Real Estate Home Buying Process Guide – Part One

The process of buying a home is overwhelming to many, especially first time home buyers. Even veteran home buyers may not be aware of new laws, customs, loan options, technologies and market trends that have changed the home buying process since their last purchase. Being the biggest single investment most people will ever make, how come there is so little information on what the process truly involves? And why is there no well-known site or publication that informs consumers of changes and updates as they become available? Well, we're here to address that issue and provide you with the first edition of The Buyer's Guide To The Home Buying Process. Here is the first part in a three part series outlining what goes into the entire home buying process.

"Now that I've decided that I want to be a home owner, where do I start?"

So you've decided to purchase a property...now what? Well, the first step is to analyze your credit worthiness, assess your overall financial situation, explore your financing options and obtain a lender letter. This is the first and probably most important part of the process.

• Do you know what your credit score is?
• Do you know if you're viewed as favorable, mediocre or high risk to a lender and how that directly effects your interest rate and which of the 250+ loan options you qualify for?
• Do you know how much of a down payment you will need?
• Do you know how much you truly have to put down once you factor in closing costs and Paid-Out-Of-Closing Items?
• Do you know what information and paperwork you will need to provide the lender before they can qualify you?

You want to make sure you know your credit and financial situation in detail, work with a lender in choosing a loan program that best suits your specific needs and make sure you're comfortable with the monthly payment. And in today's market, having a lender letter is essential to a strong offer and gives you increased leverage when negotiating on the price and terms of the offer.

You should consult a reputable and experienced lender to get a Good Faith Estimate (GFE) in order to answer these and other questions as well as obtain your lender letter. The GFE will also break down all of the costs associated with the purchase of a home including the interest rate of the loan and your monthly payment of Principal (P) and Interest (I). You will need to factor in Taxes (T) and Home Owner's Insurance (I) in order to come to your final monthly payment (PITI) and lenders will typically ask you for that information prior to providing you with a GFE. You can get tax information on any property off of public records sites (the County or State you are looking to move to) or the lender or your Buyer's Agent can research that for you.

If you are unsure as to which lender to use or who is reputable and experienced, here are some suggestions:

• If you are a member of a Credit Union, check with them. Their rates and closing costs are usually very competitive.
• Check with your banking institution. They may offer incentives to those who have an extended banking history with them and/or a certain minimum daily balance.
• Check with your coworkers, friends or Buyer's Agent to see who they have dealt with in the past and their experience with them.
• Speak with two to three lenders and getting three different GFEs for comparison purposes. Make sure that you speak with them all within a span of one to two weeks. They will each pull your credit and it will hurt your credit score if they are too far apart.

A good lender is more than just someone who approves you for a loan. A good lender will act as a credit counselor as well and will offer you explanations and suggestions for improving your credit and financial situation so that you can obtain a more favorable interest rate or loan program. Examples of suggestions are "Why don't you pay off the two credit cards with a $500 balance and close them out in order to increase your credit score so that you can get a better rate?" and "Even though you paid off that loan, it still shows open on your credit score. You should write them a letter asking them to formally close it and alert the credit bureaus of it being closed. That will improve your credit rating and you'll have to put less money down in order to purchase."

But don't confuse these suggestions with just "buying down the rate" to get a better rate. Yes, it does get you a better rate, but if you don't live in the property for more than 7 years, what you save each month with a lower rate may not outweigh what the cost of the point was.

Once you receive the GFEs from the two or three lenders you've checked with, make sure to compare them side-by-side. You can do this with your financial planner, friend or family member who has bought five to ten or more properties in the last several years or your Buyer's Agent. Understanding the entire GFE is key to knowing whether it just looks like a good deal or if it really is a good deal.

One thing that is intangible is the service and performance of the lender. Sometimes, if it's too good to be true, it is. The lowest quote may not always be the best one. What if it looks good, but the lender is sloppy, procrastinates or just doesn't have a good work ethic and your loan isn't ready come settlement date? Well, there are no current laws holding lenders accountable and YOU pay the price.

That's right...if the lender screws up and the loan docs are not ready or the lender pulls a bait and switch with higher closing costs or a higher interest rate and you don't want to move forward with the purchase of the home, you will be in default of the contract and may lose your earnest money deposit, etc. This is why it is so important to work with a reputable and experienced lender.

Sounds scary, but it really isn't. Seventy percent of Americans are home owners, which means that 210 million people have had to obtain some sort of financing and went through a similar process as you. And if you're informed and have people on your side looking out for you, you should have no problem.

If you wish to get a list of information you will need to provide a lender, a rough estimate of what you can afford and further information on financing and what to look out for, refer to The Buyer's Guide To The Home Buying Process. The Financing section provides information on interest rate tables, lender's calculations, maximum monthly debt ratios, a check list of items to provide the lender, etc.

Tags: Buyers Guide, financing, GFE, Good Faith Estimate, home owners, Insurance, lender