When Purchasing A Home, Where Do I Start?

I hear customers saying all of the time, "what do I do first?". This may not surprise you coming from a mortgage professional, writing on a blog called Florida Mortgage Pro, but the absolute first thing that you want to do is talk to a mortgage professional, even before a Real Estate Agent and here is why.

Start With a Mortgage Person?

I believe that you should start by seeing a mortgage professional for the following reasons, and I believe that many Real Estate Agents would tell you the same. Speaking to a mortgage pro first will have many benefits, the following are just a few.

1. Realistic Expectations: Nothing makes the home buying process more frustrating, than seeing a house that you love, only to find out it is above your price range. Every house that you walk through afterward is compared to the house that you loved, but couldn't afford. It is likely that any house with similar features will be similarly out of the price range, and therefore any house within the price range will be missing features that you love about the house you cannot afford. It is better to look know what your price range is, and look at houses you can afford. Your loan officer can also give you the monthly payments for different loan amounts, it may be that you qualify for $300,000 at 100% financing, but you are only comfortable with the monthly payment on a $150,000 loan. If that is the case you don't want to spend time looking at $300,000 properties, but you won't know that for sure, until you speak to a loan officer.
2. Pre-qualification or Pre-Approval: You are going to need at least a pre-qualification letter from a lender before any listing agent will take an offer you submit seriously, so it is better to have the letter ahead of time in case you quickly find a house that you love. Also a lot of the more experienced buyers agents don't want to spend a lot of time with you until you are pre-qualified as well and for good reason, if you cannot get a mortgage than you are wasting your own time as well as their time. Another benefit of seeing you mortgage professional first is, that if they offer pre-approvals like Freedom Mortgage does, you can obtain a loan commitment before you identify a property, this tells a seller and listing agent that they do not have to worry about accepting your offer only to have it fall through because you are unable to obtain financing. A pre-qualification letter means that a loan officer thinks he can get you a loan, a pre-approval with a  loan commitment means that an underwriter has said that you can have a loan based on your information.
3. Know Your Loan Options: Your sales contract is going to set the maximum amount of financing that the seller is willing to accept, your mortgage professional will be able to discuss with you the different loans that you qualify for and in your situation is it better to go with 80%, 90% or 95% financing, what are closing costs likely to look like? Are you a veteran, eligible for the VA loan? Is an FHA loan or Conventional loan better in your circumstances? You may want to take advantage of the USDA program and their favorable terms, but the program is not valid in all areas, you don't want to look at houses that will not qualify based on their location. These are questions that your loan officer will be able to answer and it helps to know them ahead of time, to make sure you are being effective with your time looking at houses.

While your real estate agent is going to be the person to help you find the house of your dreams, it is always wise to make sure that the house of your dreams, fits within the budget of your reality first. The only person that is going to be able to help you figure that out is your mortgage professional, especially in the market we are in right now with the interest rates being as volatile as they have been over the past few months.

What Documents Will I Need?

Your loan officer will be able to tell you exactly what documents their lender(s) will require but here are a few items that are pretty consistent across all lenders

1. Income Documentation: The days of "this is how much I make , take my word for it" are over, any income that is used to qualify you will have to be verified, Here are some quick guidelines.
1. Plan to bring you most recent paystubs at a minimum and all w2s and 1099's from the previous year, it is always a good idea to provide your loan officer with the previous years tax returns as well.
2. If you are commissioned or self employed, 2 years of tax returns, including w2s and 1099s
2. Asset Documentation: The days of "this is how much I have in the bank, take my word for it" are over, any assets you use for purposes of paying a down payment or closing costs are going to have to be verified
1. Most Recent Bank Statements
2. Statements for any investment or retirement savings that you will be drawing from for down payment or closing costs
3. Photo ID: Passport or Driver's License are the best.

Typically that is enough to get you started, but your loan officer will be able to walk you through any additional information that he or she may need.

What Rising House Values Mean To You As A Buyer

Those of us in the real estate and mortgage industry have been telling clients that we are seeing housing prices on the rise, now there is empirical data to support our anecdotal evidence. The Case-Shiller 20 City Composite report is showing that the average of the 20 cities has the housing prices on the rise, back to the levels of April 2004. In news that is a little more pertinent to our market, Tampa FL is back to the levels of November 2003 and on the upswing with a 10% rise when comparing May 2012 with May 2013.

What does this information mean to you?
This means several things for the prospective home buyer.

1. The days of offering 75% of the asking price on a short sale or bank owned property and getting an offer accepted are likely over, unless the comparable sales in the market show a substantially lower value than the asking price. This is no longer a market where it makes sense for the bank to take whatever they can get and cut their losses as quickly as possible. In today's market if a bank has to keep the house on the market even for 6 months, at the end of those 6 months the property is going to be worth 3-5% more than it was when it was listed. Offers now have to make sense and what we are seeing be accepted today is typically offers within 5% of the asking price
2. It may be time to start thinking of accepting higher loan values and paying Mortgage Insurance rather than depleting your savings, in a market where houses are gaining 10% of their value year over year, many times it makes more sense to keep your money in your own pocket, put less money down, pay a years worth of Mortgage Insurance and let the increase in value remove the Mortgage Insurance for you. To illustrate, let's look at an example home sale of $100,000 to make the math easy. In order to avoid paying mortgage insurance you would have to put down 20% or $20,000.00, which would have a principal and interest payment of $417.00 / month. Instead you could put 10% down, save $10,000.00 and have a principal and interest payment of $469.00 / month. Mortgage insurance would be required and carry a premium oc about $37.00 / month. The math looks like this. 469 (principal + interest at 10% down) - 417 (principal and interest at 20% down) + 37 (monthly mortgage insurance premium) * 12 = $1068. The following year pay for an appraisal, let's estimate high at $500.00. You have spent a total of $1,568.00 to save $10,000.00. If the housing market should increase only by 3% over the next 3 years you are still saving a substantial sum of money looking at a total cost of $3,704.00 paid over three years including the estimated $500.00 for the appraisal vs saving $10,000.00 at closing.
3. Adjustable rate mortgages are about to start making sense again. While the rates were at historic lows in the 3% range, it only made sense to lock that rate in for as long as possible, as mortgage rates climb higher towards historical norms in the 5-6% range, it could make sense to lock in a 3.75% rate for three years. While the mortgage rates are likely to rise, they are also likely to stay within a point or two for the next 3 years, Interest rates haven't started with a 7 since 2002 coming out of the dot com boom. At this juncture it is likely to take significant growth from the economy to raise the interest rate more than a point. When you look at locking in a rate in the 3's for 3 years and the interest rate not likely to be much higher than it is now in three years coupled with the rising price of houses. It may make sense to take a low interest rate for three years, especially for a first time home buyer on a starter home, then sell in three years to move up rather than taking in the higher rate for 30 years.

In summary, now is an excellent time to buy as the market is still in the infancy of the rebound, this is a time where the housing prices are less expensive that they are likely to be at any time in the near future, with rates that are still on the low side historically speaking, but with rising mortgage rates, it may be time to start considering all of the financing options available and not just locking in the rate for as long as possible.