For most first time home buyers, and many repeat buyers, the process and documentation of a home purchase can be overwhelming. This need not be the case. A clear understanding of the process, the documents that will likely be needed and all the responsibilities of those people involved will relieve a great deal of unnecessary stress in the process.
While each loan is different, there are some basic steps you can take to make sure your purchase goes as smoothly as possible.
Step 1: Do a self-evaluation prior to shopping
Go to www.annualcreditreport.com and get a free copy of your credit report from the three major repositories (Equifax, Experian and Trans Union). This site will provide you the content of the each report from the main repository for free once a year. They WILL NOT provide you with the scores unless you pay for that; and at this point the scores are not critical (more on that later). Sit down and review your report content with a critical eye.
Look at the open accounts:
- Are any balances more than 50% of the available credit?
- Are there any late payments in the last two years?
- How long have you had that account open (the longer the account is open the better it effects your scores – this is called Credit Depth)?
- Do you have a single credit item or total open credit items of more than $1,500 credit line (for a first time buyer the lender will likely want to see a total credit history of more than 1,500)?
- Are there any derogatory items listed? If so:
- Are they accurate? If so not much you can do about this other than wait for them to come off naturally.
- Are the inaccurate? If so, gather your evidence and contact the creditor to try and correct. If that does not work contact the credit repository that the item shows up on and dispute it. ***Keep in mind that you may have NO OPEN DISPUTES on your credit when you go to finance so you want this to be resolved before you apply***
- Are there judgments? Are they showing as paid or closed? If not make sure you attend to these.
- Are there late payments, overdue or collection accounts? If so look at each one and determine if they are accurate and if you can pay them off to remove the negative. The fact that they are paid will not remove the item(s) but it will show that you paid the bill.
It’s the Principle of it
Over the years I have worked with many borrowers who had small collections on their reports. Things like cable; telephone; utilities or cell phone cancellation collections. These annoying items are usually under $100. The customer will inevitably tell me that they will never pay those bills because they feel like it was unfair, or a charge they did not expect for terminating a service or any number of reasons they feel wronged by the charge. While I totally understand the emotion of his the reality is that lending is a matter of risk management and even though the borrower felt the charge was unfair, I advise them to pay them off. My logic is that the charge off, even a small one does much more damage to your borrowing power than the righteousness of not paying them.
Now that you have reviewed your report and dealt with anything you can to make it the best view of your credit history possible for the underwriters let’s look at the next step:
Step 2: Make a document File
For most people the process of gathering all the documents needed by the realtor, lender and attorney feels like pushing a wet noodle uphill with your nose. No matter how many documents you supply they need more or the same documents over and over to different people.
Be prepared for this. When you decide buying a home is what you want get an accordion folder or file folder and start gathering the basic documents that anyone might need. As you go through the process whenever you get a new version of a document that is in your file add the new one and remove the oldest one to your personal files.
Here is a sample list of what should be in your document folder and ready to be scanned or faxed at a moment’s notice:
If you have a W-2 job:
- A current month of paystubs for all borrowers. This includes the entire stub showing your pay, taxes, year-to-date amounts, your name and date of the check. If you get paid once a month, this is one stub, if you get paid twice; two, if you get paid bi-weekly; it could be 3, weekly; it could be four or five.
- Last two years W-2 forms for all borrowers
- If you are self-employed or 1099:
- Last two years Federal Income Tax returns; you will need to be able to show at least two years income from your business or self-employed position for almost any lender.
- If you own rental property or have other income besides your primary job:
- Last two years Federal Income Tax returns
- Two months of bank statements. If you get paper statements in the mail make sure you save all pages, even the blank one at the end. If you bank on-line you can usually print the summary page and a 60 day transaction history report. Make sure you have your down payment money in the account you will be providing statements for. Closing costs and down payment money for a purchase need to come from the account that you provide to the underwriter. ***A word of caution: When you are shopping for a new home, and financing for that purchase DO NOT make any large deposits to your accounts that are not payroll related. Underwriters require you to document all deposits that are not payroll related. If you make a large deposit be sure they will want to know the source and require documentation for that deposit to show that you did not get any new debt or advance credit cards to get the cash. ***
- Most recent retirement or investment account statement. These will likely be used for reserves. When the underwriter reviews the file depending on the risk factors they may require proof that you have one, three or even twelve months of payments in reserve. Retirement account statements can be used to satisfy this requirement.
- Documentation of the source of your down payment and money for closing costs. If you do not have the money liquid in your bank account for your down payment and closing costs; where is it coming from? Many first time home buyers do not know you can get a gift from relatives for this. Check with your loan advisor for details on how to handle this.
There are likely to be other items needed and your loan advisor can guide you for the specifics based on your loan scenario but here are some other items to keep handy:
- Color copy of your government issued ID (Driver’s License, Passport, etc.)
- If you are currently renting: a copy of your lease
- If you have rental property: copies of the leases for terms of one year or more, tax bill and home owner’s insurance for each property
- Your 4th grade report card – Just kidding on that one.
Step 3: Decide what you want
I know this may sound like a simple thing but to get the best result out of your home purchase experience you need to take some time and decide what it is you really want.
Sit down (with your partners if you are buying a family home) and list out the features you want. List everything you can think. Then mark each items as a NEED or a WANT.
Some examples of NEEDS might be:
- 3 bedrooms (you, your child and a home office or guest room)
- Large Fenced Lot (maybe you have an outside pet)
- Near good Schools (perhaps your children will be walking to school)
Some examples of WANTS might be:
- Pedestal sinks
- Granite counter tops
- Full finished basement
Needs should be items that you MUST have. Wants to should be items you could live without if the price was right but would be nice to have.
If you present your list to your realtor and there are NO homes that meet our Needs list requirements, perhaps you should either revisit the list and pare it down or look into custom home building (that is a whole other discussion).
Step 4: Congratulations! You are now as prepared as possible to start the process.
Contact a lending professional and get pre-qualified. During this stage the loan officer will gather information to present to an underwriter for initial impressions and will result in a pre-qualification letter that will indicate the amount of loan you could be qualified for. There are several different levels of pre-qualification letter:
- Level 1 – Based on credit report and information told to the loan officer by the client only.
- Level 2 – Income and Asset documentation is provided to the loan officer and is reviewed by the Underwriter. This letter has a higher level of commitment and is therefore more highly regarded by the seller.
- Level 3- Commitment to Lend – this is a full underwrite of the file and is only lacking the actual appraisal. This level of commitment is usually only provided after the contract is executed, the loan is locked and the processing is happening.
Once you are pre-qualified you can start shopping. If you are a first time buyer I would recommend using a realtor. Your loan officer should be able to provide several suggestions based on who they have done business with in the past in the area you are shopping in.
*** IMPORTANT ***
Once you are prequalified and until you actually close on your new home, DO NOT:
- Make any large purchases without alerting your loan officer beforehand
- Change jobs
- Get any new credit accounts
- Pay off any current debts in full without discussing with your loan officer
The realtor will discuss what you are looking for (this is where the Wants and Needs list comes into play), what you can afford (this is where the pre-qualification letter comes into play) and will then provide several possibilities. Some realtors are taking advantage of technology by showing you listing and virtual walk through videos to fine tune your search before they take you to the actual site.
Once you select the home you want your real estate professional will help you craft an offer to the seller. This offer can be accepted, rejected, or counter offered. This is where you negotiate until you reach an offer acceptance. Once you have that it is time to re-engage your loan officer and provide the accepted offer. This document will give the loan officer critical information about your loan. Things like:
- What is the sales price?
- Is the seller paying any closing costs?
- When do they want to close?
- Are there any special negotiated items?
- Who are all the people involved with the transaction?
Step 5: The Loan Process
From here it should be smooth sailing.
You have all your most recent income and asset documents on hand (Step 2) so now you can provide updated documents to your loan officer.
You need to order a home inspection. This IS NOT the appraisal. A home inspector’s job is to review the entire structure for maintenance items or defects that may or may not cause you to go back to the owner and renegotiate to have those items repaired prior to your purchase or negotiate the contract sales price to account for the cost of the repairs.
Your loan officer will go over the current rates and programs available based on the contracted information and you will likely lock your rate and program.
Your loan officer will submit your file and supporting paperwork for an initial review by the underwriter. They will also contact all the people listed on the contract to introduce himself and let them know the process and communications that will happen during the processing of your new loan.
A home appraisal will be ordered by the loan officer through an appraisal management company. This report gives the lender an opinion on the value of the property based on other local sales that are similar to your subject property. It tells the lender how long the home would reasonably be on the market if it needed to be sold and the general information on the area. These are all Risk items that are used to determine final costs and rates.
You will need to contact an insurance agent to get a quote for home owner’s insurance on your new home. The agent will provide you with a written quote that you should send to your loan officer. Insurance on a new home will likely need one year paid in advance. Insurance will go into effect as soon as you actually own the home.
Once the appraisal report is in you will get a copy and it will be submitted to the underwriter.
The underwriter will normally have a couple more items they need from you at this point. It may be clarification on a document you submitted, or a letter of explanation, or a supporting document. Your loan officer will let you know throughout the process what is needed and when it is needed. For any document request: the faster you can send it over, the faster it can be cleared by the underwriter.
Once your loan is approved the file will go to the closing department where they will contact all the parties and schedule your closing.
You will attend the closing, normally at an attorney’s office, and sign your new mortgage paperwork, title and deed documents. The attorney will let you know how they want you to present the money due at closing (down payment and closing costs). Once done you get keys and move to step 6.
Step 6: MOVE IN!
Congratulations you are now a proud new owner of your first home.
Over time you should expect to hear from your loan officer to check in on your progress, let you know about what the rate markets are doing and any opportunity to refinance that can save you money.
There are some things you may want to consider doing right after you take ownership:
- Visit your new home! It’s your, time you started feeling like it…
- Plan on several trips to get basics – like drapes – the old college blanket over the windows thing may work for a short time, but you really need to consider retiring it.
- Decide on where you want your furniture – or if you need some start shopping (now it is ok to finance something if you need to, you can always check with your loan officer to see how a new debt might effect your future borrowing power).
- Get to know your neighbors – I know this may sound like something out of Mayberry RFD, but hey, if they do not come over to say hi, you take the step. It’s always good to know who is around you, have a personal connection with someone who can keep an eye on your home when you are not around and you might make some new friends.
- Most of all enjoy your new home!
This is by no means a complete list of everything involved but I have tried to hit the high points. Your professional real estate and mortgage people can give you all the specifics related to your home purchase. This should give you a good starting point and remember you are working with professionals the whole way, use their expertise to get the best results for you and your family.