A STEP-BY-STEP GUIDE TO FINANCING YOUR HOME
A STEP-BY-STEP GUIDE T TEP GUIDE TO FINANCING YOUR HOME OUR HOME
Sol Skolnick, Professor Home Loan
Table Of Contents
1.
Own or Rent
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2.
The 12 Steps To Home Ownership
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3.
Making the Loan Process Work for You
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4.
Please Don't Do Any of These 10 Things
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5.
Keeping The Loan On Track
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6.
About Loan Providers
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7.
A Glossary of Mortgage Terms
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Preface It is important for you to understand the home purchasing process and feel informed and supported from our initial conversation through the day that your loan closes and the seller hands the keys to you. When I first entered the mortgage lending industry in 2004, I did so with the intention of helping buyers like you undertake sustainable home ownership. Purchasing a home can be emotional and stressful. Having the knowledge of how the process is supposed work will not diminish the emotion but hopefully can alleviate much of the stress. The strategies and insider tips in this book have been thoroughly tested and proven effective time and time again. This book is a guide for you to have the most successful real estate transaction possible and put you into the loan instrument that fits your lifestyle and your financial needs and plans. You can call or text me at 914-380-0600. Email is sskolnick@unitedmortgage.com. If you need a loan, you better call Sol. This edition is based on text from Authorify. It has been adapted, expanded, updated, and verified through third-party sources to reflect the current regulations, facts, figures and market conditions.
Solomon Skolnick NMLS#70064 August 2024
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About Sol Skolnick, olnick, Professor Home Loan Sol is a Senior Loan Originator (NMLS #70064) with United Mortgage Corp. a national lender established in 1991. Sol, known as Professor Home Loan, is your key to sustainable homeownership through expert mortgage planning that makes owning your dream home a reality! He provides each of his clients with the information that they need so that they can choose the loan instrument that aligns with their lifestyle and their financial needs and plans. Sol has been a residential mortgage originator since 2004. He has received the 5-Star Mortgage Professional Award numerous times. As an author and photographer his published works cover sustainable home ownership, civics, gardening and the American cultural landscape, A N.Y.C. native, Sol has lived with his family in Westchester, N.Y. since 1989. His volunteer work includes Foster Parenting for Guiding Eyes for the Blind breeding dogs, kitchen hand at "God's Love We Deliver", Instructor in finance at Neighbors Link, President of the Pleasantville School Board, and the Mt. Pleasant Public Library, and Executive Director of the Pleasantville Music Festival a "Best of Westchester Magazine” selection.
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CHAPTER 1 Own or Rent
“You don’t buy a house based on the price of the house. You buy it based on the monthly payment that’s going to be principal and interest and insurance and property taxes.” – Diana Olick The decision to own or rent a home is one of the most significant financial choices an individual or family can make. Both options come with advantages and disadvantages, and the right choice depends on a variety of factors including financial stability, lifestyle, and long-term goals. Financial Considerations One of the primary factors that influence the choice between owning and renting is the financial aspect. Owning: • Creates Equity: When you own a home, you are building equity over time as you pay down the principal on your mortgage. This means that you are essentially investing in an asset that can appreciate in value, potentially leading to long-term financial gain. • Tax Benefits: Homeowners often enjoy tax advantages, such as deductions on mortgage interest and property taxes, which can lower their overall tax liability. • Stability in Costs: With a fixed-rate mortgage, your base monthly mortgage costs remain stable over the term of the loan, providing predictability in budgeting. However, the cost of homeowner's insurance and property taxes typically increase. Renting: 1
• No Equity Building: Renters do not build equity in the property they occupy, as their monthly payments go towards the landlord's overhead and profit. • No Property Tax Responsibility: Renters are not responsible for property taxes or many maintenance costs, limiting their financial obligations. • Flexibility in Location: Renting allows for greater flexibility to move to different locations without the energy expended and cost of selling a home. Flexibility and Mobility Owning: • Less Flexibility: Homeownership can tie you down to a specific location, making it more challenging to relocate for job opportunities or personal preferences. • Responsibility for Maintenance: Homeowners are Renting: • Greater Mobility: Renters have the flexibility to move relatively easily when their lease expires, allowing them to adapt to changing circumstances. • Limited Maintenance Responsibility: Renters typically do not have to worry about major maintenance costs or property repairs, as these are the landlord's responsibilities. Initial Costs and Affordability Owning: • Down Payment: Owning a home often requires a down payment, which is a decision to place money in an illiquid asset. This does however create immediate equity in your home. responsible for maintaining and repairing their properties, which can be both time-consuming and costly.
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• Closing Costs: Buyers must pay closing costs, which adds to the initial financial expenditure. • Monthly Mortgage Payments: While these payments can be stable, they may initially be higher than monthly rent. Renting: • Lower Upfront Costs: Renting generally requires a smaller upfront financial commitment, as there is no down payment or closing costs. • Predictable Monthly Rent: Renters have a clearer understanding of their monthly housing expenses, which can be more budget-friendly in the short term. Long-Term Investment vs. Short-Term Flexibility Owning: • Long-Term Investment: Buying a home is often seen as a long-term investment that can provide financial security and stability in the future. • Ownership Satisfaction: Many homeowners take pride in owning their homes and customizing them to their liking. Renting: • Short-Term Flexibility: Renting is ideal for those who prioritize short-term flexibility and don't want to commit to a particular location or property for an extended period. • Avoiding Market Risks: Renters do not have to worry about fluctuations in the housing market affecting their investment, however it does affect their expenses when markets heat up and rents are increased. Conclusion The choice depends on individual circumstances, financial goals, and personal preferences. Owning a home can provide long- term financial benefits and a sense of stability but comes with
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higher upfront costs and permanent maintenance and upkeep responsibilities. Renting offers flexibility and lower initial costs but lacks the potential for equity building and long-term investment. Ultimately, the decision should align with your financial situation, future plans, and lifestyle. It's important to carefully consider the pros and cons of both options and assess your own priorities before making this significant life choice. Some individuals may choose to rent early in their career for mobility and then transition to homeownership as they establish themselves financially, while others may prefer the flexibility and reduced responsibility that renting provides throughout their lives. In the end, the key is to make an informed decision that suits your unique circumstances and aspirations.
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CHAPTER 2 The 12 Steps To Home Ownership o Home Ownership “I will forever believe that buying a home is a great investment. Why? Because you can’t live in a stock certificate. You can’t live in a mutual fund.” – Oprah Winfrey Finding the right home is one major component of homeownership. Searching for and buying a home involves a process that includes many steps and pieces that need to come together before the home is “yours,” you make the move, and settle in. This chapter provides an overview of the home-buying process, breaking it down into 12 basic steps that will make the process clear, rewarding and less anxiety-provoking.
THE 12 STEPS TO HOME OWNERSHIP
1. Find Out What You Can Afford 2. Get Pre-Approved for a Loan 3. Create a List of Needs vs. Wants 4. Choose a Location 5. Engage a Real Estate Attorney 6. Engage a Buyer's Real Estate Agent 7. Choose a Home Type 8. Go Home Shopping 9. Make an Offer 10. Put Money in Escrow 11. Negotiate with the Seller 12. Close the Loan and Receive the Keys
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1: FIND OUT WHAT YOU CAN AFFO U CAN AFFORD
This first step is essential. You have to establish your price range before you do anything else in the home-search and home- buying process. Develop and know your budget. Factor in the down payment and closing costs, and how much money you will need in liquid reserves (checking, savings, retirement, stocks etc.) after the closing. When developing your monthly budget include the mortgage payments, property taxes, homeowner's insurance, utilities, basic maintenance, and homeowners’ association fees if they apply. If you’re not sure where to start, let's have a conversation so that we can develop a preliminary estimate to see what you may be able to afford.
STEP 2: GET PRE-APPROVED FOR A LOAN
Home buyers contact mortgage lenders because the full cost of a home is generally more than the typical buyer can afford or often want to put into an illiquid asset at one time. The process of buying a home, whether or not it’s your first, is a major emotional investment, you will want to maintain control and make practical decisions based on your budget and goals. The best approach? A conversation with an experienced, mortgage originator with whom you will work closely. Together you will determine the appropriate budget for your home acquisition and monthly expenses that leads to a pre-approval for you to share with a real estate agent. Many real estate agents now require a pre-approval letter, or a Mortgage Credit Approval Letter (MCAL), or proof of funds before taking you on as a client.
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This assures them, and later assures the seller's agent and the seller, that you have the financial capacity to complete the deal. The differences between a pre-qualification, a pre-approval and an MCAL are discussed in the "Origination" section of Chapter Three. During the pre-approval process you will fill out a non-binding application that includes information about your income and assets, your employment and current living situation. We will run your credit to determine your FICO scores from all three credit bureaus and examine your liabilities. This will allow us to understand your financial profile and your Debt to Income (DTI) ratio. Your DTI is determined by how much you will pay in housing principal, interest, taxes, insurance and association fees where applicable (referred to as PITIA) , and existing debt, such as auto loans/leases, credit cards, student loans etc., in relationship to your earnings. The MLO will match this information with various loan programs to determine which will best suit you.
STEP 3: CREATE A LIS TE A LIST OF NEEDS V F NEEDS VS. WANTS
You will determine what is most important to you in a home — the non-negotiables — vs. what you’d like to have in a home — things you might need to let go or defer. Determine what you need (think number of bedrooms or bathrooms, garage, laundry room, finished basement, etc.) vs. what you want in your home (such as a fenced-in yard, gourmet kitchen, deck, walk-in closets). Then, write these items down so that you will eliminate wasting time and energy looking at houses that don’t meet your criteria, and your budget.
STEP 4: CHOOSE A LOCATION
Location, location, location! You hear that term in real estate
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often. The home is where it is, so be as certain as you can that the home is in a place that will be comfortable and convenient for you. Examine the housing market bearing in mind your price range and determine how an area aligns with your needs. Factor in the neighborhood, the commute to work (if that applies to you), the school districts, proximity to amenities and recreation facilities, crime statistics, noise, neighbors, parking, traffic, impending construction, or anything that could impact the desirability of a particular area for you.
STEP 5: ENGAGE A REAL ES GE A REAL ESTATE ATTORNEY
A real estate attorney is licensed to practice law and is conversant with all aspects of the home purchase process. Requirements governing the involvement of real estate attorneys vary from state to state and even within states. Even if you are in an area that does not require that you be represented by council you may find it reassuring to do so. Clarity Hiring an attorney from the beginning of your real estate transaction to review all agreements and contracts and assist in negotiations will ensure the maximum level of transparency and comfort. Savings The upfront fees of hiring a real estate attorney are modest in comparison to the possible financial impact of getting things wrong. A real estate attorney will safeguard you and your investment by thoroughly reviewing all legal documentation, handling negotiations and asking the questions you may not know to ask. A real estate attorney works for you, represents your needs and will negotiate on your behalf during the
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purchasing process. Your lawyer can act as a support to walk you step-by-step through the intricacies of real estate transactions, and also act as a safeguard, protecting you from the problems and issues you cannot see or predict. Experience Even if this is not your first real estate purchase, your real estate attorney has gone through this process more times than you ever will in a lifetime. They have the institutional knowledge of working daily in the industry and have their fingers on the pulse of the local and state laws. It’s important to have the legal support to mitigate any risks that could delay, if not jeopardize, your real estate purchase. Closing Although not all states require a real estate attorney to be present at closing, all property buyers can benefit from legal support. There are many moving parts to the closing process, including the mortgage, title insurance, the deed and final inspection. Hiring a lawyer to review, adjust and prepare all closing documents–and ensure they are protecting you and your assets–can be reassuring.
STEP 6: ENGAGE A BUYER'S REAL ES UYER'S REAL ESTATE AGENT
The terms real estate agent and REALTOR® are often used interchangeably, but they aren’t the same thing. A real estate agent is an individual who’s licensed to help you buy or sell a property. A REALTOR® is a real estate agent who’s an active member of the National Association of Realtors (NAR). The NAR is the largest trade organization in the United States. A buyer's agent is a real estate professional who represents your interest as the purchaser in the transaction. Most residential real
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estate agents represent both buyers and sellers but not typically at the same time. Having the listing agent represent you as a buyer is an example of dual agency which is illegal in some states and can create a potential conflict of interest. As of August 17, 2024, potential purchasers using an agent must have a buyer's agreement with a realtor. A buyer's agreement is a contract that defines how the buyer and the real estate agent agree to work together. It sets expectations and protects both parties. Key points include: • Clarifying responsibilities and expectations. • Establishing an exclusive working arrangement for a period of time. • Outlining compensation terms for the agent. A buyer's agent will find potential homes, communicate with the seller’s agents, and represent your interests when negotiating the purchase. They will identify properties, based on your pre- approval, that fit your budget and criteria, help you develop a competitive offer, negotiate on your behalf, and provide you with knowledge and support throughout the process. The agent has access to the Multiple Listing Service (MLS), where they can find more detailed information about individual properties than is available on real estate websites and apps. Insight into the area. Your agent can provide you with the flavor of the neighborhood and information about the restaurants, the markets, boutiques, clubs, houses of worship, social events and more. However, The Fair Housing Act prohibits them from answering questions about crime, religion, neighborhood economic status and the local school district. An agent will be able to point you to reliable sources that can provide quantifiable information about these important factors.
Go home shopping. Scrolling through listing photos just isn't
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the same as viewing a property in person. Your agent will work with a home's listing agent or owners (if the property is for sale by owner, FSBO) to schedule showings. They'll also fill you in on anything they learned about the sellers or the property from that communication. Help you make offers. After you've identified a home, you want to buy, your agent will advise you on how much to offer based on the current market. Negotiate with the seller. The agent will inform you of the seller's response to your offer and advise you on the next steps, such as whether to accept a seller's counteroffer or negotiate price and terms. Refer you to other professionals. Your agent can refer you to other professionals, such as a lender, an insurance broker, movers, painters, electricians, plumbers, landscapers etc.
STEP 7: CHOOSE A HOME TYPE
When you’ve determined price range, needs vs. wants, and location, home type moves to the top of the list. 1. Single-family residences (SFR) are freestanding (detached) buildings. This type of structure doesn’t share a wall with another building. 2. A semi-detached home is a single-family dwelling that shares one common wall with another owner's building. 3. A multifamily home is a residential property that consists of 2-4 individual units. Each unit will have its own entrance, kitchen space, bedrooms and bathrooms.
4. Townhomes are multi-floor homes with their own entrance
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and living space. Townhomes share two walls with neighbors unless the townhome is located at the end of a building. In some markets, the terms “townhome” and “townhouse” are used interchangeably. 5. Condominiums, known colloquially as condos, are buildings made up of individually owned units. They can look and feel like an apartment building or a community. You own the interior space of the unit. The common area is typically managed by a homeowner's association, with fees being assessed to owners for common area expenses. 6. Co-ops may physically resemble an apartment building, but the ownership model is different than any other type of residential real estate. The building is owned by a cooperative corporation. As a co-op owner you are a shareholder of the corporation that owns and manages the building. You are purchasing shares in the corporation that owns the building not an individual unit. As a shareholder you have the right to lease a specific unit for your own use. The cooperative corporation is run by a board of directors, elected by the shareholders, and are responsible for financial oversight, common area maintenance and repairs.
STEP 8: GO HOME SHOPPING
Now comes both the fun part as well as the tricky part — looking at homes. The fun part is searching and viewing homes online that meet both your budget and criteria, as well as visiting open houses, allowing you to feel and see for yourself what is and isn’t the right home for you, and then identifying it. Make a thorough search of the available homes that fall within your price range and meet all your needs — and at least several of the wants — from the lists that you wrote out in step three. The tricky part? You need to examine each property’s condition
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so that you know exactly what it is you’re getting.
Every property has its own specifics related to water supply, sewage disposal, sanitation, utilities, cable, and internet access, which impact the desirability, convenience and value of the property. Prior to going to contract hire a certified home inspector who will evaluate the following according to the American Society of Home Inspectors (ASHI): 1. Heating, Ventilation, and Air Conditioning (HVAC) 2. Interior plumbing and electrical systems 3. Roof and rain gutters 4. Attic, including visible insulation 5. Walls 6. Ceilings 7. Floors 8. Windows and doors 9. Foundation 10. Basement 11. Structural components The inspector isn’t going to tear the home apart to inspect piping and wiring. But the more exterior and interior parts of the home an inspector can access, the more complete the final report will be.
STEP 9: MAKE AN OFFER
Once you’ve found the home that you and your agent are sure is the one — it falls within your price range, it’s in the desired area and neighborhood, it meets all your needs criteria and maybe most of your wants, it’s been thoroughly inspected and examined — it’s time to make an offer. This is the first step to actually
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purchasing a specific property.
“Making an offer” essentially means proposing a price to buy the property, and depending on the seller, the listing agent, your own agent, and the current housing market, that proposal could be equal to, less than, or more than the asking price. Further, a “spoken deal” means nothing; many legal requirements and written documents, such as the Residential Purchase Agreement, are involved in officially making an offer on a home, and this is another area where you truly need the expertise of a good real estate agent and in many states an Attorney. If you choose to work without an agent, especially if you’re a first-time home buyer, you can put yourself at risk of making expensive mistakes, or even the losing the deal. Further, keep in mind that real estate laws and requirements can change over time and do vary from state to state. For second- or third-time home buyers: You can't assume that because you bought a home several years ago (even if it is in the same area) that the rules and the process of purchasing remain the same. Further if you are making a purchase in a different state the rules are surely going to be different. The process of actually drawing up an offer for a home in which you’re interested is a bit complicated. Here are a few basic things that are important to know about making an offer. The offer: • must conform to local regulations and standards. • must mention the amount being offered as well as the actual asking price. • must include any terms and conditions on the purchase. • must be drafted and signed. • must be forwarded to the seller through an agent (your buyer’s agent or the seller’s agent). • is not a binding sale contract. 14
• is the buyer’s offer on the house based on its current condition and according to the terms and conditions. • is subject to change if the seller doesn’t agree with your terms. • can be refused if the seller doesn’t accept the amount being offered. • becomes void if the seller makes any changes, and becomes a counteroffer, which you can accept, refuse, or change. In this last instance, which is actually quite common during this process, an offer turns into a counteroffer, which can turn into another counteroffer, and on it goes back and forth until both parties are satisfied, or until the buyer moves on and/or the seller refuses to accept the buyer’s deal. The offer doesn’t actually become a contract until all parties agree to all terms, conditions, and changes in writing. So, now, what should be included in the drawn-up purchase offer? Here is a list of the most common items: • Physical address of the property. • Legal description of the property. • Price and terms and conditions of the purchase. • Seller’s promise to give clear title to buyer. • Target closing date. • Earnest deposit associated with the offer, as well as method of deposit. • Disposition of earnest deposit if deal falls through or fails. • Plans for adjusting taxes, fuel, and water bills between buyer/seller. • Who will pay for title insurance, land survey, home 15
inspections, etc. • The deed to be granted. • State-mandated legal requirements. • Attorney review of contract. • Any disclosures. • The time after which the offer will expire.
Something else to consider is contingencies. Many offers are made contingent upon a factor or event that must be resolved before the offer moves forward. The most common contingencies are home inspections, financing and appraised value. The offer can be made contingent upon a satisfactory home inspection report. If major physical damage is revealed during the home inspection, the deal could be called off. This shouldn’t be all that surprising, however. If a home is considered structurally unsound or unsafe to live in, then there’s a good chance the deal won’t move forward. For financing, the offer is made contingent on the buyer receiving a sufficient mortgage loan from their bank, or for current homeowners, contingent upon the sale of their home. Having as strong pre-approval or Mortgage Credit Approval Letter (MCAL) is the way to avoid having financing sink your deal. Appraisals that are lower than the purchase price do occur and can be deal breakers. If your target home’s appraisal is lower than the purchase price, this effects the loan-to-value (LTV). For example: you have agreed on a purchase price of $600,000. Your down payment is 20% ($120,000). The loan amount is $480,000 (80%). The appraised value comes in at $580,000. The lender will only provide 80% of the appraised value which in this case is $464,000. You can try to renegotiate the price based on the appraised value or if you are still willing to make the purchase at $600,000 you will have to make up the $16,000 difference.
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STEP 10: PUT MONEY IN ESCR Y IN ESCROW
Part of the home-buying process involves putting money into escrow; the buyer is expected to put an initial deposit into escrow in order to make the contract binding, which then helps the contract move through and toward closure. Essentially escrow refers to a time period, not a place. Escrow is the period between 1) the time an offer of purchase is made on a property; and 2) the time when that property’s title is officially transferred from seller to the new owner. The escrow process is essential in cases in which the ownership of title will be changed. The money put into escrow, or the initial deposit amount collected as part of escrow, is considered as “earnest” money. How much money are you, the buyer, supposed to put into escrow? This totally depends on the terms as stipulated in the offer of purchase. An escrow agent or the seller's attorney who specializes in this period and process will be involved. The agent serves as a third party who enjoys a neutral state between seller and buyer, and helps provide assurance to both parties. The agent is also heavily involved in the actual transaction to ensure the clauses of the offer will be met completely, accurately, and satisfactorily. Further, the escrow agent serves as the manager of the trust account that holds the funds that will cover the value of the transaction. The money collected from the buyer is held in escrow until the seller completes his or her obligations, and transfers the title over to the buyer. After this transfer is authorized, verified, and completed, the payment is then remitted to the seller. The “earnest” money can be used to cover some of the down payment,
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the purchase price, and the closing costs.
STEP 11: NEGOTIATE WITH THE S TE WITH THE SELLER
The negotiation process in real estate transactions is one of the key steps for both the buyer and the seller. While the seller and listing agent want to sell the home for the reasonably highest amount they can, the buyer and the buyer’s agent want to get the best deal that they can. It can feel like a competition, and this is where negotiations come into play. For many buyers, this is the toughest and most challenging aspect of purchasing a home, to the point of becoming exhausting. It’s especially difficult to navigate if you don’t have a good buyer’s agent who’s skilled in negotiation tactics. In fact, this is one of the key reasons that we recommend hiring a real estate agent — negotiation! But you should also learn negotiation skills yourself. There are strategies and tactics you can learn and do when you are involved in the home-buying process, and we will discuss these in greater length later in this book. However, we can offer a summary of this aspect in this step in this process for the purposes of this chapter. You need to plan ahead with your agent on how to make a winning negotiation strategy. For example, once you find the home that meets your needs and falls within your price range, and you intend to make an offer, your agent will help you review comparable sales in the area and compare these comps with the prospective house, which will aid in validating the asking price. It doesn’t need to be a “secret” that you did some research on comparable homes. In fact, you should actually mention the comps during the negotiation. Why? It will let the seller and the listing agent know that you performed your due diligence by doing your homework ahead of time — research — and this
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could strengthen your bargaining position.
As discussed in Step 9, a purchase offer can evoke different responses from the seller. First, the seller might accept your offer as is. Second, the seller might counter the offer by requesting changes (making a counteroffer for your review). Third, the seller could reject your offer altogether, coming back with a totally different counter proposal. How does negotiation play into this? Essentially, knowing how to negotiate, and having a skilled buyer’s agent on your side, will get you the best deal possible. It will also help you to deal with the seller’s response (acceptance, counteroffer, or rejection) strategically and effectively. First, know the maximum amount that you are prepared to spend on this home. If you’ve persuaded the seller to come down from the original listing price (based on the comps you’ve acquired and shared), but now the seller comes back with a counteroffer, you, with the guidance of your agent, will need to determine how much you want the home and how badly you want to go through with the deal. For example, if you persist with your offer price when there’s a high market demand, you risk losing the property to another buyer who’s willing to pay more. This is why it’s important to know your limits and to stick to them. Another tip for negotiating is to set your emotions aside, no matter how tricky that could be. The process of buying a home, which includes negotiating, is a professional business transaction, so there is no room for personal sentiments. If the price that the seller demands is too high relative to the comparable value of the property, then you need to know when to walk away from the deal, regardless of how painful it might be.
STEP 12: CLOSING THE LOAN AND RECEIVE THE KE AN AND RECEIVE THE KEYS
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First, what is the closing process? In most cases, both the buyer and seller, along with their attorneys, and often their agents are present in a professional office setting. Essentially, it involves everything that’s needed to make the home sale and home purchase complete, legal, and finalized. Although nearly pro forma (“done as a matter of form” or “standard”), the closing process (also referred to as settlement) is meant to bring all the parties involved to the same happy conclusion. Before the process of closing can begin, the buyer must inspect the property by performing a final "walk-through" with their agent. The final walk-through should occur within 24 hours of closing. During the final walk-through, the homebuyer and their real estate agent will inspect the property to ensure that everything is functional and that any agreed-upon repairs have been completed to a professional standard. This includes ensuring all appliances, fixtures, and systems (HVAC, water, toilets etc.) work. You should also check that any items that were included in the sale, such as appliances, lighting fixtures or window treatments, are still present and in good condition. The final walk-through is also an opportunity to check for any new issues that may have arisen since the initial home inspection. For example, if the home has been vacant for a period of time, there may be new signs of pest or water damage. The closing process is actually a brief component, essentially involving the exchange of funds and documents to complete the transaction to which all parties have agreed, based on the contract. The main “goal” of the closing process is to transfer the title of the property from former homeowner (seller) to new homeowner (buyer). It includes the final review of the title report and insurance, to make sure that there are no errors, unreported claims, or other flaws in the review of the property’s ownership. All property
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transfer taxes must be paid during closing. Further, you need to settle all other claims, including closing costs, legal fees, and adjustments. The closing agent is the party who is responsible for drawing up and finalizing the documentation regarding the home loan. They’re committed to the completion of all relevant and required paperwork so the property can officially be transferred from seller to buyer — the buyer gets the keys to the home; the seller gets the payment. Then, it’s the closing agent’s responsibility to subtract the funds required to pay existing mortgages and other costs related to the transaction. The closing agent must also ensure the deeds, loan documents, and other papers are prepared, signed, and submitted to the municipal offices that maintain property records. This seems like a lot, but there really is little work to be done by you, the buyer — the closing agent (often allied with the title company) take care of all the necessary documentation required by title companies, lawyers, and lenders. The final result of the closing process is that the buyer obtains the title to the property, the seller receives the payment, the agents receive their commissions, the lenders’ loans are fully documented in the public records, and the state government collects the taxes generated by the transaction.
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CHAPTER 3 Making the Loan Process Work for You
“This is the real secret of life — to be completely engaged with what you are doing in the here and now. And instead of calling it work, realize it is play.” – Alan Watts Understanding the loan process from start-to-finish is the best way to ensure smooth sailing and issue-free closing. Knowing what must be done, when it must be done — and subsequently that it was done — is the best strategy for success. Your team, your loan officer, buyer's agent, and attorney are the ones that make this happen for you. The loan process is comprised of four phases: origination, processing, underwriting, and closing. The origination of a loan is straightforward: you decide to enter into a loan agreement with a particular lender. This is the origin of the loan, i.e., origination. Processing is also just what it sounds like: the loan is processed by the lender. Processing usually includes filling out an application and authorization forms, answering questions, and providing personal documents to the lender. Once the loan is processed it moves to an underwriter. When a loan undergoes underwriting, a specialist compares the information in the application and any documents that you have provided with the lender’s requirements and standards for that particular loan instrument. We’ll go in-depth about underwriting 23
later on in this book.
Finally, we come to closing, where the loan is completed and funds are transferred to the seller and the seller's bank and the property is transferred to you. If you think of the whole process as these four simple steps, it has a straight forward path. A loan originates from somewhere, it is processed, it’s underwritten, and then it’s closed. Let’s focus on the three main categories that make up a typical mortgage: rate, type, and size.
HOW MORTGAGE RATES ARE P TES ARE PRICED
Residential mortgage rates are priced based on a combination of factors, and the specific rate you receive can vary depending on your unique financial situation and the lender you choose. Here are some of the key factors that influence how residential mortgage rates are priced: Market Interest Rates: The overall interest rate environment plays a significant role in determining mortgage rates. Lenders often use benchmark rates like the U.S. Treasury yields as a starting point. When these benchmark rates rise or fall, mortgage rates tend to follow suit. Credit Score: Your FICO credit score is a crucial factor in determining your mortgage rate. Borrowers with higher credit scores generally qualify for lower interest rates because they are considered less risky to lenders. Lenders use credit scores to assess creditworthiness and your likelihood of repaying the loan. Loan Type: The type of mortgage you choose can affect the interest rate. Common options include fixed-rate mortgages and adjustable-rate mortgages (ARMs). Fixed-rate mortgages
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typically have higher initial interest rates compared to ARMs but provide rate stability over the life of the loan. Loan Term: The length of your mortgage term also influences the interest rate. Shorter-term mortgages, such as 15-year loans, have larger monthly payments but come with lower interest rates compared to 30-year loans and you will pay less interest over the life of the loan. The rate is lower because lenders take on risk for shorter period of time. Down Payment: The size of your down payment can impact your mortgage rate. A larger down payment typically results in a lower interest rate because it reduces the loan-to-value (LTV) ratio, which is the amount of the loan compared to the home's appraised value. The larger the down payment the more equity that you hold which lessens the risk to the lender. Debt-to-Income Ratio (DTI): Lenders evaluate your DTI ratio, which compares your monthly debt payments to your income. A lower DTI ratio indicates less financial risk and may in combination with other factors lower the interest rate. Property Type and Location: The type of property you're financing and its location can influence your interest rate. Lenders may have different rates for single-family homes, 2-4 family homes, coops, condos, vacation homes, and investment properties. Additionally, rates can vary by geographic region and local housing market conditions. Lender Policies: Different lenders have their own underwriting guidelines and pricing structures. Your loan officer will help match your needs with their programs. Economic Conditions: Broader economic factors, such as inflation, unemployment rates, and central bank policies, can impact mortgage rates. These factors can lead to fluctuations in
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market interest rates.
Points: Start by asking your lender what the "par rate" is for the loan that you are considering. "Par" means that you are not paying any "points" to reduce the rate nor are you receiving a credit (cash to you) which would increase the rate. Each point typically costs 1% (100 basis points) of the loan amount and can lower your interest rate by a certain percentage. If you choose to raise the rate the lender will give you a cash credit that may be applied towards paying the closing costs. To get the most competitive interest rate, it's essential to maintain a strong credit profile, shop around, and carefully consider your loan options. Additionally, working with a mortgage originating professional can help you navigate the lending landscape and find the best loan instrument for your specific needs.
TYPES OF MORTGAGE INSTRUMENTS
Residential loans are either “Fixed-Rate” mortgages or “Adjustable-Rate” mortgages. In a Fixed-Rate Mortgage (FRM), the interest rate is set for the entire term of the loan. A Fixed-Rate Mortgage offers consistency to borrowers because they’ll know exactly how much each monthly payment will be from the first day to the last day and how much principal and interest they will pay in total. Ask your mortgage originator for an amortization chart of your loan. The chart shows how much of your payment is assigned month by month to the interest the lender is charging and how much goes to principal which creates equity for you. The amount that goes towards paying interest is larger than the amount going towards principal at the beginning of the term. The amount going towards interest will diminish each month while the amount going towards your equity will increase.
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Most Fixed rate mortgages have higher interest rates than other types of mortgages because the lender is obligated to maintain the same rate for the length of the loan, which can be up to 30 years (360 months). For some folks, committing to paying a bit more in interest is a fair exchange for the peace of mind that they have a fixed amount to pay every month for the life of the loan. In that case, FRMs can be the ideal choice. However, if a borrower wants a lower interest rate at the beginning or does not see this purchase as a long-term hold, an adjustable-rate type is an alternative. The initial interest rate for an adjustable-rate mortgage (ARM) is typically lower than the FRM rate, but it is subject to change at specified intervals. So, an ARM (which amortizes over 30 years) can have a fixed-rate period for 5, 7 or 10 years. After the fixed period is over the rate is reviewed and adjusted every six months. The rate can go up or down within a specified cap range. The interest rate for ARMs is a combination of a margin (fixed percentage for the life of the loan) added to an economic index, such as The Secured Overnight Financing Rate (SOFR). SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. SOFR is subject to change every day and is posted in the Wall Street Journal. There is a minimum and maximum rate assigned to the loan so that the highest and the lowest rate for the life of the loan is written into your note. For example you choose a 7 year ARM at 6%. This rate remains the same for 84 months. Approximately 45-60 days prior to your rate change you lender will indicate the new rate based on the margin (fixed for the life of the loan) and the current level of the index. If your margin is 2.75% and the index is now 4.00% your new rate would be 6.75%. If the index is 3% your new rate goes down to 5.75%. Your initial note will tell you the maximum
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amount the rate can increase or decrease at any particular change and the minimum/maximum rate allowable for the life of the loan. Most ARMS issued from 2023 forward are reviewed every six months after the initial adjustment period has begun. Borrowers who want lower monthly payments at the beginning of the repayment process can benefit from an ARM. For example, a medical student who is making less money now than they hope to make in the future could benefit from a smaller monthly payment at the beginning, and then pay more later. A borrower whose intention is to own the house only for a few years may strategically choose an ARM with the intention of selling the home before the adjustment period begins. If a borrower chooses an ARM, they usually will have a choice between an amortizing ARM and an interest only ARM. An amortizing ARM is the most common type. With this type of mortgage, the lender calculates a monthly payment that will pay off the entire balance within the term of the loan (usually 30 years). However, since ARM loans don’t have a fixed interest rate, the payments can fluctuate over that time period. Rates can increase or decrease with a bottom rate and an upper limit clearly defined in your loan document. An Interest Only (IO) ARM has more stringent requirements for the borrower because the bank is allowing you to not pay principal for up to 10 years. This keeps their level of risk high for an extended period of time. This type of loan (30-year term) allows you to make interest payments (no principal) for a preset number of years. This is most often the first 10 years (120 months) even if the rate is subject to change earlier. The actual money that you borrowed (the principal) is then scheduled to be paid off during a 20-year term (beginning in month 121) with interest and principal applied each month, so that the loan is complete at the end of the 30-year (360 month) term.
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You may always pay principal on an owner occupied primary or secondary (such as a vacation home or pied-a-terre) residence even during the IO period without penalty. When you pay principle during the IO period the underlying balance is reduced in real time and your next mortgage payment (if the rate has not adjusted) will be lower because the actual amount that you owe has been reduced.
TYPES OF MORTGAGE PROVIDERS
Lenders offer both conventional and government backed loan instruments. Government-insured loans include the Federal Housing Administration (FHA) program (low down payment), the Veterans Affairs (VA) program (veterans and active service members), and the United States Department of Agriculture (USDA) program for specified rural locations. More detailed descriptions of these providers appear in Chapter Six. Conventional (non-government) loans come either from the lender's portfolio, outside investors, or are sold to Fannie Mae and Freddie Mac. Fannie and Freddie are the two government- sponsored real estate enterprises known also as GSEs, but they are not government insured in the manner of the Federal agencies named above. Non-QM Loans (Non-Qualified Mortgage): are a type of mortgage loan that does not meet the criteria or "qualifications" set forth by the Consumer Financial Protection Bureau (CFPB) for conventional mortgages, often referred to as Qualified Mortgages (QM). The primary difference between Non-QM loans and conventional loans lies in the types of documents, underwriting and borrower eligibility requirements. Non-QM loans are often more suitable for business owners, the self-employed, recipients of 1099s, gig workers and those who
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have an ITIN. An Individual Taxpayer Identification Number (ITIN) is a tax processing number issued by the Internal Revenue Service. The IRS issues ITINs to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain, a Social Security number (SSN) from the Social Security Administration (SSA).
MORTGAGE AMOUNTS
The size of a mortgage is expressed as either conforming or non-conforming (also referred to as jumbo). The dollar limits to determine if it is conforming or jumbo are set by the Federal Housing Finance Agency (FHFA). A jumbo loan is one that is larger than the conforming price set by the FHFA. Non conforming (jumbo) loans will have different guidelines than smaller ones. In addition to requiring a higher income level they often set a lower allowable Debt to Income ratio, higher FICO credit scores, and larger amounts of assets in reserve in personal accounts after the closing. The conforming loan limits are reviewed once a year by FHFA but do not have to change. Currently (2024) conforming loan limits in most of the 48 contiguous states and Washington D.C. are $766,550 for a single-family home. The limit is higher for 2-4 family units. High cost areas such as parts of California, CT., and NY currently have a conforming limit of $1,149,825 for a single-family residence. Your loan officer will tell you exactly what the limits are in the area that you are planning to make your purchase. Now that you know about the mortgage options let’s become familiar with the people involved in making the mortgage process work.
THOSE INVOLVED IN THE LEND VED IN THE LENDING PROCESS
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The first person engaged in the lending process is the mortgage loan officer (MLO or LO). The loan officer is the project coordinator, overseeing the transfer of information between you (the prospective buyer) and their organization’s processing and underwriting departments. The loan officer will be in direct contact with the you from the beginning of the mortgage process all the way through closing. The loan officer is licensed with the National Mortgage Licensing System (NMLS). The loan officer’s licensing status can be verified with the NMLS at www.nmlsconsumeraccess.org. The site is simple: you enter in a loan officer’s name, address, and other important information. It will let you know if they are an active registrant in the federal database, if they are authorized to conduct business, and, if so, what organizations they are authorized to represent. The NMLS number is always displayed next to the LO's name on written and electronic material. Origination: The LO will chat with you to find out where you are in the process: What is your price range, where are you planning to look, when do you want to move, are you working with a Real Estate agent? Once rapport has been established between the LO and the borrower the application is entered. This causes loan disclosures and a request for documents to be sent to you. Once you have executed and returned the disclosures, and all income and assets documents are provided they are matched to the application and the transaction moves into the second phase, which is Processing. The processor works with the loan officer to handle the documentation and tasks. They will coordinate with the departments inside the lender's office to have the appraisal ordered and a bank attorney or closing agent to be selected. Before sending the application to the underwriter they will verify that all of the documents reflecting income and deposits match
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