Lynda Hinton, CRS, GRI, Managing Broker Windermere Real Estate/Whatcom, Inc.
Windermere Real Estate Whatcom
Lynda Hinton :: 360.303.1023 :: Lynda@lyndahinton.com
Now that you're beginning the process of finding out about mortgages, I'm sure you're asking things like, "Where do I start?", "Who should I talk to?" and "How much can I afford?". Below are answers to some frequently asked questions regarding the home loan process. It probably doesn't cover all questions that you might have, but will give you a good start. If you have a specific question, go ahead and ask me.

Where do I start?
Get your paperwork together. If you have all of your paperwork thrown in a pile on the floor, it may be time to start going through it. Compile your last 2 months pay stubs and bank statements. Two years of tax returns is also a good idea. For self-employed individuals this might mean a 1099, business license and proof of cash deposits from your business. Otherwise your W-2 forms will work. Lenders like to see steady income at the same occupation for 2 years or more. Occasionally a lender will ask for proof of rent paid. This could be shown through a form signed by your landlord (provided by your lender) or through canceled rent checks. Your lender will provide you a list of documentation to compile. To do a full pre-approval with a lender will usually need your documentation. While a pre-approval isn't required upfront, it will often be needed when you make an offer on your home, so it's good to do it right away. And, it will give you greater confidence that you are looking at homes in your available price range.
Look at your credit report, either online or through what your lender can provide you - they will run it anyway, even if you already have recently. Make sure it looks accurate to you. Surprisingly, a large percentage of people have some errors on their credit report. Know your rights and what you can change on your file. Be proactive to get it done. It directly impacts the mortgage interest rate you receive, your payments, and therefore the amount of house you can afford.
Think personally about what you could apply towards your monthly mortgage payment. This should be done separate from what a mortgage broker will tell you that you can afford. Sometimes they approve you for more than you can realistically handle based on your lifestyle. This is an important step to ensure that you don't get in over your head!

Who should I talk to?
Talk with a mortgage broker, or several. Whatever makes you comfortable that you are ready to move forward in working with someone. It's hard to change lenders once you've found a house and have begun the lending process for that particular home - often times it's too late at that point. So I recommend that you do any mortgage lender shopping around BEFORE you find the house. I work with some of the best and most capable brokers in Whatcom County, and would be happy to refer them to you. I use them personally, and it's too risky to just pick a lender from the phone book.   

How much can I afford?
Knowing what you can afford is the first step of home buying, and that depends on how much income and how much debt you have. In general, for standard loans, lenders don't want borrowers to spend more than 36-40 percent of their gross income on debts (including the mortgage payment). This is called the Debt-to-Income ratio (see next question for a calculation). It pays to check with several lenders before you start searching for a home to get quotes on interest rates. (Your interest rate directly correlates to your monthly payment which effects your Debt-to-Income ratio). Most mortgage brokers will be happy to roughly calculate what you can afford. More specifically, the price you can afford to pay for a home will depend on six factors: 
        
      Gross income 
      Amount of cash you have available for down payment, closing costs and cash reserves 
         required by your lender
      Your outstanding debts 
      Your credit history 
      Type of mortgage you select 
      Current interest rates

How do you calculate a Debt-to-Income ratio?
As a quick calculation lenders will usually loan up to a 36-40% "debt ratio". Working backwards into calculating what you can afford for your mortgage payment, you would take your gross income multiplied by say 40% and subtract your payments on all of your consumer debt (i.e. credit cards, student loans, car payments; not insurance, phone bills, food). What is left over is what you can use to spend on your home. Example: A couple earns $7,000 combined gross income per month multiplied by 40% = $2,800. Subtract your credit card payments of $150 and a car payment of $250. That leaves you with $2,400 per month to apply towards your mortgage payment. Lenders would be willing to give you a loan of an amount that had a total payment of $2,400 (including principle, interest, taxes and insurance). Now you'd need to know your interest rate to determine what that payment equates to for a total loan amount. In this example, $2,400 approximately equals a $350,000 mortgage at a 6% interest rate (after adding taxes and insurance) on a 30-year fixed mortgage.
 

How much money do I need?
People always ask me, "Can I really buy a house with little or no money down?" Yes you can. It's not a scam or a late-night infomercial. There are ways to do it. Let's first understand what your regular costs to buy a home are. Closing costs to buy are generally 3% of your sales price. So if you're buying a $300,000 home, your costs would be $9,000 paid out of your pocket at closing just to get the transaction closed. This includes pre-paid insurance premiums and taxes, escrow fees, title fees, and variety of administrative fees. These costs vary by transaction and lender, but 3% of purchase price is a good estimate to have in mind. The other major cost to buy a home is whatever you are putting down. It used to be unheard of to buy a home without at least 20% down. That has changed. Could you imagine trying to save that much now? If you're selling a home and rolling your equity into another home, that is very achievable, but it is very difficult for many first-time home buyers to accumulate that much in savings.

You can negotiate with the seller to pay your closing costs. Having the seller pay your closing costs (sometimes called a "seller concession") is achieved by adding your costs onto the price you have agreed to buy the home for. So if you're buying a $300,000 house and that was your agreed price, you would actually offer them $309,000 and ask that they pay the $9,000 in closing costs for you. It's all worked out in negotiating with the seller. This essentially means that you are financing your closing costs. You pay more for this money over the long-term, but it may be your best option to get into a home sooner rather than later. One issue to be aware of is that some lenders won't allow the sellers to pay certain costs for you. And some lenders place a ceiling on how much a seller can "pay" towards a buyers closing costs. Make sure you know this upfront to avoid complications at closing. There are ways around this - talk to your lender.

You can finance your home with 100% financing. As long as your debt ratio and credit score qualifies you, 100% financing is becoming much more common. The loan is a little more difficult to get sometimes and it can make sellers nervous to accept a buyer with 100% financing, but it can be done and happens all the time. An inherent risk in this type of financing is that your home is leveraged completely. If right after you purchase, you suddenly needed to move across the country for your job and had to sell your home, you would have to pay out of your pocket to get your home sold. Closing costs on the selling side are greater than the buyer's closing costs. Without equity in your home to cover these costs, you would have to pay out of pocket to get your new house sold - even if you sold it for what you paid! In the Pacific Northwest this risk is mitigated by our historically great appreciation rates. Even owning your home for a year can raise your home's value by 3% or more which can give you the equity needed to pay those closing costs if you need to sell sooner than you thought.

Earnest Money - Keep in mind that even if you are planning to buy your home without putting money down, you will almost always have to make an earnest money deposit with your purchase and sale to secure the contract and show good faith to the sellers. Earnest money is applied towards your costs or downpayment at closing. If you're not paying either of these, then the money is returned to you. The amount needed for the earnest money deposit varies, but depends usually on the costs of the home, the market conditions, the seller's situation and their faith in you as a buyer. As your agent, I can help you determine the appropriate amount.

When is an appraisal done?
Lenders require appraisals to ensure that they are not loaning too much on your property compared to its value. It is to protect their interest should you default. An appraisal is ordered by your lender but paid for by you. It occurs during the time between when the purchase and sale agreement is signed and when the transaction closes.


What is a Good Faith Estimate?
A Good Faith Estimate (GFE) is a breakdown of costs that the lender estimates you will be charged to acquire the home. It also shows the interest rate they will give you. It is an estimate, but it is supposed to be an estimate done in good faith that it will be the actual rate and costs. Lenders are required by law to provide you with these when you submit a loan application. Make sure you talk with your mortgage broker about the GFE if you are confused. It is their job to make sure you understand it.

What is an APR?
The Annual Percentage Rate (APR) is the relative cost of credit as determined in accordance with Regulation Z of the Board of Governors of the Federal Reserve System for implementing the federal Truth-in-Lending Act. The APR is the actual yearly interest rate paid by the borrower, including the points and other fees charged to initiate the loan. The APR discloses the real cost of borrowing by adding on the points and by factoring in the assumption that the points will be paid off incrementally over the term of the loan. The APR is usually about 0.5 percent higher than the loan rate.

Is it okay to buy a car before I purchase a home?
It is best not to. In fact, you should avoid all major purchases that would create debt of any kind prior to purchasing a house. It's plain and simple When determining your ability to qualify for a mortgage, a lender looks at what is called your "debt-to-income" ratio. As mentioned above, a debt-to-income ratio is the percentage of your gross monthly income that you spend on debt. This will include your monthly housing costs, including principal, interest, taxes, insurance, and homeowner's association fees, if any. It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and car payments. Suppose you earn $5000 a month and you have a car payment of $400. At 8% on a thirty-year fixed rate loan, you would qualify for approximately $55,000 less than if you did not have the car payment. Even if you feel you can afford the car payment, mortgage companies approve your mortgage based on their guidelines, not yours. Do not get discouraged, however. You should still take the time to get pre-qualified by a lender. However, if you have not already bought a car, remember one thing. Whenever the thought of buying a car enters your mind, think ahead. Think about buying a home first. You can always pursue buying a car after you have purchased the home.

Is it okay to change jobs before buying a home?
It depends. For most people, changing employers will not really affect your ability to qualify for a mortgage loan, especially if you are going to be earning more money. For some homebuyers, however, the effects of changing jobs can be disastrous to your loan application. If you earn your income from regular pay (i.e. not commissions, bonuses, etc) and are either a salaried employee or an hourly employee who works a straight forty hours a week, changing jobs should not be a problem as long as you are remaining in the same line of work. If, however, you are a commissioned or part-time employee or a substantial portion of your income comes from bonuses or overtime, you should not change jobs before purchasing a home. Lenders consider these to be unstable sources of income and would like to see at least 2 consecutive years with the same employer to average your income over the period. The same applies for self-employed individuals who already tend to have a more difficult time of getting a mortgage, partially due to the fact that they tend to include a lot of expenses on the Schedule C of their tax returns, especially in the early years of self-employment. While this minimizes your tax obligation to the IRS, it also minimizes your income to qualify for a home loan.

How much will it really cost me to own a home?
After you purchase your home, you will obviously have mortgage payments going forward. But what else? There are utilities (water/sewer/garbage, gas/oil, electric). Ask around to find out averages for your area. Maintenance is another expenses that needs to be considered and obviously varies greatly depending on the age and condition of the home. Major improvements, like a new roof or exterior paint, might be necessary right away or some time into the future. In some cases (condos, planned developments, etc) you will have homeowners dues. You will know the cost of these upfront before you purchase. They generally range between $100 to $500. Buildings with more high-maintenance amenities, like a swimming pool, usually run higher than others. Don't forget to factor these costs into your budget. They are real and will create a lien against your home if not paid. Sometimes people think that homeowners dues are like throwing money away. While it's true that it isn't money being paid directly to your equity, it is money that covers maintenance and sometimes utilities. These are costs you would pay anyway. And these costs go towards preserving the value of your home. Special assessments can be assessed by your homeowners board for unplanned major expenditures. Another type of special assessment may be assessed by the city or county for things such as sidewalks on your street or a new drainage system in your area.

During a Seller's Market, should I just wait it out?
People always say to me "it's a seller's market right now. I think I'll wait it out because I don't want to get in bidding wars and pay too much for a home." What they don't understand is that during a seller's market prices are driven up. So if they wait and then jump into looking in 6 months or a year the prices are higher than they were when they first considered looking. I've seen it over and over again where buyers are priced out of a neighborhood they like only by waiting another 6-12 months. No one can accurately predict the future and you never know how long the "seller's market" will last. Since 1983, we have had two fairly long expansions with only a slight recession in between each. You would not want to wait nine years to buy a home, would you? You could miss out on a substantial amount of appreciation by waiting, and end up paying much higher prices.

What is the best time to buy?
This is partially a personal decision. Do you prefer to move during, after or before the holidays, the summer, your vacations, etc? Will your children need to change schools mid-year? Look at my Market Stats page to see how many homes are sold each month. Ideally, you'd like to be a buyer looking in the slower months because seller's may be willing to take less for their home. However, the slower buying months also mean they are the slower selling months. November and December have traditionally been the slowest for our area, so not many sellers choose to sell during these months - the ones who do may be more flexible.
 

What contingencies should be put in an offer?
Most offers include two standard contingencies: a financing contingency which makes the sale dependent on the buyers' ability to obtain a loan commitment from a lender, and an inspection contingency which allows buyers to have professionals inspect the property to their satisfaction. A buyer could forfeit his or her deposit under certain circumstances, such as backing out of the deal for a reason not stipulated in the contract. The purchase contract must include the seller's responsibilities, such things as passing clear title, maintaining the property in its present condition until closing and making any agreed-upon repairs to the property.



Lynda Hinton

Direct: (360) 303-1023
Office: (360) 734-7500
Fax: (360) 676-4694


Windermere Real Estate Whatcom :: 515 W. Bakerview Rd. :: Bellingham, WA 98226 :: Phone: (360) 734-7500 :: Fax: (360) 676-4694
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