Congratulations on taking the first steps to purchase a home! We are here to provide helpful tips on buying a home.
Step #1: Speak with a Local Mortgage Lender
Why do I need to get pre-approved for a mortgage?
I know how much I can afford. Speaking with a mortgage professional gives you a clear understanding of what you can truly afford and lets you focus on properties that fit within your price range and budget. This will save time and frustration on everyone’s part. Another reason to get pre-qualified is to prepare yourself if another offer comes in on a home you have interest in. As the saying goes, chance favors the prepared mind! Those who are prepared have an advantage over those who are not. If another buyer has a bid on a home that you like, the seller(s) will most often choose the candidate that is the most prepared and is financially secure.
Even though you may know how much you make, it doesn’t always translate to what you can qualify for. There are certain things that can affect your ability to purchase a home. Here are just a few examples:
- Low credit score
- High credit cards balances and other payments
- Foreclosures and short sales
- Child support payments
- Part-time employment or recent job transfers
- Rental properties or other investment properties. Once you are pre-approved for a mortgage, you will want to maintain the status of the information provided to the lender. A change in spending habits, career, or bill paying can have an impact on your qualifications.
Things to avoid doing when shopping for a home:
- Avoid any large purchases such as purchasing a car, opening new lines of credit, purchasing large items on a credit card, or changing your credit status in any way.
- Do not dispute something on your credit report. If there is something that is not completely accurate on your credit report, do not file a dispute. If the lender feels that it is not a great concern, leave it alone. A dispute on your credit report will be flagged and will stop the loan process until the dispute is resolved.
- Prevent changing jobs or have any serious reductions in income. Most mortgage companies will recheck your financials to make sure nothing has significantly changed since the process began.
- Pay your bills on time. A late charge or delinquent payment can have a significant impact on your credit score.
Why Should I Work with a Realtor?
Buyer Broker Agreement allows Realtors to legally represent you in a real estate transaction. That places the needs of the buyer(s) at the highest level to make sure they are working on your best behalf. Here are just a few examples of the duties Realtors perform:
- Research and identify homes that fit your criteria. Schedule appointments to view the homes.
- Identify and explain the positive and negative attributes of the homes.
- Research the background of properties that might be of interest.
- Provide comparable sales and a Market Analysis to suggest an offering price for the house.
- Write and explain the details of the Purchase and Sale Contract.
- Negotiate the price, terms, and conditions of the contract with the seller’s agent.
- Handle all the details of the building inspection, appraisal, loan processing, attorneys, walkthrough and closing details.
Why should I have a Buyer’s Broker agent?
- If the fee offered out by the listing agency is lower than the buyer’s broker fee. If there is a situation where this might happen, it is the responsibility of the agency to disclose that to the buyer prior to showing the property so the buyer has an informed decision on whether or not they want to visit it.
- If you are looking at FSBO (for sale by owners). These are unrepresented parties that are not working with a Realtor to sell their home. Some FSBOs will offer a brokerage fee if a Realtor brings a buyer. Others may pay partial or none of the brokerage fee. If this is the case, you would pay the brokerage fee. This can be accomplished several ways. The cost of the brokerage fee not covered can be factored into the price of the home. The fee can be paid directly to the agency without factoring it into the home or financing. The Realtor can negotiate the difference with the sellers to get them to pay the difference.Once a client, the Realtor will ask a series of questions geared towards helping identify potential properties that may be of interest to you. Once you have chosen a few properties, your agent will arrange the appointments and show you the selected homes. While there, they will make notes on what you like and dislike for future reference on property searches. They will also set up a program that will email new listings and home that have price reductions that fall into your price category.
Inspections while purchasing a home:
- Building Inspection: The building inspection is the first course of action once the seller and buyer have agreed on a price and signed the Purchase and Sale Contract. The building inspector will examine the home and identify any potential safety hazards or defects in the home. Keep in mind, the inspector will call out very minor defects as well as major defects, if they exist. With the agent’s guidance, they will help you determine which components is basic building maintenance and which ones need to be addressed. All repair requests for problems found in the inspection must be addressed in writing with an addendum and signed by both parties to be made official and enforceable.
- Radon Testing: Radon is a cancer-causing radioactive gas that is linked with causing lung cancer. If the test comes back with a result of 4 pc/l or higher, mitigation is highly recommended. For more information about radon use the links listed below. http://www.epa.gov/radon/pubs/citguide.html http://www.radon.com/radon/radon_facts.html
- Water testing: As part of the mortgage process, most lenders will require water testing as part of the approval process to obtain a mortgage. Depending on the lender, basic coliform bacteria may be required. More advanced testing may include heavy metal testing.
- Additional inspections may be advised if necessary such as mold, chimney, advanced septic inspection, and structural inspections if additional problems become evident.Appraisal of the property:In today’s market, it should be made aware the appraisers have been very busy with home sales and refinancing. Because of all the activity, it is not uncommon for appraisers to take up to a month to visit the home. The appraiser is charged with the duty of assessing the market value of the home and making sure that the value of the home accurately reflects the purchase price. The following circumstances can occur when appraising a home.
- Once the building inspection phase is complete, the next step is contacting the mortgage lender to have them order the appraisal. The mortgage lender does not have direct access to the appraisers anymore. They are required to contact an appraisal service that turns around and randomly assigns an appraiser from the pre-approved list of their members.
- If any of the tests comes back with an unsatisfactory result, you as the buyer(s), have the right to ask for repairs to cover a portion or full amount of the damage or defect. Another option may be to ask for a credit to repair the damage yourself or by a professional of your choice. If the repair proves to be significant or more than what was bargained for, you have a right to terminate the contract with the seller(s). Just remember there is no guarantee the seller will do anything mentioned above, however good negotiation can go a long way with settling it.
- The home successfully appraises for what the home is contracted for and is submitted to the lender for final approval.
- The home does not successfully appraise for the contract amount. If the home appraises for less than the contract amount, there will be a few options for the buyer(s).
- The buyer(s) and seller(s) will need to negotiate a new price that does not exceed the appraised value of the home. The lender will only finance up to the appraised value of the home. Anything over would need to be covered by the buyer(s).
- If the buyer(s) and seller(s) cannot agree with a resolution, the buyer(s) have a right to terminate the contract within the specified timeframe indicated by the contract in writing to the seller(s).This process can take up to two weeks, in some cases, depending on what is needed to verify the information. It is important for the buyer(s) to be upfront and honest when providing information to the mortgage representative. Inaccurate information can slow down or even stop the process creating stress for everyone involved.Once the underwriters have fully examined all of the documents, they will issue a commitment letter. The commitment letter is the banks way of giving final approval for the loan based on the information given. It is not uncommon for the lender to give a conditional commitment letter. This means the lender has given a commitment, however there are a few conditions that must be satisfied before they will sign off on the loan.If a gift is given, the bank will ask for a gift letter signed by both the giver and receiver that states that the monies given were a gift and not a loan; they do not have to be paid back.Prior to the closing the buyer and the Realtor will visit the property and conduct the final walk through. This can be done up to 24 hours prior to the closing. The buyer(s) are looking to make sure that the home has been properly vacated and cleaned according to the contract. The following things will be noted and observed by the buyers.
- Final walk through:
- Additional documents may need to be produced or verification of funds such as a gift of cash from a relative. (Please note that if a relative is providing a gift of cash, it should be deposited into your account a month prior to the closing. Lenders will trace back the source of the money to see where it came from. This can also stall or hold up a closing. A gift of cash should also be declared to the lender when the application is completed.
- The Commitment Letter:
- Once the appraisal is completed and any additional negotiations have been resolved, the appraisal is sent to underwriting where it is examined to make sure it meets all of the underwriter’s guidelines. The underwriters will also examine the buyer(s) credit score, tax returns, bank statements and other financial documents relating to the buyer(s) including credit card statements, car payments, liens, judgments, child support payments and any other debts relating to the buyer(s).
- All personal property not included in the contract has been properly removed from the property.
- The home has been broom swept and is reasonably clean for occupancy.
- Nothing has been removed from the property that was supposed to stay according to the contract. (Ex: refrigerator, stove, dishwasher, microwave.)
- Any repair requests that were made during the building inspection have been completed.
- The home has the proper smoke detectors and carbon monoxide detectors installed. What happens if repairs were not performed, the home was left messy or items are still in the house? The Closing: What are closing costs?
- Closing costs are the expenses that have occurred from fees and services needed to close the loan. They are paid at the time of closing. They can be handled in several different ways. Below is a list of the common closing costs and prepaid expenses associated with closing on a property. This must be discussed when making an offer on the property as it needs to be in the contact if the buyers are looking for assistance from the seller.
- When all of the conditions have been satisfied and the lender has given the final approval for the loan, the bank will issue a closing package to the buyer(s) closing attorney. The buyer’s attorney will encompass the closing package into the HUD statement. The HUD statement is a document that the buyer(s) attorney prepares on behalf of the buyer(s) and seller(s). This important document will have all the financial details of the transaction including the purchase price of the home, concessions, recording fees, attorney fees, appraisal fee, prebates, property transfer tax, credit report fee, property tax adjustment, escrow fees, mortgage interest, fuel proration, homeowners association proration (where applicable), private mortgage insurance and other fees.
- This is why a final walk through prior to closing is performed. The homeowner is responsible for making sure that all personal belongings are removed from the property and that all repairs were made according to that the contract stated. If there is something that is unsatisfactory, it is documented and addressed at the closing table. Money can be escrowed from the seller(s) to cover the cost of what the issue may be. Once the issue has been resolved, the money is returned to the seller(s) or used to make the repairs. If the issue is not reserved within a given time agreed upon by the seller(s) and buyer(s), the new buyer may be entitled to keep the escrow money. Receipts of all repairs will be provided and verified prior to the closing.
- The buyer can pay the costs themselves by bringing extra funds to the closing.
- The buyer can ask for a concession from the seller at the time the offer is made. A concession is a contribution from the seller to the buyer to assist in the closing costs. The costs are factored into the mortgage.
- The buyer can check with the lender to see if there is a program that can assist with closing costs. Property transfer tax is charged at the time the deed is transferred to the buyer(s) at the time of the closing. For a buyer purchasing a home as their primary residence, a rate of .5% is charged for the first $100,000 and 1.45% for the amount that exceeds $100,000. For more information about the property tax return click or enter the link below into your browser. Investment properties and second Prebates: If the current owner(s) occupies their home as of April 1st and it is their primary residence and qualifies for a rebate on their property taxes based on their income, the buyers may be responsible for reimbursing the sellers for the unused portion of the prebate. The prebate is calculated by the state based on the owner’s combined income. More information can be found at http://tax.vermont.gov/property-owners/property-tax-adjustment-claim.Heating Fuel: Depending on what type of fuel is used to heat the home, the buyer(s) will be responsible for reimbursing the seller(s) for any unused heating fuel. This is typical for oil, kerosene, propane, wood pellets and other types of stored fuels. Natural gas is a pumped directly to the home by VT Gas and it charged on consumption.Fire Insurance: The Closing disclosure will include a statement will include a year’s policy paid in advance in order to protect the homeowner/lender of loss in case of a fire or other disaster. They will escrow each funds to pay the insurance company. It is up to the buyer to obtain insurance.Origination fees: the fee the mortgage company charges to process the loan. The fee will vary from company to company.Accrued Interest: There may be a gap from the time you purchase the home and the time your first payment is due. In the meantime, there is interest accruing on the mortgage that needs to be paid. The lender will calculate what the interest is during that time frame and require it to be paid at the time of closing.now protected against any default on the loan. The lender will require an insurance policy for the home prior to the closing.
- There is a lot that goes into the purchase of a home. That’s why it is important to have a trusted guide to assist throughout the process. To help get started, here are names listed below to access resources for a mortgage professionals, attorneys and building inspectors. Click on one of the companies below to view their website.
- Private Mortgage Insurance: If your down payment on a home is less than 20 percent of the appraised value or sale price, you must obtain private mortgage insurance, known as PMI, with your lender. This will enable you to obtain a mortgage with a lower down payment because your lender is
- Misc. Fees: There are other small processing fees such as flood certification fee and escrow setup fee
- Recording fees: The attorney records the deed and mortgage in the land records of the town the property it is purchased in.
- Title insurance: It is common for the lender to require buyers to purchase title insurance on behalf of the lender. This covers the lender in case a defect is discovered later on title. It is highly recommended the buyer(s) purchase their own title insurance policy as well for their protection. This will cover the buyers from the time they purchase the property and everything from the past in case a defect is discovered somewhere down the road. (Please note that title insurance covers everything prior to the purchase and not future events).
- Property Taxes: Property taxes take precedence over mortgage liens. The mortgage company always wants to be in first position when it comes to claims on the property. For this reason, most mortgage companies will escrow property taxes and pay them when the bill comes due. The escrow account will cover taxes and insurance since the escrow account is new and hasn’t had a chance to be built up, the lender will escrow a few months to a year’s worth of property taxes depending on the tax cycle of the town. Any property taxes paid by the sellers(s) are considered a prepaid asset and will need to be reimbursed for any unused portion by the buyer(s) at closing.
- Homes will be charged 1.45% on the entire purchase price. This is a onetime fee.https://secure.vermont.gov/TAX/pttr/help.php
- Attorney Fees: Your real estate attorney handles all the legal paperwork between you, the lender and the seller’s attorney. He or she is responsible for performing the title search, preparing all the documents on the closing disclosure, and coordinating the funds for disbursements to all of the people/businesses involved in the closing. Fees will vary and it is encouraged to ask questions about the scope of services that each attorney offers. It is wise to choose an attorney once you have gone under contract for a home.