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Wealth in Homeownership
Thinking of Buying Home
Buying home, especially first time, is a big decision to make. Typically, the process of this decision making takes time to have funds, steady income, good credit score and money management. A big step forward is to know how your household budget is like, what your capacity is, what type of loan arrangements you are qualified for, where you want to buy your home, and what type of home you want to buy.
Homeownership is just not for peaceful living. It is the beginning of stage in life of making family and creating family wealth as you keep paying off your mortgage and financially stabilize over time. This is the challenge of life you’d love to take on.
To start with, download the files below and work on your household budget at this stage, and browse over Buyer’s Guide
Preparing to Buy
Having checked on your household budget, be prepared for a courageous leap to buy a home. This stage where you want to know the financial arrangement you have to make. The bank or the mortgage broker will delve deep into your financial strength and capacity. Here is the list of documents that you should collect in your Green File:
- Financial statements
- Bank accounts
- Investments
- Credit cards
- Auto loans
- Recent pay stubs
- Tax returns for past two years
- 401K statements, life insurance, stocks, bonds, and mutual account information.
- Copy of your credit report and its clean up if required.
It’s good idea to get to know rough estimates of closing costs and monthly payments for tentative price range of what money can buy a home for you. A downloadable file is placed below to play with numbers. You will then in better position to discuss loan arrangements with your bank or mortgage broker. Your loan officer will:
- Give you a Loan Qualification letter to acknowledge your potential for raising a loan towards purchase of a residential property.
- Advice you on types of loans available related to down payment.
- Advise you on the documents for creditworthiness you gave to the loan officer to look at.
Advise you how to set about for next stage of Loan Pre-approval.
Loan Pre-Approval
By the time you have gone past the preceding stage of Pre-qualification for loan, and you have arranged the money you’d need to close to buying a home, you are entering this stage of getting Loan Pre-approval from your bank or mortgage broker. It is generally pre-underwritten by the bank or the mortgage broker who is ready to commit to fund the loan when purchase contract is given. It is like having a bank on your side to go a buy your home.
Your realtor will always ask you to obtain Pre-Approval Letter from bank or mortgage broker to enable you to support your offer to the seller for purchase of a listed property. This Pre-Approval Letter is always conditional for a certain number of days and your loan worthiness. If your situation changes, or you decide to borrow money elsewhere during the critical days of your home purchase, you may run into review of underwriting by the lender of loan. Ensure that your credit is not affected during days of your shopping to buy a home for yourself.
Loan Programs
Familiarize yourself with the types of loans that are typically available.
The power of leverage to purchase a real estate property lies in the capacity of the potential borrower. Typically, the borrowers fall in four categories of buyers of residential properties:
- Principal Residence
- Second Homes
- Investment Property
- Cash-out borrowers
Lenders qualify potential borrows based on capacity of the borrower to payback loan over long period of time for the associated property having qualifying market value as collateral on which mortgage for the loan is placed.
It is the large social objective of the government that homeownership and expansion of investment dwelling units is encouraged to meet ever growing demand to improve the standard and quality of life of people. The flow of money is regulated through banks and investment companies from primary consumer market to secondary market that purchases loans and circulate money back into the economy.
Two big buyers of loan papers from banks are the two government sponsored enterprises (GSE) based on their underwriting guidelines:
- Fannie Mae or Federal National Mortgage Association. (FNMA), and
- Freddie Mac or Federal Home Loan Mortgage Corporation (FHLMC).
Fannie Mae buys loan papers from larger commercial banks and lenders, whereas Freddie Mac often buys loans from smaller banks. Together, they control about 70% of housing financial industry in the nation and significantly stabilize the housing market.
In addition to above loans, there are government insured/guaranteed loans available:
- FHA Loans: These loans are 3.5% down government insured. There is insurance cost upfront on buyer thrown into the loan for the buyer, and recurring insurance premium till principal balance drops to 78%.
- USDA Loan: These loans are made available in specified rural areas for low-income borrowers.
- VA Loans: These loans are for the active members of U.S. military and veterans and their families. There is no down payment. There are funding fees on closing rolled into loan. These loans are guaranteed 100% by U.S. government.
The loan products and their underwriting guidelines are regulated by law. Depending upon the type of borrower you are, it is best that you engage services of an established and experienced loan company, define what you are looking for, and how well you can qualify for the loan to suit your purpose. Conventional loans are available from as low as 3% down.
It is very important that you make no misrepresentation of yourself and objective of the loan you plan to apply for. Your assertions and signature on the loan application are always under penalty of perjury.
Research Livable Location in Town
Real estate is indeed very local! You are setting about to find not just your new home, you are equally searching for the reputation of the city, town, neighborhood, school districts, marketplaces, and the locale that goes with your home. Above all, the community you’d love to move into matters in your life.
Most people who start with home buying search, spend lot of time on the internet and collect lot of distant information. The important question at the back your mind is always: “what’s the best that my money can buy for the home space in the environment I’d enjoy to live in.”
Remember, when family grows, you’ll run short of home space. Amusingly, it takes just about five years to clutter your space!
Just like the car you drive is your identity, so is your home where you live and the richness index of the city you want to be.
Engage a Real Estate Agent
Having gone through Loan Pre-approval and done some research to find location in the town where you prefer to be, it is now the stage for you to engage a knowledgeable licensed real estate agent having experience and credentials.
Inasmuch as you’d like to question a potential agent you have tentatively found and selected to talk to, be prepared for some good questions on you so as to get good answers to the agent to show how well you are prepared to buy a home.
Process of home buying involves lot of contractual paperwork and legal nuances. Be not be all by yourself into this venture, so much so when you can get a dedicated real estate professional without having to pay fee or commission since conventionally the seller picks up the tab. However, if you need devoted services of a real estate professional for a fee, you can have them.
Share your thoughts with the agent you engage to help you in finding an ideal home for you and take on all the process to reach settlement table. It’s always better to sign an agreement of mutual privileges and obligations.
Your agent will assist you in making an offer on the property on sale and enter into a contract. The contract is a legal document and it binds you with the seller unless you have conditional provisions to step out.
Title & Escrow Agent and other players
Escrow agent is selected by the buyer and defined in the purchase offer. An Earnest Money Deposit [EMD], or simply Deposit accompanies the purchase offer. If seller accepts the offer turning it to contract, the check must be delivered to the Escrow company by the listing agent and its receipt is sent to the buyer’s agent within three business days. Copy of the contract is sent to Escrow Agent to start the process of collecting documents and coordination with other players of the contract.
Due to digital transmission of purchase offer and acceptance of offer, proof of transmission of Earnest Money Deposit, either physical delivery or electronic delivery to the Escrow Agent and its receipt activates the contract.
In this era of digital movement of documents carrying digital signatures independently authenticated by third party, Escrow Agent is the neutral party relied on by all parties to the contract. This is the virtual meeting place where money is taken from the buyer and distributed to all involved parties as per contract. Transfer of property is filed with County office. Escrow agent pays or retains fees and taxes for the county government, the state government, and the IRS on behalf of the parties to the transaction for distribution. Escrow Agent also sends report of the transaction to the IRS, the State and the Homeowners Association.
Escrow company is in close contact with the lender for the loan, and gets final version of the settlement statement prepared from lender. This is to ensure that the lender charges its fees, applies the interest rate applicable, and funds loan for the buyer on the day of closing.
Remember that contract comes to close at the moment the property changes hands at the settlement table.
In these days of digital transfers, the property can be transferred without seller and buyer coming on the physical settlement table, and so is money transferred electronically.
It is the role of Title and Escrow company that contract between two parties closes smoothly. Take keys of the home at the settlement when it closes.
DO NOTIFY…
- Utility companies to transfer accounts in your name.
- Post office to re-direct your mail from previous address to your new address.
- Management company of Homeowners Association that HOA bills are sent to you.
- Address change to your friends, relatives, office, bank, credit cards, DMV, insurance companies, post office, etc.
Closing Day and Moving in
Escrow agent is selected by the buyer and defined in the purchase offer. An Earnest Money Deposit [EMD], or simply Deposit accompanies the purchase offer. If seller accepts the offer turning it to contract, the check must be delivered to the Escrow company by the listing agent and its receipt is sent to the buyer’s agent within three business days. Copy of the contract is sent to Escrow Agent to start the process of collecting documents and coordination with other players of the contract.
Due to digital transmission of purchase offer and acceptance of offer, proof of transmission of Earnest Money Deposit, either physical delivery or electronic delivery to the Escrow Agent and its receipt activates the contract.
In this era of digital movement of documents carrying digital signatures independently authenticated by third party, Escrow Agent is the neutral party relied on by all parties to the contract. This is the virtual meeting place where money is taken from the buyer and distributed to all involved parties as per contract. Transfer of property is filed with County office. Escrow agent pays or retains fees and taxes for the county government, the state government, and the IRS on behalf of the parties to the transaction for distribution. Escrow Agent also sends report of the transaction to the IRS, the State and the Homeowners Association.
Escrow company is in close contact with the lender for the loan, and gets final version of the settlement statement prepared from lender. This is to ensure that the lender charges its fees, applies the interest rate applicable, and funds loan for the buyer on the day of closing.
Remember that contract comes to close at the moment the property changes hands at the settlement table.
In these days of digital transfers, the property can be transferred without seller and buyer coming on the physical settlement table, and so is money transferred electronically.
It is the role of Title and Escrow company that contract between two parties closes smoothly. Take keys of the home at the settlement when it closes.
DO NOTIFY…
- Utility companies to transfer accounts in your name.
- Post office to re-direct your mail from previous address to your new address.
- Management company of Homeowners Association that HOA bills are sent to you.
- Address change to your friends, relatives, office, bank, credit cards, DMV, insurance companies, post office, etc.
Mortgage Payments Management
Now that you have moved in to your new home having raised loan from a bank, you are now committed to make monthly payment to the lender over a period of time you committed on the Promissory Note, and mortgaged your property as collateral. This is the beginning of your homeownership wealth over time. The equal monthly payment, called amortization of loan over months for payoff are mathematically computed having component of interest on the balance of loan balance at any time, and the rest is the principal component.
If you can increase your monthly payments to the loan company, you are progressively decreasing loan balance, the interest on the balance, and increasing component of principal payments. The effect is the overall reduction of payoff period of loan.
The equity buildup has two components due to reduction of your loan balance, and the typical increase of the market value of your property due to appreciation of property attributable to economic forces of inflation. Real estate prices are very sensitive to city, locality and neighborhood.
You may be curious to know how the numbers play up towards equity buildup and the financial value of your decision you made to purchase a home for yourself. We have put together an Excel spreadsheet for you to see how numbers change for duration of payoff based on changes in variables of property price, loan, interest rate, duration of committed payoff periods, modify input numbers.
Check out here how you can reduce the overall payoff period by increasing monthly or biweekly payments: