Common FAQ By First Time Home Buyers On Home Purchases

Gustan Cho Associates
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This ARTICLE On The Common FAQ By First Time Home Buyers On Home Purchases Was PUBLISHED On November 25th, 2020

These Are Common FAQ By First Time Home Buyers On Home Purchases:

Julie Hayward is the owner/broker of Edge Realty LLC.
  • Julie Hayward is one of the top real estate agents in the state of Illinois
  • Julie is one of the top referral partners of Gustan Cho Associates and Capital Lending Network, Inc.
  • Realtor Julie Hayward is the referral realtor partner of choice for Gustan Cho Associates
  • This is not just because of her expertise in all aspects of real estate, home values, and knowing the Chicagoland Area like the back of her hands, but also due to her passion on helping first time home buyers
  • Being accessible to all of her buyers and sellers is priority number one for Julie
Julie Hayward has a practice of being available 7 days a week, evenings, weekends, and holidays.

About Realtor Julie Hayward

How to Select a Loan Officer and Obtain Pre-Approval

The word AMAZING is an understatement to describe Julie Hayward:

  • She goes beyond the call of duty and every single one of her clients become her lifelong friend
  • Julie Hayward’s partner is prominent Chicago Area real estate Attorney Chad M. Hayward who is also her husband and best friend
  • Anytime a home buyer, home seller, or loan officer may have a legal question, Julie has access to Chad 24/7
  • Julie Hayward is an associate contributing editor for Gustan Cho Associates
  • She has written a book on real estate that will be published soon
  • The focus of her upcoming book is helping first time home buyers, OPPORTUNITY KNOCKS,  with the home buying process 
  • Julie has asked Gustan Cho to answer the common first time home buyer questions most first time home buyers have

Below are the most common 11 FAQ by homebuyers have and the our answers.

Common FAQ By First Time Home Buyers: Choosing A Loan Officer And Getting Pre-Approved

The first of the 11 questions FAQ by homebuyers is what do I need to know when obtaining a mortgage:

  • Once a homebuyer has decided to become a homeowner, the first step to take is to consult with a mortgage loan officer to get pre-approved for a home loan
  • Buyers who already have been looking at homes, the realtor can refer them to loan officers who they have worked with
  • Real estate agents need to feel very comfortable with the loan officer

The real estate agent will need to feel confident the loan officer will not just close home loan but will close it on time.

  • Real estate agents are extremely selective in referring loan officers
  • Most will not refer anyone who they have not worked with in the past or had bad experiences with them
  • Real Estate Agents are the quarterbacks in the overall home buying and mortgage process
  • This is because they are the professionals who need to make sure that everyone in the process is on the same page
  • This includes from homebuyers, to sellers, to both the buyer’s and seller’s attorneys, as well as the loan officer

Besides getting a loan officer referral through a real estate agent, homebuyers can shop for a loan officer through other means. Research loan officers online, ask friends and/or family members, or just do your own due diligence. Start interviewing loan officers who they feel comfortable with. Buyers need to be comfortable with their loan officer because the mortgage process can be stressful.

Second Common FAQ By First Time Home Buyers: Mortgage Process

The first process in buying a home is to get pre-approved by a mortgage lender.

  • Consulting a lender and getting a pre-approval letter will not cost anything
  • By law, residential lenders cannot ask for any upfront money except for the home appraisal fee
  • Credit reporting fees cannot be charged upfront
  • If borrowers need rapid rescores done during the mortgage process, the rapid rescore fee is paid for by the lender
  • Once homebuyers have chose a lender and a loan officer they feel comfortable, the next step is to get qualified
  • Once the loan officer thoroughly qualifies the borrower, a pre-approval letter is issued
  • After getting pre-approved, the next step is to shop for a home with the buyer’s real estate agent
  • Homebuyers can shop for a home until they find one they like

Once the homebuyer enters into a real estate purchase contract, the mortgage process then begins.

Common FAQ By First Time Home Buyers: I Got Pre-Approved, Can The Interest Rate Change?

The third Common FAQ By First Time Home Buyers if I got pre-approved, can the interest rate change?

  • The answer to the above question is YES
  • Interest Rates can change and interest rates are not set in stoned until the loan officer LOCKS the borrower’s mortgage interest rates
  • Normally, most mortgage loan officers will lock the borrowers interest rates after the borrower gets a conditional approval
  • Loan officers can lock interest rates prior to approval
  • However, before locking any mortgage interest rates, borrowers needs to submit an executed real estate contract and the loan has to be registered with the mortgage company
  • Most interest rate locks are for 15 days to 30 days
  • If the closing gets delayed and the interest rate lock period expires, the loan officer will ask for extensions
  • Keep in mind, the longer lock period is, the more it will cost via pricing adjustments
  • Locking a mortgage interest rate is like getting insurance where if the rates skyrocket during the locked in period, the mortgage company still needs to get the interest rate that it was locked

Extensions are not free and does cost money so it is the best interest to all that the loan officer does everything possible to close the loan on time.

Difference Between Pre-Qualified Versus Pre-Approved

The fourth Common FAQ By First Time Home Buyers: Difference between being pre-qualified versus pre-approved:

  1. Most home seller’s realtors will not let you submit a real estate purchase offer without a solid pre-approval letter.
  2. When a borrower calls me to get pre-approved for a home loan, I interview the borrower for about 30 minutes
  3. This phone interview process is the pre-qualification process and once I feel that the borrower qualifies, then we move to the pre-approval process

During the pre-qualification process, some of the questions asked by loan officers may be the following:

  1. What is the price range of the home they are intending to purchase?
  2. Does the home buyer have an estimate of the property taxes, homeowners insurance, flood insurance if applicable, HOA  if applicable  ( I can normally estimate the homeowners insurance)

Qualified Income And Debt To Income Ratio

What is the borrower’s source of income? Is the home buyer self employed or W2 wage earner:

  1. Whether the borrowers are hourly or salaried

Whether they get the following:

  • Social security income
  • Pension income
  • Part time income
  • Overtime income
  • Alimony income
  • Child support income
  • Other income

Monthly Debts 

Besides income, the loan officer will ask about all of their monthly minimum debts:

  • The loan officer will ask about whether they have any child support payments and/or alimony payments
  • The loan officer will ask about credit prior to pulling credit
  • He or she may ask you if they had any bankruptcies, foreclosures, deed in lieu of foreclosures, or short sales

Reason being is because there are federal minimum mandatory waiting periods after a bankruptcy and/or foreclosure to qualify for home loan programs.

Derogatory Credit Tradelines

What are offensive credit trade lines

Loan officers will question whether or not there are the following:

  • Outstanding judgments
  • Tax liens
  • Delinquent federal student loans
  • Outstanding collection accounts

FHA does not require to have outstanding collection and charge off accounts to be paid off:

  • Outstanding collections and/or charge off accounts do not have to be paid to qualify for a home mortgage
  • However, most lenders have lender overlays and may require the borrower to pay outstanding collections and/or charged off accounts
  • This holds true even though agency mortgage guidelines does not require outstanding collections and charged off accounts to be paid
  • If one lender has overlays on outstanding collections and/or charged-off accounts, contact us at Gustan Cho Associates

Gustan Cho Associates is a five-star national mortgage company licensed in multiple states with no lender overlays on government and conventional loans.

Qualifying For Mortgage In Community Property States

Common FAQ By First Time Home Buyers on community property states:

  1. Illinois is not a community property state
  2. However, there are 9 community property states
  3. Our neighbor to the north, Wisconsin, is a community property state
  4. Many loan officers make a simple but yet serious mistake where they do not ask about the monthly debt obligations on spouses of borrowers of community property states
  5. With community property states, HUD requires that the debts of the spouse needs to be counted even though they are not on the loan
  6. Credit scores do not matter
  7. Poor credit does not matter
  8. However, monthly debt obligations, judgments, and tax liens does matter for spouses on community property states on FHA loans
  9. Fannie Mae and Freddie Mac does not require the spouses debts to be counted on conventional loans
  10. Once the loan officer deems that the mortgage applicant qualifies, the loan officer will take a four page mortgage loan application called a 1003 either over the phone
  11. Or the borrower can complete it online
  12. With the mortgage loan application, the loan officer will run credit
  13. The loan officer will request certain types of documents such as W2s, two years tax returns, 2 months bank statements, copy of drivers license and social security card, and other applicable documents

Once the loan officer reviews the borrower’s loan application, credit report, documents, and runs the file through the automated underwriting system, the loan officer will then issue a pre-approval letter if the borrower qualifies for a mortgage.

The Pre-Approval Stage Of The Mortgage Process

The Pre-Approval Stage is the most important phase of the mortgage process.

  • The number one reason why borrowers go through stress during the mortgage process and the reason for last minute loan denials is due to not being pre-approved correctly
  • Or because the loan officer issued a hasty pre-approval without properly doing his or her due diligence
  • There are many borrowers who want a pre-approval within minutes of them getting pre-qualified
  • However, for the loan process to go smoothly, borrowers need to cooperate with loan officer and make sure that the loan officer has all grounds completed
  • With the 1003 and the credit report, the loan officer is able to run it through Fannie Mae’s Automated Underwriting System called Desktop Underwriter, commonly referred as DU, and/or Freddie Mac’s Loan Prospector, often referred to as LP
  • Just because borrowers get automated approval is not guaranteed that loan will close

Automated Underwriting System

Borrowers need to understand that DU or LP will only go by the information that is listed on the mortgage loan application the items reporting on the credit report:

  • Credit reports can contain errors
  • All pre-approvals are not pre-approved the right way
  • Some loan officers are more picky than others
  • Some loan officers will just issue a pre-approval without looking at all of the documents provided by the borrower or sometimes many loan officers will not even ask for documents
  • A loan officer should carefully review the borrower’s two years tax returns and pay special attention to the borrower’s unreimbursed expenses.
  • Tax returns for self employed borrowers are averaged for the past two years
  • However, if the most current year tax returns has a significant decrease in income, most underwriters will not average the two years but will only use the year with the lower income

If the borrower needs overtime income, bonus income, or other income to qualify for the loan, the loan officer should get a verification of employment prior to issuing a pre-approval letter.

Assets And Bank Statements

Loan officer is on borrowers side and will do everything possible to make the deal happen but needs borrowers cooperation:

  • 60 days of Bank Statements is required
  • The loan officer should pay attention for overdrafts in the past 60 days and/or any overdraft fees on bank statements
  • If you have overdrafts in the past year but do not have overdrafts in the past 60 days, then an astute loan officer will tell you to go to the bank and get him 60 days of bank printouts that is signed, stamped, and dated by the bank teller
  • Year to date overdraft fees are reported on the actual bank statement
  • But they are normally not reported on computer bank statements that is provided by the teller
  • Proof of funds needs to be provided for the down payment
  • Closing costs can be covered either by a sellers concession or by a lender credit by the lender in lieu of a higher interest rate
  • Loan officer should carefully review your credit report
  • The loan officer needs to make sure the borrower does not have any credit disputes on non-medical collection accounts
  • Medical credit disputes are exempt from retraction
  • Credit disputes that are two years old or older are exempt from retraction
  • Credit disputes with zero balances are exempt from retraction

If the total aggregate balance  of all outstanding collection accounts does NOT exceeds $1,000 , then the credit disputes do not have to be removed.

Credit Disputes During Mortgage Process

Credit disputes are not allowed on non-medical collection accounts when the total outstanding balance of unpaid collection exceeds $1,000 or on any charge off accounts:

  • Borrowers can have credit disputes on non-medical collection accounts with zero balances or on medical collection accounts
  • Removing  credit scores will drop credit scores
  • Borrowers who barely meet the minimum credit scores on FHA or Conventional loans may no longer qualify once they retract those credit disputes if their credit scores dropped

Once the loan officer has reviewed the following:

  • Mortgage application
  • Credit scores
  • Credit report
  • Income docs
  • Bankruptcy and foreclosure paperwork if applicable
  • Divorce decree if applicable to see if borrower is obligated to pay and/or receive child support/alimony
  • Other potential item a mortgage underwriter may question, then the mortgage application can proceed to processing and underwriting
  • The pre-approval process should not take long
  • How long it takes will depend on how fast the borrower can get all of the docs to the loan officer

All Pre-Approvals from Gustan Cho Associates are a full credit mortgage loan approvals and are fully underwritten and signed off by our mortgage underwriters.

What Is The Difference Between FHA And Conventional Loans?

FHA Loans are by far the most popular loans today.

  • FHA Loans are residential mortgage loans that are originated and funded by banks and mortgage companies but it is guaranteed by the United States Department of Housing and Urban Development, HUD, which is the parent of FHA.
  • Most folks think that FHA is a government mortgage lender.
  • FHA does not originate, process, underwrite, nor fund FHA Loans
  • The role and purpose of the Federal Housing Administration, FHA, is to insure private lenders
  • HUD insures lenders who are FHA approved when borrowers default on their FHA Loans
  • In order for FHA to insure these FHA approved lenders, borrowers who these FHA lenders approve and fund need to meet FHA Lending Guidelines
  • If the borrowers do not meet any aspect of FHA Guidelines and the lender makes a mistake, FHA will not insure the FHA Loan that they originated
  • Nor can the lender resell the FHA Loan on the secondary market
  • This is because no institutional investor will purchase a FHA Loan that was not originated and funded correctly
  • This is the main reason why lenders can be knit pickers by asking conditions after conditions by borrowers during the mortgage process
  • Mortgage rates on FHA Loans are lower than Conventional Loans
  • This holds true even with the borrower only putting a 3.5% down payment

This is because the risk tolerance to lenders is low due to the guarantee by FHA.

Conforming Loans

What kind of loans are compatible

Conventional Loans are called conforming loans because they need to conform to Fannie Mae and/or Freddie Mac lending guidelines in order for the lender that originates and funds to resell the Conventional Loan to Fannie and/or Freddie.

  • If the lender does not conform to Fannie Mae/Freddie Mac standards, Fannie/Freddie will not purchase the loan
  • Mortgage lenders use their own funds originally to fund the loan from their warehouse lines of credit and package up all of the loans they fund and resell it to Fannie/Freddie
  • The sell it so they can relieve their warehouse lines of credit and reuse it to originate and fund more loans
  • In a way, it is like using a credit card to purchase something and reselling that merchandise for a profit and paying off credit card balance

This process is repeated so to go and purchase more items and repeat the process all over again.

Credit Score Requirements

To qualify for a 3.5% down payment home purchase FHA Loan, the minimum credit scores required is 580 FICO

  • FHA has much more lenient lending requirements than Fannie Mae’s and Freddie Mac’s Conventional Loans

Here are other basic FHA Versus Conventional Loan Guidelines:

  1. 3.5% down payment for home buyers with at least a 580 FICO Credit Scores
  2. With Conventional Loans, minimum down payment is 3% down payment for first time home buyers or 5% down payment for those who owned a home in the previous 3 years
  3. The minimum credit score to qualify for a Conventional Loan is 620
  4. Home buyer with credit scores between 500 and 579 can qualify for FHA Loans
  5. However, 10% down payment is required
  6. Maximum front end debt to income ratio is capped at 46.9% DTI and back end debt to income ratio is capped at 56.9% DTI for borrowers with at least a 620 score
  7. Maximum debt to income ratios to qualify for Conventional Loans is capped at 50%
  8. There is no front end debt to income ratio requirements

Maximum debt to income ratios is capped at 43% DTI for borrower with credit scores under 620 scores.

Mortgage With Outstanding Collections And Charge Off Accounts

FHA does not require to pay off outstanding collection and outstanding charge off accounts:

  1. Many times, borrowers are told that they do not qualify because their credit scores are not 640 FICO and that they need to pay off all of their outstanding collection accounts and judgments
  2. Any lender can have higher lending standards that surpass the minimum FHA Guidelines and these additional requirements are called mortgage lender overlays
  3. Some applicants may not qualify with this particular lender that has higher standards than FHA but they can find FHA Lenders with no lender overlays
  4. Google FHA Lenders With No Lender Overlays
  5. You will find Lenders that will just go off FHA Lending Guidelines and will not ask for any other requirements as long as you meet the minimum FHA Lending Requirements
  6. Fannie Mae and/or Freddie Mac have similar guidelines on collection accounts and/or charge off accounts
  7. However, any outstanding accounts that is past due needs to become current in order to qualify for a Conventional Loan
  8. Conventional Loans are somewhat tougher when it comes with outstanding collection accounts than FHA Loans
  9. This is because it is not insured by a government entity like FHA
  10. Any home buyer who puts less than 20% down payment will require private mortgage insurance

The private mortgage insurance company may require additional requirements in order for them to insure the conventional loan.

Mortgage After Bankruptcy

There is a 2 year waiting period to qualify for a FHA Loan After A Chapter 7 Bankruptcy:

  1. With Conventional Loans, there is a four year waiting period to qualify after a Chapter 7 Bankruptcy discharged date
  2. FHA requires one year into a Chapter 13 Bankruptcy repayment plan with the approval of bankruptcy trustee
  3. There is no waiting period to qualify for a FHA Loan after a Chapter 13 Bankruptcy discharged date
  4. There is a two year waiting period to qualify for a Conventional Loan after a Chapter 13 Bankruptcy discharge date
  5. There is a 3 year waiting period to qualify for a FHA Loan after a foreclosure, deed in lieu of foreclosure, or short sale
  6. There is a 7 year waiting period to qualify for a Conventional Loan after a foreclosure
  7. There is a four year waiting period to qualify for a Conventional Loan after a deed in lieu of foreclosure and/or short sale
  8. FHA treats foreclosure, deed in lieu of foreclosure, and short sale the same and the waiting periods are all 3 years to qualify for a FHA Loan

However, Fannie Mae/Freddie Mac have different waiting period requirements after foreclosure, which is 7 years, and 4 years after a deed in lieu of foreclosure and/or short sale.

Qualifying For Loans With Mortgage Part Of Chapter 7 Bankruptcy

Mortgage Part Of Bankruptcy:

  • Borrowers with mortgage loan as part of your Chapter 7 Bankruptcy, there is a three year mandatory waiting period from the recorded date of foreclosure and/or sheriff’s sale
  • This holds true even though the loan balance has been discharged on your Chapter 7 Bankruptcy to qualify for a FHA Loan
  • With Conventional Loans, there is a four year waiting period after the discharged date of the Chapter 7 Bankruptcy if they had a mortgage as part of your Bankruptcy to qualify for a Conventional Loan
  • This holds true even though the foreclosure was not recorded until a much later date after the discharged date of the Chapter 7 Bankruptcy

There are many instances where a borrower will not qualify for a FHA Loan but will qualify for a Conventional Loan due to this Conventional guidelines on a prior mortgage included in bankruptcy.

How Much Down Payment Do I Need On A Home Purchase?

On any home purchase transaction, there is the down payment requirement by the home buyer and there are closing costs:

  • The two most popular loan programs today in the United States are FHA Loans and Conventional Loans
  • With FHA Loans, there is a minimum of 3.5% down payment required on a home purchase
  • With Conventional Loans, minimum down payment required are 3% down payment for first time home buyers
  • First time homebuyers is defined as a homebuyer who did own a home in the past 3 years
  • Otherwise the minimum down payment required 5% down payment of the purchase price
  • The down payment required depends on the particular loan program
  • The down payment can be gifted 100% by a relative with FHA Loans
  • This holds true as long as the donor of the gift can sign a gift letter that states that the down payment is a gift and is not a loan and it does not need to be paid back
  • With Conventional Loans, part of the down payment can be gifted
  • VA Loans and USDA Loans do not require any down payment
  • All the home buyer needs to worry about are the closing costs
  • Home buyers do not have to pay the closing costs if they can get a sellers concession and/or lender credit to cover the closing costs of their home purchase

I will cover closing costs, lender credit, and sellers concessions on a later question Julie Hayward asked on this interview.

How Much Money Do I Need To Purchase A Home?

Home buyers will need the down payment and closing costs to purchase a home:

  • The down payment is mandatory and can be gifted
  • There are closing costs that come with every home purchase
  • Closing costs are any costs that are incurred in the closing of the home purchase

Examples of closing costs are:

  • Title charges
  • Attorney’s fees
  • Appraisal costs
  • One year
  • Homeowner’s insurance premium
  • Origination costs

Pre-paid which are two months of escrow reserves required by the lender. Pre-paid are homeowners insurance and property taxes held in escrow by lenders:

  • Most home buyers only can come up with the down payment of their home purchase
  • Many homebuyers cannot come up with a penny more which is fine because the home buyer does not have to cough up closing costs
  • Closing costs can be covered either by a sellers concession from the home seller to cover most or all of the closing costs
  • Or a lender credit where the lender can give a credit towards part or all of the borrowers closing costs in lieu of accepting a higher mortgage interest rate
  • An experienced real estate agent will always ask for a sellers concession for their home buyers
  • FHA allows up to 6% of sellers concessions from the home sellers

Conventional Loans will allow up to 3% of sellers concessions towards a home buyers closing costs on owner occupant homes.

Sellers Concessions And Lender Credit

What are dealer concessions

Buyers can use sellers concessions to cover all closing costs but cannot use it towards the down payment on their home purchase:

  • Sellers Concessions Overages cannot be given to the home buyer in the form of cash and needs to be given back to the home seller
  • However, if a loan officer discovers that there is an overage in sellers concession, then the loan officer can use it to buy down the mortgage rate by buying points with the overage sellers concession

If the home buyer is short of closing costs because they did not get enough sellers concessions, the home buyer can get the rest of the closing costs covered by a lender credit and not worry about coming anything out of pocket.

FAQ By Homebuyers: Home Purchase Case Scenario

For example, lets say a home buyer is buying a home for $100,000:

  • The down payment required is 3.5% or $3,500
  • Closing costs is $5,000
  • But the home buyer only has a $3,000 sellers concession towards the home buyers closing costs
  • All the money that the home buyer has is $3,500 and not a penny more so where are they going to come up with the extra $2,000?
  • The answer to this will be a lender credit
  • If the borrower got quoted a mortgage interest rate of 3.75% for a 30 year fixed rate FHA Loan, the borrower can choose a higher mortgage rate where he or she can get that extra $2,000 from the lender so the borrower does not have to worry about the shortage
  • Maybe the rate may be 4.0% for the $2,000 excess the lender can give the borrower to use it for closing costs

The borrower then can choose to lock their mortgage rate at $4,000, get a $2,000 lender credit and not have any closing costs and just worry about the down payment and close on their home.

FAQ By Homebuyers: Property Tax Proration Credits

There are cases where a home buyer can purchase a home without any money out of pocket and in some cases can get money back at closing due to property tax prorations.

  • In Illinois, property taxes are paid in arrears
  • The home seller owes the home buyer one year’s property tax credits which is called property tax prorations
  • Home buyers in Illinois can used property tax prorations towards their down payment
  • Lets go back to the above example on the $100,000 home purchase transaction
  • The home buyer only has $3,500 for the down payment
  • The closing costs got covered by a $3,000 sellers concession and $2,000 in lender credit  
  • Lets say that the home buyer has made a $1,000 earnest money check to the seller’s real estate agent which will used towards the down payment
  • Lets say that the property tax prorations for this property is $5,000
  • The net amount of funds the home buyer will need to bring to close on their home purchase is zero
  • Actually, on this particular transaction, the homebuyer will get a check back of $2,500.00 by the title company
  • This is because the property tax credit by the seller of $5,000 was more than the required down payment of $2,500

The above case scenario is just an example and it may not happen often but there are times where home buyers either need little to no money or sometimes will get money back at their home closing due to Illinois’ property tax prorations.

FAQ By Homebuyers: Currently, I Rent, How Do I Know If I Can Afford To Buy?

Most Common FAQ By first time home buyers is how much money do I need to buy a house:

  • Home buyers think that they need a lot of money to purchase a home and never consider thinking of being a homeowner
  • However, it is not as difficult as most think it is
  • Sometimes, buying a home may be much cheaper than renting
  • Buying a home and paying the monthly mortgage payments will pay down the principal balance of the mortgage loan balance
  • When a renter pays rent, they are just helping landlord pay his mortgage and do not recoup any of monthly rent payments
  • Many renters do not realize that they qualify to purchase a home
  • But they just assume that a home purchase requires a lot of money and they assume that their monthly mortgage payments will much much higher than their current monthly rent payments
  • This is not usually the case
  • Renters who rent an apartment or home, they need to come up with a security deposit and the first month’s rent

If a person is renting, the landlord will most likely require one month’s rent or two month’s rent for security deposit plus first month’s rent.

FAQ By Homebuyers: Buying Versus Renting Case Scenario

Let’s use the above example on a $100,000 home purchase where we can compare renting versus buying:

  • Most homes in the Chicagoland Area normally rent for at least $1,500 per month
  • For a $1,500 per month rental, renters would need at least the first month’s rent plus a one month rent for the security deposit of another $1,500 for a total of $3,000 to get the keys
  • On a home purchase, buyers will need to put down at least $1,000 earnest money
  • Home buyers will need 3.5% of the purchase price of $100,000 or $3,500 to show the lender that they have the down payment covered which can be gifted by a family member
  • Since buyers already gave the $1,000 security deposit they just need to show $2,500
  • The closing costs of $5,000 is covered because on this example the buyer has a $3,000 sellers concession in addition to $2,000 from the lender credit in lieu of the higher mortgage rate of 4.0% versus the par rate of 3.75% with no lender credit
  • Buyers will get a $5,000 property tax proration at closing so they will get $2,500 by the seller plus the keys to their new home.

Here is what your housing payments will be on a $100,000 home purchase with $5,000 annual property taxes and $600 annual homeowners insurance:

  1. Purchase Price $100,000
  2. 3.5% down payment is $3,500
  3. FHA Loan Amount is $96,500
  4. Upfront Mortgage Insurance Premium $1,688.75 which is added to the FHA Loan Balance
  5. New Loan Balance with Upfront FHA MIP is $98,188.75
  6. Annual FHA Mortgage Insurance Premium is 0.85% of FHA Loan Balance or $834.60 or $69.55 per month
  7. Annual Property Taxes is $5,000 or $416.67 per month
  8. Annual Homeowners Insurance is $600 or $50 per month

Now we can do the monthly housing payment calculations:

  1. Monthly Principal & Interest on mortgage balance of $98,188.75 @4.0% FHA 30 year fixed $468.77
  2. FHA monthly FHA mortgage insurance premium     $69.55
  3. Escrow of property taxes                                                  $416.67
  4. Escrow of homeowners insurance                                  $50.00
  5. TOTAL MONTHLY HOUSING PAYMENT                  $1,004.99

On this case scenario, the new homeowner would get the home with cash back at closing and their buying their home will give them a monthly payment of $1,004.99 versus renting their home which would cost them $1,500 per month.

Home ownership does come with more expenses versus renting. For example, the homeowner will need to pay for their own expenses and other services that is included as a renter may be the responsibility for the homeowner such as scavenger services and water service as well as maintenance.

FAQ By Homebuyers: My Home Is For Sale But I Can’t Buy A New Property Until It Sells

Home buyers can qualify to purchase another home as an owner occupant property without having to sell the existing property under certain circumstances.

  •  First to qualify for second owner occupant property property without selling the original property they own and/or if they intend on keeping both properties
  • Then the second property needs to qualify for an owner occupant residence and if it doesn’t it needs to get financing as an investment property
  • Home buyers can keep an existing owner occupant property and purchase a second owner occupant property if the new owner occupant property they are purchasing is much larger and/or much smaller

For example, a mortgage underwriter needs to make sense why the new home buyer is vacating an existing owner occupant property and purchasing a second owner occupant property.

FAQ By Homebuyers: Buying Second Primary Owner-Occupant Home

A good reason may be that the home buyer is moving from a condo to a single family home because they got married and raising a growing family.

  • A home buyer can purchase the second owner occupant property if they are moving into a larger property that is at least 30% larger due to a growing family
  • A underwriter will also understand if the home buyer is going from a larger home to a smaller home due to down sizing
  • Many folks who have larger single family homes and have their children go off to college and become empty nesters and decide to downsize to a town home or  condominium
  • Once the second property property purchase can qualify as a primary home loan, then the next step is to qualify for the second home purchase with having two mortgage loans
  • If the exiting property has at least 25% equity, then mortgage lenders will let you use 75% of the potential rental income of your exiting property as qualified income in debt to income ratio calculations
  • An appraisal will be required on the exiting home to determine value as well as market rental value
  • If the exiting home does not have 25% equity, then the home buyer can pay down the current mortgage loan balance to have at least a loan to value of 75% LTV

If that is done, then 75% of the potential rental income of the exiting property can be used as qualified income in the calculation of the borrowers debt to income ratios.

Common FAQ By First Time Home Buyers: What Do I Need To Know For Closing?

What Do I Need To Know For Closing?

A Clear To Close is when your mortgage lender has cleared all of your conditions and is ready to prepare the closing documents to the title company and fund your mortgage loan.

  • Due to new mortgage regulations, called TRID, which went into effect on October 2015, there is a three day waiting period after the CTC, clear to close, in order for the closing to take place

Once a CTC have been issued, the closing department will be in contact with the title company and the Closing Disclosure, also called the CD, will be prepared.

Common FAQ By First Time Home Buyers: The Closing Disclosure

The Closing Disclosure is the replacement of the old HUD-1 Settlement Statement:

  • The CD is a breakdown of all the charges and fees and the proceeds that the home seller will get
  • It will also give the bottom line figure on how much cash to close the home buyer needs to bring to the closing table
  • When the final CD is finalized, then the closing date and time is set
  • The title company and/or buyers attorney will notify the homebuyer to notify what to bring to closing and the amount of wire the home buyer needs to wire the title company
  • At closing, paperwork gets signed by both the homebuyer and seller and once everything is signed, the final paperwork is emailed to the lender
  • The closing department will review the final signed docs by both the homebuyers and sellers and once approved, the lender will fund the loan funds to the title company
  • Once the title company receives the wire from the lender, the closing is complete

The home buyer will get the keys to their new home purchase and the home seller will get the proceeds of their sale.

Common FAQ By First Time Home Buyers: How Frequently Should I Communicate With My Lender

A home buyer should contact their loan officer anytime they have any questions.

  • The mortgage process is very complex
  • Every loan officer has different ways of dealing with their borrowers
  • I run my own team of licensed mortgage loan originators and I have specific rules and standards for all of my loan officers to adhere to
  • I preach to my new loan officers that we have a great responsibility to all of our borrowers
  • Our borrowers are trusting us with all of their financials and are relying on us to make sure that they close on their home loan on time
  • It is not just the home buyers that are counting on us
  • It is the home sellers, the buyers realtors, the sellers realtors, the buyers attorney, and sellers attorney
  • Open communication is key and a borrower has the right to have their loan officers accessible 7 days a week
  • I am available 7 days a week, evenings, weekends, and holidays for all of my borrowers as well as for all of my loan officers who may have any questions
  • Many times I may be on the phone due to my hectic schedule
  • However, whenever a borrower calls me and I see their number on my calling ID, the next outbound phone call after I hang up with the person I have been on the phone with will the borrower who has called me
  • I enjoy it when a borrower calls me often and encourage my borrowers to contact me anytime or text me
  • I represent borrowers throughout the United States from all time zones so I start early and my day is not done until past midnight CDT
  • The answer to the above question on how frequently should you communicate with your lender, it should be often
  • Loan officer’s job is to take your calls, emails, and texts and answer any and all questions you may have
  • If you are not getting that type of service, you deserve better and there are plenty of loan officers that will give you the service that you deserve
  • Borrowers are depending and counting on their loan officer and your loan officer has the most private and confidential information which includes financial and personal information as well as countless of letters of explanations

If a loan officer is too busy to return your phone calls in a timely fashion, he or she needs to rethink in taking on more borrowers.

In Conclusion

In conclusion, I like to thank Ms. Julie Hayward, the owner/broker of Edge Realty LLC in giving me and my team the opportunity to be the loan officer to answer her 11 FAQ by homebuyers for her upcoming new book that will soon to be published. It is always a great pleasure working with Julie. There is not a single homebuyer that does not thank me for the outstanding service Julie provides them. The team at Gustan Cho Associates is honored that Julie Hayward has asked us for our expertise for her book. The team at Gustan Cho Associates are always grateful for the great advice we get from Julie when it comes to real estate questions. Special thanks to her real estate attorney husband Chad Hayward. Chad always goes above and beyond the call of duty in giving us guidance and legal advice to our borrowers. Gustan Cho Associates fully endorse Julie Hayward and Edge Realty LLC. Gustan Cho Associates is a national mortgage company licensed in multiple states with no lender overlays on government and conventional loans. Gustan Cho Associates has a national reputation in being able to approve/close home loans where other companies can’t.

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