Unlocking Home Ownership Amid Ultra-Low Rates
Not only are Millennials transforming the way society shops and invests, but they’re finally garnering sufficient earnings power to start families and buy homes. This generation’s belated rite of passage will provide new long-term impetus to the economy and stock market.
This autumn, as I help my Millennial daughter buy a home, it occurs to me that many of you might be in the same situation — i.e., trying to explain the mortgage process from start to finish for your kids who are first-time homebuyers.
The Federal Reserve has implemented aggressively dovish monetary policy to combat economic damage from the coronavirus pandemic, which in turn has pushed mortgage rates to historic lows. The timing is right to buy a home.
That’s why I put together this step-by-step guide. According to the latest statistics about first-time homebuyers from the National Association of Realtors, first-timers make up 35% of all homebuyers. On a median basis, the age is 32 (within the Millennial generation); the home price is $182,000; the down-payment is 6%; and the annual income is $72,000.
If you or someone in your family requires a tutorial about the rigors of buying a home, the following checklist should do the trick. Staying on top of ever-changing mortgage rules is all the more important, as competition for homes gets ferocious amid a chronic shortage of homes for sale.
Buying a home can be a deeply fulfilling experience, but the process can seem daunting for first-time homebuyers. There’s a lot of paperwork to fill out, with many people, companies and agencies involved, not least of which is the bank that’s providing the mortgage.
To make the right decisions and avoid common mistakes, you must understand the mortgage process from A-Z. That’s where this five-point checklist comes in. Remember the old saying: battles are won before the fight, through preparation. Before you embark on the great adventure of buying a home, know these facts ahead of time.
The steps are listed in the chronological order in which you should tackle them. For the sake of concision, I’ve boiled the process down to its essentials:
Your home-buying endeavors don’t start by looking for a house — they start with your lender. This process entails an evaluation of your finances that determines whether you qualify for a loan and how much you can afford.
The lender will discuss with you the most you can borrow, as well as financing options. If there are problems with your creditworthiness that may torpedo any deal, it’s at this early stage when you’ll pinpoint and handle them.
2) Finding an agent
Once you’ve received the all-important pre-qualification letter, get a real estate agent. It’s important to find an agent who’s credible. Word of mouth from friends, neighbors and family should carry a lot of weight with you; don’t blindly rely on the random online listings of agents you don’t know.
Once you’ve found an agent, give him your pre-qualification letter and start house hunting.
3) Making an offer
Once you’ve selected an affordable property that you like, make an offer. Be sure to put the seller’s asking price into context, by researching the selling prices of comparable homes in the area.
Determine how “motivated” the seller is to part with his home. Has the house been on the market for a protracted length of time, say, more than 90 days? Has the seller been coming down in price? Don’t be afraid to negotiate.
4) Getting the loan
If the seller accepts your offer, you will file a mortgage loan application with your lender.
You’ll probably have to collect and submit to your lender these required documents:
- Paycheck stubs for the past 30 days.
- W-2 forms for the past two years.
- Details about about long-term debts, such as auto loans, student loans, etc.
- Recent statements from all of your bank accounts.
- The previous year’s tax returns (the past two years if you’re self-employed).
- Proof of any supplemental income.
Loan underwriting comes next. This occurs when the lender passes your application file along to what’s called an underwriter. It’s the underwriter’s job to determine if you represent an acceptable level of risk for the lender.
The underwriter will generate a list of items you must provide to meet the lender’s requirements. These tasks constitute “conditions for approval.”
Common conditions for approval include:
- Additional documents that prove your income.
- Proof of property appraisal.
- Sufficient cash reserves to cover your first few monthly mortgage payments.
You might also be asked to pay-off certain loans to raise your credit score.
Closing is the last stage in the mortgage process. This occurs when you’ve satisfied all of the lender and underwriter requirements, all of the necessary funds and proceeds are doled out to the appropriate parties, and all of the paperwork is finalized and signed.
The seller will receive whatever profits they reaped from the sale, whereas the buyer will present a check to cover closing costs.
Closing costs are the fees paid to third parties that help facilitate the sale of a home. As a rule of thumb, they typically total at least 2% of the home’s purchase price.
These closing costs include (but are not limited to):
- Application Fee: Covers the cost for the lender to process your application.
- Appraisal: Paid to the appraisal company to confirm the fair market value of the home.
- Attorney Fee: Paid to an attorney to review the closing documents.
- Escrow Fee: Paid to the title company, escrow company or attorney for conducting the closing.
- Escrow Deposit for Property Taxes and Mortgage Insurance: Typically, the buyer is asked to pay at closing two months of property tax and mortgage insurance payments.
Many additional items are included under closing costs, depending on your area.
In most cases, these final closing tasks will be managed by a mortgage attorney who acts as an intermediary between the buyer and seller, both of whom are present at closing with their respective real estate agents. Once you’ve run through the entire gauntlet at closing, the deed (and the house keys) will be transferred from the seller to the buyer.
The home is now yours and you can move in.
These are broad and universal guidelines. Circumstances can vary, depending on your area and the parties involved.
Homebuying tip: Before the advent of the Internet, homebuyers were largely at the mercy of agents for information. That’s no longer the case.
Several websites have sprung up that provide up-to-date information about recent home sales in your neighborhood. Two widely used, respected and free sites are www.zillow.com and www.redfin.com.
Also, don’t be shy about negotiating an agent’s commission. It may be an unpleasant conversation, but try to shave at least a percentage point off the agent’s stated fee. You might be surprised at how much leverage you really have in getting an agent to come down in compensation.
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