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Title: Real Estate 101 (or How to Buy a House in Waco)
Author: Bill Patterson
Article:
Step 1: The Lender
As a Realtor, I frequently get calls from people that want to
own a home, but have no idea of how to go about buying one. They
may say, "I think I want to buy a house but I don't know what to
do." Or, "I saw a house I would love to buy but I'm not sure
where to start or how to do it." Or even, "Can I afford to buy a
home?" If you are thinking, "Yes! That's me!" you're in the
right place. The question you should be asking is this: Can you
afford NOT to buy one. OK, here is dirty little secret number
#1: If you can afford to rent a house in Waco, you can afford to
BUY one. Let's be honest, landlords don't buy a house and then
rent it for less than the payments, insurance, taxes and upkeep
cost them. They are making a monthly profit on that house (or
apartment) you are renting -- you could be putting that money in
YOUR pocket, instead of theirs. The only real problem in making
the transition from a renter to a homeowner (doesn't that word
have a nice ring to it?) is this: Can you come up with the
necessary cash to buy that home you've always wanted?
Since most of us don't have tens or hundreds of thousands of
dollars in the bank or in a sock under our mattress, we come at
last to the real crux of home buying, which is also,
conveniently, the starting point of the process of buying a
home. The home buying process starts with getting pre-approved
for a loan (called a mortgage) with a lender. Why start there?
Well, if unless you do have $100,000 in a sock under your
mattress, you're going to have to borrow it from someone willing
to lend it to you. And if no one is willing to lend it to you,
there's not really much point in shopping for a house. If in
fact you can't find anyone to lend you the money to buy a home,
a good loan officer should be able to point you in the right
direction to get your finances in order so that you can buy that
home you've always wanted. The other reason for starting with
the lender is that they are typically the slowest aspect of the
entire transaction. So it only makes sense to get them started
on their part first.
Folks often wonder where they should go to borrow for a home.
There are two basic types of lenders in Texas: banks and
mortgage brokers. They do essentially the same thing except that
banks are generally loaning their own money and mortgage brokers
are lending the money of others. Banks obviously loan money to
reap the benefits of interest and while mortgage brokers charge
a fee for making the loan while the entities that actually loan
the money receive the interest. So, banks must be cheaper right?
Not necessarily. Banks also charge fees to make loans and
sometimes they charge higher fees or possibly higher interest
rates. How then to choose. I recommend talking to 3 or 4
different lenders and compare their fees and rates. They will
give you a "good faith estimate" of what the interest rate, the
various fees and your payment will be. A good place to start is
with the financial institution with which you have your checking
and/or savings account. Your realtor can recommend some other
lenders that he/she has had favorable experiences with in the
past and can help you make sense of all the numbers they will
throw at you. As a general rule, a local bank with in-house
underwriting makes for a quicker and smoother transaction than
internet lenders.
The five stages to obtaining a loan are as follows:
pre-qualification, application, underwriting, approval and
funding. The lender can't actually approve the loan until you've
picked out a house but they can "pre-qualify" you. Most lenders
these days can do this over the phone in 15-20 minutes. They
will need some information from you regarding your income and
expenses. So it will be much quicker if you are prepared when
you make the call. For income they will want to know how much
you make each week or month. This is easy for salaried employees
but for hourly employees it's a bit more complex. How much you
make per hour is useful but then there are issues of hours and
overtime, etc. Better to be prepared to provide a
weekly/biweekly or monthly wage before taxes and Social Security
and etc. are taken out (a few months of pay stubs are useful for
making this calculation). You'll also need to have information
about any savings accounts, stocks/bonds or retirement plans you
may have, as well as any other sources of income (trusts, rent
or other royalties, etc.). Then you'll be asked about your
financial obligations: rent, utilities, and other debts such as
car notes, credit cards, child support or any other loans you
currently owe. For any loans or other sources of credit, you
will need to provide balances, and monthly payments at the
least. Of course, you can get "pre-approved" or "pre-qualified"
without all this information in front of you but the more
accurate a picture you can give to the lender, the better idea
he can give you of what you might actually be able to borrow. If
your estimates of these figures are way off, the amount that
you're pre-qualified to borrow may be way off as well.
With all the talk of pre- this and pre- that, you may wonder
what it takes to be "qualified" or "approved" for a loan. The
answer: documentation. Unless your credit score is very high,
you will need to provide proof of all the numbers you give to
the lender. You will have to make a formal application for the
loan at this point. This will entail an application fee which
varies from lender to lender. The lender will ask for bank
statements, pay stubs, and other documents to verify the
information you provide. It is very important to relay these
documents to the lender as soon as possible after he requests
them. When you make your application, the lender may give you
the option to "lock" in your interest rate. This is not going to
be a free option, however, and if rates don't go up it could be
money down the drain. If they do go up it could potentially save
you a LOT of money over the life of your loan. It may only cause
your payment to go up a few dollars but ask your lender or
realtor to show you the effects of the additional interest in
the long term.
Your lender is going to review your application and accompanying
documentation and relay them along to the most difficult person
to please in the entire lending process: the Underwriter. The
underwriter is the person that reviews your entire loan package
and accompanying documentation for accuracy and determines
whether it meets pre-set guidelines. If the underwriter isn't
satisfied, it's not going to matter how nice your loan officer
is or how much he likes you, the loan is not going to be
approved in the end. So, to that end, whenever your lender asks
you for more paperwork, give it to them as soon as possible,
that day if you can. This will speed the entire process along
smoothly. Before your loan goes into underwriting, you will have
to have a valid agreement between you as a buyer and the
seller(s) to purchase a house. This agreement is called a
contract and will be discussed in a future installment of Real
Estate 101. Once the loan is out of underwriting, it is
considered approved, but beware, things could still get messed
up. If, for example you go and buy all new furniture the day
before you are supposed to finalize your home purchase, you may
find yourself unable to borrow that money after all, since this
would likely unbalance the underwriter's careful assessment of
your ability to pay back the loan. Approval is conditional, you
can get unapproved a lot quicker than it took you to get
approved.
Funding is the final step in the process. This occurs after both
parties (buyer & seller) have signed all the necessary
paperwork, and the bank actually hands over the money so that
the seller can be paid. Then you actually get the keys to your
new home and the sellers finally begin smiling. In the good old
days, funding typically happened at "closing", the loan officer
would come with a check and everyone would sit around the table
and eat cookies, tell funny stories, and sign papers. It is
becoming more frequent that funding occurs only after the
underwriter or a bank lawyer has reviewed the loan documents
(and often takes one last look at your credit) and the money is
wired to the title company who then disburses it. Sometimes this
happens quickly but all too often it takes what seems a
ridiculously long while and the smiles are fewer and farther
between. In Waco, there are still a few lenders that do things
the old fashioned way, it sure is a lot less stressful that way.
Now that you're up to speed on obtaining a mortgage, check back
soon for the rest of the Real Estate 101 series:
2. Offers and Counteroffers
3. Under Contract and the Option Period
4. Closing
Bill Patterson
Kelly, REALTORS
<a
href="http://www.wacohomesellers.com/">WacoHomeSellers.com</a>
About the author:
Bill Patterson is a REALTOR in Waco, Texas and has been helping
buyers, sellers and investors for the past 5 years.
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