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Buying
a New Home before You Sell the Old
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Homeownership
has many advantages: building equity, tax deductions
and the security of knowing you own your own home. Owning
a home is the American Dream!
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While
it may seem that housing costs are simply too high for
many people, sometimes it's an even greater risk not
to buy. The same house that you can purchase today may
cost you much more in the future due to inflation and
rising housing costs.
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Looking
to the future, in order to retire, you'll need to build
up enough in savings and investments to generate yearly
income of 70% of your pre-retirement income a tall order
without the capital you can acquire though home ownership.
To the side, you'll see some other information you can
use to help you prepare for making a purchase.
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| Home
Loans |
| If
you've been thinking of purchasing a home, you may have
some concerns about your ability to buy. You're not alone—many
people postpone buying a home for various reasons. The
most common reasons relate to the loan: lack of a downpayment,
insufficient income, and credit problems. |
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| Ways
To Accumulate A Downpayment |
| The
LoanFinder.net is able to do 100% loans with No Down Payment
in many scenarios, but the Down Payment is often the most
intimidating part of home loans - especially to first-time
buyers. |
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| One
of the biggest problems facing homebuyers today is coming
up with enough money for the downpayment and closing costs.
The amount of money you have available can greatly limit
or increase your purchasing power. The two most common
ways to get the downpayment are to save the money or to
use the proceeds from the sale of your existing home to
purchase your new home. But there are other strategies
for you to consider. Loan programs such as FHA, VA and
Community Homebuyers can help. And here are some additional
ways to accumulate the necessary funds that are acceptable
to most lenders. |
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| 1.
Borrow against your 401K or Insurance Policy - You can
also cash out your 401K but you will be subject to withdrawal
penalties and payment of taxes. If you borrow against
it, the loan payment will be counted as a debt. |
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| 2.
Sell or borrow against an asset - Selling an asset such
as a car can help increase the amount of money you have
available. Borrowing against an asset is also acceptable
as long as you qualify with the additional debt. |
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| 3.
Obtain a low point or zero point loan - This will reduce
your closing costs substantially, but there will be a
tradeoff in the interest rate. This strategy works best
if you don't have a lot of money up-front but have enough
of a monthly income that you can afford a slightly higher
monthly loan payment. |
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Ask the seller to pay for all or a part of your non-recurring
closing costs - Your real estate agent can assist you
with this when you make an offer on a home. And with some
government back loans, the seller is required to pay some
of the buyer's closing costs. |
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Ask the seller to carry back financing - If the seller
does not need all of the equity in their property, they
may be willing to carry some of the financing which will
reduce the amount of your downpayment. |
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Check into city and/or county downpayment assistance programs.
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Close escrow late in the month to reduce the amount of
prepaid interest on the loan. |
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8.
Use equity in another property - You may be able to
obtain 100% financing if you or someone you know has
equity in a property that can be used as collateral.
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9.
Have your parents give you the money as a gift - Any
taxpayer is permitted to give up to $10,000 per year
to another person without having to pay a gift tax.
Technically, your mother could give you $10,000 and
give $10,000 to your spouse. Your father could do the
same. This would give you $40,000 for a downpayment
and closing costs.
You'll
have to provide documentation (such as a "gift letter")
to prove that the money really is a gift and not a loan.
Also, please note that if your downpayment is less than
20% or if you are obtaining a government-insured loan,
at least 5% of the sales price must be paid from your
own money.
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| 10.
Shared Equity - An alternative way for parents to help
their children purchase a home (or for anyone to help
someone else, for that matter) is with "shared equity
financing." This allows a person who does not live in
the home, and another person who does, to be co-owners.
The occupant owner pays the non-occupant owner a monthly
fair-market rent proportionate to the non-occupant owner's
percentage of ownership. The non-occupant owner gets the
tax deductions (again, in proportion to the share of ownership)
allowed to landlords. The property must be the principal
home of the occupant owner and the rent payments must
be fair and in proportion to the non-occupant owner's
interest in the property. |
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| Need
More Income? |
| Not
just income from a job counts. Income from alimony, child
support, bonuses or even future raises might be considered
in qualifying for a loan. The key is to have the documentation
to prove that it is income you can count on in the future.
Another option is to find a co-mortgator who is willing
to go on the loan with you to help you qualify. And talk
to a loan officer to find out about financing options
that will allow you to stretch your purchasing power,
such as an FHA loan, an adjustable rate mortgage, balloon
financing or a graduated payment mortgage. |
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| Your
Credit History |
| If
you can, get a copy of your credit report before applying
for a home loan. This will enable you to correct any errors
before they become an issue with the lender, start repairing
your credit if you've had previous problems or establish
credit if necessary. You can request a copy of your credit
report, for a small fee, by writing to any one of the
following credit bureaus: |
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TRW
Complimentary Credit Report
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P.O.
Box 2350
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Chatsworth,
California, 91313
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Trans
Union Corporation
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Customer
Relations Department
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P.O.
Box 7000, Department P
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North
Olmstead, Ohio, 44070
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Equifax
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P.O.
Box 740241, Department P
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Atlanta,
Georgia 30374
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In
consideration of possible security risks, I do not recommend
that anyone request or receive their credit report via
an on-line service. A loan officer can run your report
for you. Most Real Estate Brokers can run a copy as
well.
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| When
you read your credit report, look for: |
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| Incorrect
Entries -- if there are mistakes, you can have them
corrected by writing to each credit bureau and requesting
that the information be deleted. They will contact the
creditor who must respond within 30 days. If the creditor
does not respond, the item will be removed and a new report
will be sent to you. If there is still a dispute, you
can add a 100-word statement to your file explaining your
side of the story. |
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| Outdated
Negative Entries -- You can request, in writing, that
unfavorable items older than 7 years be removed from your
report. Bankruptcies can only be removed after 10 years.
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| Current
Negative Credit -- Talk over current negative entries
with your loan officer or Real Estate Broker. They often
have strategies for re-establishing good credit. One strategy
is to contact the creditor directly. The creditor may
be willing to remove the derogatory information from your
credit file if you make a full or partial payment toward
the debt. They may also "re-age" the account by making
the current month the first repayment month and will show
no late payments. |
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| The
Loan Process |
| When
you break it down to just 8 steps the loan process doesn't
seem so intimidating: |
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| Step
1: The Application - This step will be the most time consuming
one for you, but it is the key to a smooth loan process!
Your lender will be looking for a lot of information and
paperwork , so you might as well gather it now and have
it on hand. |
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| Step
2: Ordering Documentation - Very shortly after completing
the loan application (usually within 24 hours), your loan
officer will run a copy of your credit report and send
out "verification" forms to your employer, landlord, current
lender, etc. to verify the information on your loan application.
If you have already entered into a contract to purchase
a home, the loan officer will also order the appraisal.
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3: Receiving the Documentation - As the documentation
comes in, the loan officer will review it for red flags
or problems which need to be addressed. This is where
it is critical that you have an experienced loan officer
working for you and with you. A loan officer that can
anticipate what the underwriter will want to see and package
the information in a concise and easily understood manner
can make all the difference between getting a thumb up
or a thumb down. |
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| Step
4: Submitting the Loan - The "loan package" which contains
all of the information gathered so far is sent off for
review. |
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5: Approving the Loan - It usually takes a loan underwriter
from 24 to 72 hours to review the loan package and make
the decision on whether you get the loan. This is where
you really find out how important it is that your loan
officer put together the most complete (and easy to read)
package available. If the underwriter feels something
is missing or misinterprets something, he or she may just
set the package aside while waiting for you and the loan
officer to provide whatever else he or she thinks is needed.
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6: Printing the loan papers and sending them to escrow
- The lingo for this is "drawing the docs." The lender
prints all the loan papers and then sends them to the
escrow company. The escrow company adds some more paperwork
(such as your estimated net sheet which shows you how
much more money you need to bring in to close the escrow)
and then calls you in to sign everything. Its a good idea
to ask either your real estate agent or your loan officer
to come to this meeting. They can review the papers and,
if there are problems, take care of them on the spot.
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| Step
7: Funding the loan - Your signed papers are returned
to the lender who reviews them all to make sure everything
was signed correctly and that all the paperwork is complete.
Lenders call this the "funding review." Depending on how
busy they are, the review process can take 24 to 72 hours.
Once the lender is sure that all the t's are crossed and
all the i's have been dotted, the lender releases the
money to the escrow company for disbursement. This is
also the point where you, as the buyer needs to have the
balance of your funds into escrow. Your funds have to
be "good faith," meaning as a cashier's check or wire
transferred from an savings or checking account. A personal
check can't be accepted unless its given in advance with
enough time for the check to be deposited and cleared
through the bank. |
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| Step
8: Closing - As soon as the escrow company has the go
ahead from everyone and all the funds, they record the
deed which transfers title from the seller to the buyer.
They disburse the moneys as instructed and the escrow
is officially "closed." |
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| The
Information You'll Need for the Loan Application: |
| All
lenders use the same loan application and all lenders
will ask you for the same information. By having this
information on hand when you begin, you can make things
a lot easier for everyone! |
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| 1)
Your Residence History: a. Previous addresses for the
last 2 years. b. How long you've lived at each residence
for the last 2 years. c. If you are renting now, your
landlord's name and address. |
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| 2)
Your Employment History: a. Name and address for each
employer for the last 2 years. b. The dates you worked
at each place of employment. c. If there any gaps in your
employment, why? |
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Your Outstanding Loans and Credit Cards. For each account:
a. Creditor's name and address. b. The account number.
c. The balance owed. d. Your monthly payment. e. How many
months left to pay of the loan or account. |
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| 4)
Savings, Checking or Investment Accounts. For each account:
a. Name and address for each financial institution. b.
The account number. c. Current balance or value. |
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| 5)
Real Estate You Currently Own. For each property: a. The
address. b. The estimated market value. c. The outstanding
loan balance. d. Your monthly payment(s). e. If its an
investment property, the amount of your monthly rental
income. |
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| 6)
Personal Property You Own: a. Net cash value of your life
insurance. b. The make, year and value of each car you
own. c. Total value of your furniture or other personal
property. |
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plan to give your loan officer copies of: |
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- Most recent paystub. |
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Most recent 2 years W-2's |
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Most recent 2 years tax returns |
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If self-employed, year-to-date profit and loss statement
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Most recent 2 months bank statements for each checking
/ savings account |
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Copy of driver's license and social security card |
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Verification of your down payment (such as copy of your
savings account statement showing the funds deposited) |
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| Choosing
Your Lender |
| Calling
around and asking for interest rate quotes is not the
best way to find a lender! And here's why: |
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| 1.
Interest rates change daily, so today's quote may not
be available tomorrow. |
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Often the rates quoted over the phone are not "locked"
prices; the lender just wants to get you in the door.
This means that the rates will be subject to change until
the day your loan closes instead of being set for a specified
period of time. |
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The lender knows nothing about your situation or needs
so the interest rate they quote may or may not be a program
that will fit you — or that you qualify for. |
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You won't know what the lender really has to offer you.
Competitive rates are important, but when you consider
the fact that most lenders get their money from the same
source anyway, its not surprising that they all have essentially
the same rates to offer. |
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| Consider
asking these questions as well: |
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Are they a mortgage banker or direct lender? A mortgage
banker or a direct lender is a lender who not only originates
their own loans but also underwrites, approves, funds
and services them. A mortgage banker has their own money
to lend and so they have the most control over the loan
process. |
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Are they a mortgage broker? A mortgage broker originates
loans, but does not actually lend the money. They submit
the package to an outside source that underwrites and
funds the loan. A mortgage broker may have less control
over the loan process but they can typically offer the
best opportunity to get your loan approved since they
can send the loan to many different lenders if necessary.
They can also typically have access to a wider variety
of loan programs, and thus more flexibility. |
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How long has the company been in business? Lenders come
and go. Make sure that the company you are dealing with
has been around for a while. |
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What is their reputation in the community? Real estate
brokers can be a good resource for this information! |
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Do they lock-in their interest rates and for how long?
Interest rates can be locked for 15, 30, 45 or up to 60
days. |
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| WHY
YOU SHOULD PRE-QUALIFY FOR A LOAN? |
| Meeting
with a loan officer and getting qualified for a loan before
looking for a home will save you time, energy and frustration.
Prequalifying for a loan: |
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Tells you how much home you can afford. |
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Helps you avoid buying less home than you can afford or
being disappointed if you find the home of your dreams
only to discover that you can't get the loan you need
to purchase it. |
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Shows you about how much money you'll need for the down
payment and closing costs. |
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Lets you know what you can expect your monthly payment
to be for principal, interest, taxes and insurance (called
the "PITI"). |
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Identifies the loan programs you qualify for. |
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With
the wide variety of loan programs available, it's important
to know which types you qualify for and which will best
suit your needs. You might be eligible for a special
first-time homebuyer program. If you feel you can afford
a higher mortgage payment but can't meet standard qualifying
ratios, a co-mortgagor may work for you.
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