Homes Real Estate LLC License Numbers: MI 6505-346028; AL 000116893-0; AZ LC682664000; CO EC.100073419; FL CQ1053125; GA 75702; IN RC51700193; KY 245277; LA BROK.0995700664-CORP; MA 422609; MD 668189; MN 40608594; MO 2017021670; NC C27494; NJ 1757866; NV 2017306335; NY 10991228813; OH REC.2018004495; PA RB068594; SC 22050; TN 263727; UT 11215866-CN00; VA 0226028421; WA 20438; WI 938151-91; Rocket Homes Real Estate IL LLC License Number: 481.01277. Rocket Homes℠ and the Rocket Homes℠ logo are service marks licensed to Rocket Homes Real Estate LLC. Rocket Homes Real Estate LLC fully supports the principles of the Fair Housing Act and the Equal Opportunity Act. The Rocket Homes Real Estate LLC main office is located in Detroit, MI. Contact: (888) 468-4735.