If you're interested in obtaining a home mortgage, a good way to start is to Apply Online for a Mortgage Preapproval. An agent will process your application with a local mortgage lender and contact you with the results of your application and your buying options.
If the buyer is buying a home with cash, then his / her debt to income ratio is not a factor.
A buyer must consider whether they have enough income to purchase a home. Generally, as a rule of thumb, if the amount required to service all the buyer’s debts (monthly credit card payments, car loan payments, etc.) plus the estimated monthly payment for a new home will exceed 45% of the buyer’s gross income (before taxes), then he / she would most likely be denied a mortgage loan. Please note these amounts are on top of the buyer’s normal living expenses for things like groceries, utilities, car maintenance, etc. that don’t normally appear on their credit report.
A buyer wanting to purchase a home should minimize their outstanding debts before seeking a mortgage loan.
If the buyer is buying a home with cash, then his / her credit is not a factor.
Mortgage companies will request a buyer’s credit history. The buyer’s credit history is used to determine the buyer’s credit worthiness. Credit worthiness is basically how much risk the mortgage company faces by lending money to the buyer.
Generally, the mortgage company looks for a buyer to have five lines of credit that are in good standing. A “line of credit” is an account with a company that regularly reports the status of the buyer’s account to the credit bureau. “Good standing” is a history of on-time payments.
On the other hand, buyers should not have too many open lines of credit. An “open line of credit” is a line of credit that is active and / or not closed even if it has never been used.
Mortgage companies also look at the buyer’s credit score which is a risk calculation determined by the credit bureau to advise lenders of a buyer’s credit worthiness when compared to other borrowers.
Buyers should not allow companies to check their credit more than 2 to 3 times per month. This is called a credit inquiry. Excessive credit inquiries will drive down the buyer’s credit score.
Federal law allows a buyer to obtain one free copy of his / her credit report from each credit bureau (TransUnion, Experian and Equifax) once per year by going to AnnualCreditReport.com. The report is free, but the credit bureaus will charge a small fee for the buyer to obtain their credit score. Some banks also offer their customers free access to their credit scores.
5-Year Rule of Thumb
As a rule of thumb, if a buyer doesn’t plan to own his / her home for at least 5 years, then the buyer is more likely to not have enough equity in the home to avoid having to pay money out of his / her pocket to get the property sold at a later date. This is commonly known as being upside down.
However, if property prices have greatly increased in the last 5 years, then a buyer may be well-positioned to purchase a new home despite having lived in his / her current home for less than 5 years.
If a buyer is upside down in the property, the buyer has the option of renting the home while waiting for his / her equity to build. However, the buyer should be prepared to pay the mortgage plus his / her living expenses at the new place of residence, even if renting the home. This is also true if the buyer has moved out and is waiting for the house to be sold.
The buyer should have been consistently employed with the same employer (or like jobs) for at least the past 6 months before applying for a mortgage loan.
If the buyer is on active duty (military service), he / she must have at least 1 year of service remaining on his / her enlistment or appointment term.
Unless a buyer has a significant amount of money saved, it is ill-advised to purchase a home if the buyer knows that he / she will be changing jobs soon after the purchase.
Generally, community property is a set of laws relating to property which allows a person (by way of marriage or other relationship status) to obtain rights to property which he / she may not have actually made a financial contribution to purchase.
Texas and many other states are community property states. It is ill-advised to purchase a home if you’re in the process of going through a separation or divorce.
Additionally, Texas and many other states recognize common law marriage. It is ill-advised to purchase a home if you have an existing relationship that could constitute a common law marriage.
A buyer should seek legal counsel to determine if community property laws may negatively affect his / her anticipated home purchase.
One of the primary differences between owning and renting a home is the responsibility for maintenance of the property. When renting, the landlord is responsible. However, as the homeowner, the buyer is responsible for maintenance concerns. Home maintenance can be expensive and may include repair or replacement of things such as:
Heating and air conditioning
Roof (if not due to storm damage)
Lawn, trees and shrubs
Any repairs which may be necessary to maintain or resale the property at a later date
A buyer must consider if he / she has the income necessary to maintain a home above and beyond his / her monthly mortgage payments.
How Does a Mortgage Work?
A mortgage is a loan for the purchase of real property (land, house, apartments, etc.). A mortgage company evaluates a buyer’s credit to determine if the buyer is a good credit risk. In actuality, the mortgage company is the one to purchase the property, but the buyer agrees to make payments to the mortgage company over a period of time until the mortgage loan is completely paid off. These payments include amounts for things such as the:
Principal (the actual cost of the property)
Interest (the cost of borrowing money)
The money for insurance and taxes is placed in an account called an escrow and is used by the mortgage company to pay the insurance premium and property tax bill when they are due.
The escrow account is an account that is made in the buyer’s name. However, if an insurance claim is made for the property, any check from the insurance company would be made out to both the mortgage company and the buyer. This gives the mortgage company the right to assure the buyer makes the necessary home repairs.
See our Mortgage Tools page for more information about interest, payments, rates, etc.
The process for obtaining a mortgage loan is easier and faster when using a local lender.
Typically, local lenders are more willing to work with buyers to overcome obstacles preventing them from obtaining mortgage loans.
Additionally, buyers are required to provide several documents to the mortgage company once they are pre-approved for a loan. Using a local lender makes this process much easier. For more details, see Completing a Loan Application below.
This is why we advocate going local when it comes to your next home loan.
Most lenders offer a pre-approval process for buyers. The pre-approval is generally a short process where the lender obtains the credit score and credit report of the buyer and then determines if the buyer has the potential to be a good credit risk.
Because your agent will be very familiar with the local mortgage companies, he / she will be able to assist you with this process.
Once the buyer is pre-approved, the lender will provide a pre-approval letter to your agent letting him / her know your estimated loan approval amount.
Your agent will then contact you to discuss your home choices. See Choosing Your Home for more details.
Once the buyer is pre-approved, he / she will need to set-up an appointment with the local mortgage company in order to meet with a loan officer and submit the loan application.
All buyers to be listed on the property deed have to be present for the application submission. If one of the buyers cannot be present, he / she must provide a valid power of attorney to his / her representative who will submit the application on his / her behalf. The buyer's representative could be anyone, but typically it would be the other buyer, a family member, a friend or their legal representative. In this case, the representative must be present at the meeting with the loan officer.
The buyer must present a valid state or federal photo ID at the meeting such as a state identification card, state driver’s license, a passport or a military identification card.
The buyer / buyer representative will need to provide the following documents:
Tax returns for the last 2 years
Most current paystub
Most current bank / credit union account statement
Your agent should maintain contact with your loan officer who will let him / her know the status of your application.
It is vitally important for buyers to avoid changing the status of their credit worthiness once they have been pre-approved. Common things to avoid include:
Opening a new line of credit
Making a late payment or skipping a payment
Making any large purchases using existing lines of credit
Making a large withdrawal from a bank account
Quitting or changing jobs
Getting married or divorced
A buyer should maintain credit discipline and essentially “freeze his / her credit” up until the property purchase is complete and the closing is finished. This is still the case even if the seller allows the buyer to move into the property early. The purchase (and loan process) is not complete until the buyer’s name is on the deed.
Up until that time, it is customary for the mortgage lender to continuously monitor and recheck the buyer’s credit worthiness. The mortgage lender has the right to refuse the loan up until closing.
Make Your Rent Count: Move into a property that offers a Lease With An Option to Buy. Some advantages of this strategy include:
You have the ability to move into a home that you want and prevent someone else from purchasing it.
You get time to improve your credit worthiness without losing out on the property.
Often you can negotiate part of your rent payment going towards a down payment for the property. This down payment is “credited” to the you, as the buyer, should you choose to exercise the option to purchase the property at the end of the contract period. However, if the buyer chooses not to exercise the option, he / she cannot recover his / her principal payments because they are then considered only as rent payments.
Obtain A Private Loan: Obtain owner financing where the seller has 100% ownership of the property with absolutely no liens against the property.
Below Market Deals: Look for a lower-priced home. Lower-priced homes can be:
Pre-owned homes in an established neighborhood;
Homes that may require some repairs;
VA Foreclosure Homes; and
Bank repossessions (Bank Repo’s);
Your agent will be able to accommodate you with a list of these properties. However, these homes don’t stay on the market very long, so you must be persistent, patient and ready when these homes come available.
Don’t Max Out Your Mortgage Approval
Don’t let your mortgage approval amount dictate your budget. Mortgage approval amounts might be anywhere from 25% to 45% of your pretax income. However, you need to choose a mortgage payment (with the insurance premium and yearly property tax amount) that you are confident you can pay for the next 30 years of your life.
If you have a fixed interest rate home loan, then your interest payment will remain the same. However, the insurance premium and yearly property tax amount will typically increase over the years. Therefore, you should provide yourself with enough wiggle room in your budget to cover these increases.
You don’t want to be a prisoner in your own home. Having the perfect home can become a nightmare if after making your mortgage payment and paying all your other living expenses, you have no money left to enjoy your life.
Buyers should make two lists. The first list should be of what they need in their new home. The second list should be of what they want in their new home.
If buyers cannot get what they need and want for the right price, then they should begin eliminating items from their list of wants first.
For example, a buyer may need a home with 4 bedrooms and 2.5 bathrooms for under $110,000 and may want a pool. However, depending on the age, location, etc. of the home, having a pool may increase the price beyond his / her budget. In this case, giving up the pool may be the best choice.
If a buyer really wants some particular feature in a home, he / she may need to have the feature installed or added to the property at a later date.
Picking the Right Neighborhood
A buyer can obtain criminal activity statistics about a particular neighborhood from local law enforcement. Many law enforcement agencies offer interactive maps with markers indicating criminal activity in certain neighborhoods. You can usually access these resources through their website.
A buyer should observe how the local property owners keep their homes. A buyer should drive through the neighborhood in the evening or on a Saturday when most people are home and look for things such as:
Number of vehicles in the street/driveways
Buyers should be aware that when a new home is sold, the homebuilder is attempting to make the maximum profit possible from the sale. Most times, a new home offers no equity (or negative equity) to the buyer, and the buyer cannot immediately resell the home for the same price that they paid for it. It will take the buyer time to build up equity in the home. See 5-Year Rule of Thumb for details.
A buyer that purchases a preowned home can often purchase the home for less than its fair market value. Also, because homeowners are more flexible, they will often include extras such as paying the buyer’s closing costs and offering early move-in options, decoration allowance, and a lower purchase price.
A buyer that purchases a home that requires repairs (a fixer-upper) can gain significantly more equity than any other home especially if they complete most or all of the repairs themselves. However, this type of home has to initially be able to pass an appraisal inspection if the buyer is using a mortgage loan to purchase the property.
Most buyers have to compromise when it comes to getting what they need and want in a new home. Because price is often the limiting factor, most buyers have to give up some of the things they want to get a home within their budget.
Even if the buyer gets everything they need and want in a home, no home is perfect.
Negotiating a Price
In order to estimate the total cost to purchase, the you should consider the following:
What the seller is offering to pay (closing costs, etc.)
The seller’s list price for the property (price advertised)
Buyer’s closing costs
Cost to make any repairs to the property
Market analysis for the property which is an estimation of the fair market value of the property completed by your agent
Certain factors may lower your estimated total cost to purchase, such as the seller paying the buyer’s closing costs. On the other hand, the cost of repairs to a property may increase your estimated total cost to purchase.
The buyer should compare his / her estimated total cost to purchase with the fair market value of the property to determine if the property is worth the purchase.
Some buyers purchase properties for significantly more than they are worth with the expectation that real estate prices are going to increase quickly. However, this strategy is very risky. It is commonly known as real estate speculation.
The estimated total cost to purchase should be the basis for formulating an offer. However, the offer itself may be more or less than the estimate depending on the buyer's negotiation strategy.
The initial offer is the starting point for all negotiations when attempting to purchase a home. Sometimes a buyer may want to offer more or less than the fair market value of the property depending on several factors which include:
How competitive the market is
How long the home has been on the market
The condition of the home and neighborhood
Their intended use for the property
Zoning (commercial, residential, etc.)
The initial offer is most often submitted in writing by your agent to the seller’s agent. The offer usually includes Earnest Money.
The seller may choose to do one of three things in response to an offer:
Agree to the offer
Reject the offer without a counteroffer
Reject the offer with a counteroffer
A counteroffer is an offer made by either the buyer or seller which is different from his / her previous offer.
Any offer or counteroffer that is made should be done so with careful thought and sincerity because if accepted, the buyer or seller is obligated to follow through on the transaction. See Contract to Purchase below.
The seller is not obligated to sell the property for the list price (advertised price). This price is subject to change so even if a buyer offers the seller the list price, the seller may choose to reject the offer and raise the price in a counteroffer.
A counteroffer should be evaluated based on the fair market value of the property and the estimated total cost to purchase.
The buyer should have already determined the monthly mortgage payment he / she is comfortable with well before beginning the home shopping process. Accepting an offer that exceeds this amount is not recommended unless the buyer can afford the higher payment. See Don’t Max Out Your Mortgage Approval for details.
The buyer should not be emotionally attached to the property. This will help the buyer to make a rational decision when it comes to receiving or making counteroffers.
A contract consists of an offer, an acceptance and consideration. Consideration is something of value. In this case, consideration is money paid by the buyer in advance of closing. When purchasing a property, the money is called “earnest money”.
Normally earnest money is collected by the buyer’s agent prior to submitting an offer to the seller.
The buyer’s agent keeps the earnest money until the final offer is accepted by both the buyer and seller.
Then a contract is executed by the buyer’s agent, and both the earnest money and contract are submitted to the title company.
Should the contract fail, the earnest money can neither be released to the buyer nor the seller without the written consent of both parties.
Normally, the earnest money is credited to the buyer upon closing.
Once both parties agree as to the terms of the sell, the offer becomes a contract and both parties (seller and buyer) are obligated to complete the purchase.
If the buyer chooses not to complete the purchase, he / she may lose any earnest money which accompanied the offer, and he / she may be subject to liability should the seller decide to take legal action against the buyer.
If the seller chooses not to complete the sell, he / she may be subject to liability should the buyer decide to take legal action against the seller.
Validating the Property
The appraiser is employed by the buyer’s mortgage company. He / she determines whether the property value is equivalent to the loan amount and whether or not there is any detectable structural damage.
The mortgage company generally will not loan more money than the property is worth.
If the appraiser lists any structural damage, the seller must complete the necessary repairs prior to closing.
Normally the appraiser is paid by the buyer.
The survey is used to establish the property lines and what exactly the buyer is purchasing.
Most often the seller pays for the property survey.
A new survey must be conducted unless an existing survey is provided by the seller. Nevertheless, the buyer’s mortgage company must approve the use of the existing survey. Typically, the use of an existing survey would be disapproved if any modifications have been made to the property such as:
Storage house / shed on a slab
Room addition(s) to the house
This inspected is completed by a licensed pest controller and is required by the buyer’s mortgage company.
If termites and / or termite damage are found, the seller generally will pay for the necessary pest control treatment and / or repairs.
The cost of this inspection is included in the closing costs.
Title Insurance Commitment
Because property is a real asset, a buyer and the buyer’s mortgage company must assure that the property he / she purchases indeed belongs to the owner.
Before title insurance is obtained, a thorough title search is conducted to determine whether or not other persons or entities besides the owner can make a claim against the property which will supersede the rights of the current buyer and / or the buyer’s mortgage company. This search is necessary prior to the issuance of the title insurance commitment.
The title insurance commitment is an offer to insure against financial loss from defects in the title to the property from the invalidity or unenforceability of mortgage loans.
Who Has to Be Present?
All buyers to be listed on the deed have to be present.
If one of the buyers cannot be present, he / she must provide a valid power of attorney to their representative prior to closing. Their representative could be anyone, but typically it would be the other buyer, a family member, a friend or their legal representative. In this case, the representative must be present at the closing.
What Should a Seller Bring?
The buyer must present a valid state or federal photo ID at the closing such as a state identification card, state driver’s license, a passport or a military identification card.
The HUD-1 Settlement Statement will indicate any balance due at the closing which must be paid before the house is sold. The balance due may include, but is not limited to:
Down payment towards the principal
The information listed above is only a guide and is subject to change. State/Federal law and standard industry practices are the ultimate authority with regard to buying/selling property.
Soldiers of Real Estate was founded in 2003 by Steve Darden.