What Are the First Steps To Buying a Home? Roger Odoardi We get a lot of questions about, “what are the first steps to buying a home?” so we’ve broken down the process into six bullet points: 1. Am I Eligible? The answer to this question is based on your credit and debt to income ratio. One of the things we’re going to do in our initial conversation is pull a credit report for you with your authorization. The credit report’s going to allow us to run something called a debt to income ratio. The credit report’s going to give us most of the information for the numerator of the equation, which is—what are your outflows? Your outflows are things like, Credit card debt Student loans Car loans Along with what we’re going to end up providing is going to be the mortgage, which is the other component of your new debt once you figure out what mortgage you can do. The denominator of the equation is going to be your income. So we’re going to be talking about those numbers as “am I eligible?” 2. What Are My Goals? What Is My Budget? Next we’re going to talk about your goals. The two major components of your goals are going to be your, up front costs and your monthly costs Up front costs are comprised of your down payment, your closing costs and your ESCrows. Your down payment is going to be determined by whether you’re going 0%, 20% down, 15% down, and 40% down, etc. And that’s going to determine component number one—your up front costs— which is the down payment. The closing costs are going to be determined by the Mortgage product State you live in Some other factors At this stage if you haven’t picked out an exact property, we’re going to use some averages and estimates so we can help you understand what number you should be provisioning for. The next piece of this is ESCrows. ESCrows are things like pre-paid items…it’s really taxes, insurance. Ninety percent of people who have their mortgage pay their taxes and insurance monthly with their mortgage payment. What you have to do when you close on a mortgage up front is you have to prime that account. The priming of that account is really determined on the state that you’re buying in and the tax cycle. Are they quarterly? Are they monthly? Are they annual? Are they semi-annual? And that’s going to help us determine for how much we should be preparing you for in your ESCrow account. So those three things come together, that’s your up front money. This is really important for people to understand- what goes into that and how much they should be budgeting based on what their debt to income ratio will support, and what their goals are. The next component is monthly cost. The first piece of that is going to be your principle and interest payment—your loan amount, your rate, your term—is going to determine your principle interest payment, and that’s one of the things we’re going to do first. The next piece we’re going to go over is going to be the taxes. The taxes on a home, you’re going to find that on a listing sheet. So every time you’re out at a property you’re going to see a listing sheet for it. Now, say the annual taxes are $6,000 a year, that breaks down to $500 a month, and that’s going to be recorded here as we start to figure out what are your monthly costs on the home. The next piece is PMI. The first thing to understand is PMI goes away in a conventional loan at 20% down. So if you’re 20% down on a mortgage and it’s conventional, there’s no PMI. Less than 20% down is where we need to bring the PMI equation into our discussion. PMI is based on a factor that’s determined by the amount of down payments you have that’s less than 20%, and based on your credit score. As your credit score goes up, your PMI costs- your PMI factor- goes down. As your down payment goes up, your PMI- your cost of your PMI, your PMI factor- goes down. So that’s what we’re hoping to help you understand there. The next thing is insurance. This is your homeowner’s insurance. We’re going to use a number in our analysis, until we know exactly what you want for a property, somewhere between $60 and $100 a month depending on the price of the home, the range that you’re going to be in, and what state you’re in. But the bottom line is you’re going to go out and find the homeowner’s insurance on your own and you’re going to do that later once you’re done your agreement on the property, but we will want to use a placeholder. Typically, our loan officers are going to use somewhere between $60 and $100, maybe call it $75/month, and just help you understand that that’s a placeholder until you line it up. Condo fees, when you purchase a home that’s a condo, it’s going to have a condo fee. Again, that’s a listing sheet item, you’ll clearly see it on there, you’ll just tell us what it is so we can factor that into our discussion of your debt to income ratio. The next thing is flood insurance. We do a lot of work in Seacoast communities, areas that have rivers that can sometimes swell, and those are the areas that flood insurance is more of something that we’ll talk about and make sure someone is not in a flood zone. If they are in a flood zone, it’s really not a problem, they just need to understand that they’re going to carry flood insurance. On every loan that’s written in our country, every day, for every borrower, there’s a flood certification folder to determine if they’re in a flood zone, how severe it is, because that’s what really drives their monthly costs here and we’re going to make sure that we understand if that’s a potential that you might run into and how to plan for that properly. 3. Products That Best Fit Your Goals: So now that we know a bit about your credit, what you make for income, how much you feel comfortable with for up front costs and what you feel comfortable with for monthly, we can look into the mortgage products that may be available to you. There are many different mortgage products. Some of the most common that we’ll use are conventional, which are Fannie Mae, Freddie Mac based products. Those are going to be from 3% down to 99% down. FHAs are another common product that we’ll use. Typically, most people are using that when they want to lower down payments. So FHAs’ minimum down payment is 3.5%. So that’s an applicable product for someone who’s trying to get to a low down payment. Another product with low down payment but is only applicable in certain states is something called a USDA rural development loan. And those are going to be as little at 0% down, but they have geographic and income limits. So now we’re just starting to understand there’s some different nuances to some of these products. Another great program that we use a lot of, I’ll tell people, is veteran’s loans. So if you’re an eligible veteran, a VA loan is 0% down and it’s really a great product. We do them very frequently and people love them. But, for example, if you’re a veteran and you’re eligible for a VA loan but you’re putting 30% down you’re probably going to find your lower cost of bonds is going to be in a conventional loan. Those are the kind of things we discuss in terms of what products that best fit your goals. 4. Application Checklist: From there we’re going to give you a list of items to upload to us through a secure link, it takes people just a few minutes, everything they have is typically online these days anyways. Things you’re going to upload include: 1 month’s worth of pay stubs 2 years’ worth W2s 2 years’ worth of federal tax returns 2 months’ worth of bank statements Under “additional documentation,” certain people have in the past left divorces, foreclosures potentially, short sale, a bankruptcy. All those financial situations will generate a bunch of paperwork that sometimes factor into the product in terms of wait periods. If you had a foreclosure there’s a wait period until you can be eligible for a conventional loan. So if you have one of those things in your past, really keep track of that paperwork. If you’ve had one then you know what paperwork is important and we can help you figure it out. But you’ll want to grab those files and upload some of the final close out paperwork from those situations. For divorce, it will be a divorce decree because that’s the things like alimony, child support payments, which need to get factored into the debt to income ratio. From there we’re going to double check everything to make sure it matches with what we talked about at the beginning of our conversation. That way we make sure that you really are eligible for what we’ve discussed. You’re going to receive a qualification letter from us with a summary of what you can do, and then you’re going to get to the real fun part, which is getting out into the field and working with your realtor. 5. Into the Field to Work with Your Realtor: It’s interesting, sometimes people will qualify and then three days later they’re under agreement. Sometimes people will qualify and then two years later they’re under agreement. So the time frame is completely what works for you. It’s all about what type of home you’re looking for and what’s available in the marketplace, so there’s no right or wrong answer in terms of how long it’s going to take; You just keep working until you find the home that’s right for you. During this process it’s really important to know that we’re here for you every step of the way. Call us, email us, text us, our loan officers get back really quickly with answers to your questions. And we tend to answer a lot of questions outside normal business hours because that’s when you’re out doing this. Definitely feel free to reach out to us whenever you have a question. Email works terrific, phone calls- leave detailed messages and we can get right back to you with a solution so that you can keep moving. Your realtor is also going to be instrumental in helping you find the home that’s right for you. Eventually, if all goes as planned, you’ll end up being under agreement for a home. You’re going to find the home you like, you’re going to work with the realtor, you’re going to negotiate out the price that you’re comfortable with and you’re going to let us know you’re under agreement. And at that point people always say, “what do I do next?” 6. Under Agreement: A great thing to do is email me or fax me the purchase contract. So in certain states there’s an offer and a purchase. In certain states like New Hampshire you go directly to purchase and sales, in Massachusetts you do an offer to purchase which then leads to purchase and sales down the road. So basically “under agreement” is when you have a deal put together on the home that you want. You should then send us that initial paperwork so that we can see the sales price, the closing date, and get a feel for what you’re doing. And then we’re going to move into a strategy call. Because now we have a known address, we have a known sales price, we have a known close state and we can really work on the strategy of picking up which exact program, which term is going to be the best for you. And anywhere along the way be sure you know that we’re here to help you with any questions. Contact us any time. Roger Odoardi Roger is an owner and licensed Loan Officer at Blue Water Mortgage. He graduated from the University of New Hampshire’s Whittemore School of Business and has been a leader in the mortgage industry for over 20 years. Roger has personally originated over 2500 residential loans and is considered to be in the top 1% of NH Loan Officers by leading national lender United Wholesale Mortgage.