Home Buyer Preparation

Preparation

1. Become pre-approved for a home loan before you start looking. This will allow you to determine your affordable price range and help you and your Realtor® focus in on the right neighborhoods.

2. Save money in your savings accounts rather than paying off debts. Make minimum payments on existing debts, and don’t use credit cards or incur new debts.

3. Make all rent and loan payments on time. Pay bills every week to make sure that all payments are current.

4. Make a list of things that you want and don’t want in the home you want to buy. This list will evolve as the home search process progresses. It is a good idea to share this information with the Realtor® that you work with.

Locating the Right Neighborhoods

1. Using a map of the area in which you work, draw a circle encompassing the area that is within an acceptable commuting distance. Pick up some weekend editions of the newspapers that serve the towns within the circle and look under “Homes For Sale” in the classified section. See if any of the homes listed match with your list of wants, and if so, find a good Realtor® that works in or near the town where acceptable homes exist. To find a good Realtor®, call or E-mail me, or ask around, people you know who have recently bought homes, or call and ask the manager of a local Title Company to recommend a few good people to call.

2. Contact a few Realtors® from among those recommended and interview them to see if a personality match exists. It is very important that you and your Realtor® have mutual trust and respect. Share with the individual you select your list of wants and don’t wants, and share that you have been pre-approved for a home loan with me.

3. When deciding WHERE to buy, choose the best location you can find, not necessarily the best home for the money. In the long run, location will make a bigger difference, since you can change the home but not the location.

Negotiating

1. When making an offer on a home, recognize that your agent can’t / won’t typically recommend an offering price below the asking price. If there are no other offers on the table for the home on which you are interested in making an offer, come up with an offering price based on what you are willing to pay and what you think fair market value is. Then, deduct a few thousand dollars to give you some negotiating room.

2. You and your agent should develop justification information for your offering price by analyzing and writing down the addresses and selling prices of comparable homes to present to the seller with your offer. Choose properties with selling prices at or below your offering price as evidence that your offer is fair. Using this technique, you will achieve a more favorable result. One basic rule of negotiating for buyers is “the lower you start, the lower you will end up.”

3. When responding to a request from the seller to “split the difference” in price or on a large cost involved in the transaction, consider instead a response closer to your original position than the seller’s.

4. The most important aspect of negotiating your purchase is planning your strategy and tactics, and discussing your plan with your real estate
agent. Successful tactics can include:

a) requesting initial concessions from the seller that you are willing to give up
b) offering to adjust time frames more suitable to the needs of the seller
c) patience

Market conditions and personal circumstances can have a large impact on the results. The result of a successful negotiation is a better outcome for all concerned.

Overview

Home loan lenders rely on rules and guidelines that have been developed over many years. These guidelines are based on investigation and analysis of why some loans are not repaid.

The guidelines that have evolved are designed to identify people who have managed their finances in a way that demonstrates that they can handle the responsibilities of a home loan and the monthly expenses associated with home ownership. Of primary concern is the individual borrower’s ability and willingness to repay the home loan on a monthly basis, and secondarily, the condition and character of the property on which the loan is secured.

What lenders are looking for when approving a loan …

The documentation needed for loan approval for a home loan varies based on the type of loan which fits the unique individual situation.

Both the property and the borrowers must be approved for the financing.

Property Considerations

An independent appraisal is performed and the results analyzed. The property must be habitable, have no health or safety concerns, and be suitably zoned and constructed for residential use. There must exist suitable compelling evidence of the value of the property based on
recent sales of similar properties. Lenders will require an appraisal report prepared by a licensed California Appraiser.

Borrower Considerations

Copies of various items of personal paperwork are collected to document the financial situation of the borrowers/buyers. There are various levels of scrutiny needed, depending on the loan desired. “No documentation” loans only need a credit report, appraisal, title and homeowner’s insurance, as well as third party verification that a reliable source of income exists. “Limited documentation” loans typically only need asset verification in addition to the needs of a “no documentation” loan. “Full documentation” loans need verification of the items needed for a “no documentation” loan, as well as asset an income verification. These different loan processing types have different down-payment/equity requirements, with a larger down payment allowing for less documentation.

The lowest rate fixed rate loans usually require proof of stable income, proof of seasoned assets (deposited in an account in the name(s) of the borrower for two or more months), and a good credit report.

The only way to find out what options are available is to actually have your credit, income and assets analyzed by a competent loan officer, such as The Loan Guy.

Credit

The credit is analyzed for patterns of debt repayment. Usually three credit repositories are accessed and the results analyzed. Each of the three credit repositories uses a mathematical algorithm to derive what are known as credit scores. Lenders use the credit report and scores, along with verification of debt repayment not shown on the credit report if not all debts are included (such as rent or private loan payments) to determine whether the borrowers are likely to repay the home loan without late payments. The credit repayment patterns demonstrated over the past two years are given the most consideration, since they are more reflective of current trends in debt repayment.

Income

For other than “limited documentation” loans, lenders verify income in many different ways, depending on how the borrower(s) are paid.

For self-employed people, copies of the last two years of federal tax returns (all pages) are usually needed. After analysis of these two years of tax returns, other forms are often needed, sometimes including K-1 forms from limited partnerships for the last two years, partnership or corporate federal tax returns for the last two years, year-to-date profit/loss statements, and rental agreements.

For employed individuals, usually the past 30 days of pay stubs along with the past two years of W-2 forms are needed. If there has been a gap in the last two years of employment of more than 4 weeks, an explanation letter is usually needed. If borrower(s) have been full time students during the past two years, school transcripts are usually needed.

Income from other sources is verified as having been stable for the past 12 months and expected to continue for the next three years or more, such as promissory note income, alimony or child support, or trust fund income.

Assets

Lenders often must verify that the money used to purchase a home is notborrowed money, and if it is borrowed, that the buyer can afford the payments on all borrowed funds. Many loans require that the borrower use their own savings to pay all or part of the down payment on the home being purchased.

This verification requirement is usually satisfied by providing copies of the two most recent bank and stock statements, along with the most recent retirement account statement(s). Sometimes the lender will send a written request to the depository to verify amounts and average balances for the past two or three months if bank statements cannot be located and copied.

Many of the low interest rate low down-payment loans require that at least 5% of the purchase price used as all or part of the down payment are verified as having been in the control of the buyer for the past 60 days. Not all loans have this restriction, but this is illustrative of the type of lender asset verification requirements that apply to most purchase transactions.

Debt Ratios

Lenders always perform a mathematical analysis of verified monthly  income to determine whetherthe borrower meets ratio guidelines for the loan program being requested. Typically, lenders don’t want the ratio of income to debts (installment loans, lease payments, revolving debts like credit cards, court ordered payments, and housing expense including loan payment, property taxes and insurance costs) to exceed about 45%. Sometimes the lender will go higher, but the income must be stable and the credit very good.

Summary

Lending guidelines are just guidelines, and the typical requirements mentioned above, if all are met, do not alone assure loan approval. Similarly, if not all are satisfied, this does not mean that loan approval will be denied. Other factors are always considered, including length of time on a job, proximity of home to work, family size and situation, demonstrated ability to save money, amount of the new housing expense compared with the current expense, amount of down-payment, liquid assets in the bank after the purchase is complete, and education. For best results, always contact Smith Lending Group.