How Much Money Will You Need?
You’ve selected your Realtor – you’ve looked at tons of property profiles on the Internet – you’ve even visited Open Houses – you are now ready to go find your own home, right? Well, maybe! Before you can go out and start looking at homes, you will need to be Pre-Approved. During the pre-approval process, your loan officer determines a number of very important financial parameters. These parameters are required by your realtor to effectively structure an offer on any home you may wish to purchase. These parameters include the following:
The Amount Of Your Deposit
The deposit is the earnest money that is submitted along with your offer on a home to demonstrate to a homeowner that you are truly serious about buying their home. A standard deposit is typically 1-3% of the total purchase price. When you write up an offer, you Realtor will ask you to write a check for the deposit to be submitted with the offer. This check will be held until your offer is accepted. If your offer is not accepted, the check will be given back to you un-cashed. Once an offer is accepted, an escrow is opened with a title company, your deposit check is cashed and the funds are held in escrow until your loan is funded. The deposit is counted towards the total amount of cash you will be putting towards the purchase (your down payment). If you are financing 100% of your home purchase, the offer will be written in such a way that you will get your deposit back when escrow closes. After discussing the deposit with your Realtor, you then determine the amount of the deposit to be submitted with your offer. This amount depends upon the various factors affecting the purchase of any given home. For some buyers, the amount of the deposit is limited by the actual amount of cash you have on hand. This is often true of those buyers who are financing 100% of the purchase and are putting no money down. For buyers who have more available cash, the amount of the deposit can vary as a part of the negotiation process when submitting an offer. Typically, the higher the deposit, the more attractive your offer will be. There is one final thing you need to know about the deposit. If, after your offer is accepted AND the contingencies have been removed, you decide to NOT go through with your purchase, you stand a good change of losing your deposit. Make sure that this aspect of the deposit is carefully explained to you so that you completely understand the risks involved.
The Amount Of Your Down Payment
The down payment is the amount of cash you will be providing from your own resources towards the purchase of your new home. This amount may come from your savings, the sale of a previous house, a gift – there are a number of possibilities. The amount of down payment you can provide is a very important part of the negotiation process when buying a home. Typically, the higher the amount of deposit, the more attractive your offer. Homeowners want to know that you are investing a decent amount of cash in your purchase. This means that:
- You may be offered better rates and program options from the lender.
- There is less chance that there may be a problem if the appraisal is too low.
- There is less chance that something may go wrong with your loan during the escrow process.
The Amount Of Your Loan(s)
The loan amount(s) for which you qualify is determined by a number of factors including your level of income, current indebtedness, available cash, credit scores and so on. Your loan officer will consider all of these factors when determining the amount that a lender will loan you. To avoid PMI (Private Mortgage Insurance) if you have less than 20% down, your loan officer may structure a two-loan package. The loan amount added to the amount you provide as a down payment determines the maximum price you may pay for a home. This number is used by your Realtor when searching for suitable homes to show you. Under normal circumstances, your Realtor will not show you homes that have prices higher than the amount for which you qualify.
The Amount Of Your Projected Closing Costs
The last important number is the amount of the projected closing costs. It includes all of the non-recurring closing costs for items such as Title Insurance, Escrow Fees, Loan Fees, Inspection Fees and so on. You will need to have this amount IN ADDITION to your deposit. This amount is paid into escrow at the time of closing. If you do not have this additional amount, your Realtor can structure any offer you make to include the seller paying your closing costs. Depending upon the market conditions, this may weaken your offer. Your Realtor will carefully explain this to you when you meet for the first time and go through this binder.
Once you’ve met with your Loan Officer and have been pre-approved, you are ready to go find your new home! However, there are some very important things to be aware of at this point. Many potential homeowners fail to realize that certain actions done AFTER you have been pre-approved may directly, negatively affect your pre-approval. Make sure you are aware of the following:
- DO NOT Make Any Major Purchases Until AFTER Escrow Closes: This may sound obvious, however, some people get so excited about buying a new home that they decide to buy other things as well. Like a new car. Or that big screen plasma TV and entertainment system for their new family room. Or furniture. You get the idea! Any new purchases may affect your credit score and debt ratios and may directly reduce the amount of home loan for which you qualify.
- DO NOT Run Your Own Credit Score Prior To Applying For A Loan: Many people these days are “credit bureau conscious” and like to run their credit scores themselves before seeing a lender. There are many advertisements offering free credit checks. To do so can cause credit scores to drop. Since your lender will be running your credit anyway, ask them to give you a copy of your credit report and have them review it for you as part of the application process.
- DO NOT Apply For Any Other Credit: You are excited about buying a new home and then you suddenly realize that you will have no furniture to sit on! Some people rush out and apply for a new credit card. They think that since they will not be using this card until AFTER they are in their new home, they will be OK. Wrong! Do not apply for a new credit card, store account, major retailer credit card, line of credit or any other credit related account of any kind. Even if you plan to not use it until AFTER you are in your new home, it will affect your credit NOW.
- DO NOT Continue To Shop Your Loan: Once you are pre-approved, do not shop your loan again. Do sufficient research BEFORE you take the pre-approval step. Every time you shop your loan with a different lender, your credit scores are run. The more times your scores are run, the more your scores are lowered. It is possible that they may be lowered to the point where you no longer qualify for your pre-approved loan package. This has actually happened! You or your loan officer may not discover this until your lender tries to fund your loan and cannot.
- DO NOT Pay Any Judgments Or Collections Unless Instructed By Your Lender: You may have a judgment, collection or lien on your credit and want to pay it off — DON’T, unless instructed by the lender. They will know the effect it may or may not have on your credit and if the collection is small enough or old enough, you may not be required to pay it to close the transaction on your home. Before you buy or pay on anything while in a transaction, take the time to call your lender – it could save your home!
- DO Check Your Lender’s Truth-In-Lending Statement: Many people are excited about their new loan UNTIL they read the fine print on the Truth-In-Lending Statement. Then they may discover hidden costs, high loan fees and more. Make sure you get a copy of this statement from your lender and forward it on to your Realtor as well. Carefully read it to make sure there are no hidden fees or surprises. If you are not careful, you may fall into the trap of setting aside a specific amount for the closing costs, only to discover at the close of escrow that your lender fees are higher than anticipated and the total closing costs are too high for you to pay. Your escrow cannot close until these costs have been covered. This is a very unfortunate situation to be in and can be completely avoided by careful reading up front.
- DO NOT Change Loan Companies Once You Are In Escrow You are finally in escrow! Once we reach this point, the timing of everything becomes very critical. For this reason, I insist that you do not change loan companies once you are in escrow. To do so can seriously jeopardize your transaction. Typically, a new loan company will need to start from the beginning – and it takes time to do – often more time than is available under escrow contractual time constraints. As an example, if the time periods for removing contingencies are not kept, the seller of the home you are buying has the right to cancel the contract and put the home back on the market. If this happens, you stand a chance of losing any monies you have paid for inspections, appraisals and the like.