Homebuying Guide

CONGRATULATIONS ON TAKING THE FIRST STEP TOWARD YOUR NEW HOME!

Whether this is your first home purchase or your fifth, here you'll find useful and relevant information that will help you be a more informed homebuyer.

The home purchase process is complex, with many moving parts and several different players. While it can be very exciting, it can also be very stressful. The more you know, the more comfortable you will be. Having a solid understanding of how the home purchase process works will save you time, stress and money.

If you need additional information or have more questions, please contact a SECU homebuying professional at mortgage.questions@secumd.com.

 

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CREDIT

Credit is defined as the ability to obtain goods or services before payment, based on the trust that payment will be made. Your credit history is a record of your credit accounts. This includes just about anything you pay for in arrears (after you receive the goods or services).

It is a misnomer that "credit" strictly refers to credit cards. Your credit includes your payment history for goods and services such as utilities, cable TV, mobile phones, student loans, mortgages and lines of credit – as well as credit cards. Your credit also includes things like medical bills and appliance purchases that you pay over time.

Your credit (and credit score) is one of the most important aspects of qualifying for a home loan (as well as other loans, credit cards, insurance - even getting a job). You must have a credit history that shows the responsible use of credit. Your credit history is an indication to lenders of how likely you are to repay your loans.

Credit Report

Your credit history is in the form of your credit report, which is a list of all credit you have obtained and your history/performance with that credit. The "big three" credit bureaus that gather and maintain your credit history are Equifax, Experian, and TransUnion. Lenders and retailers report your borrowing activity to the credit bureaus.

Its important to know what's on your credit report so you can see what lenders see and to make sure there are no errors or missing information. You can get a free copy of your credit report (not credit score) at www.annualcreditreport.com or by calling 877-322-8228. It's wise to get your report from all three bureaus, as information can vary from one to the other.

You can and should dispute any errors on your credit report by contacting the applicable credit bureau in writing. See the Federal Trade Commission's Guide to Disputing Credit Report Errors.

Equifax
800-685-1111
www.equifax.com 
 Experian
888-397-3742
www.experian.com
Trans Union
800-916-8800
www.transunion.com 

 

 

Additionally, you are entitled, by law, to receive a free copy of your credit report when you’re denied credit.

Credit Score

Your credit score, which is different from but based on the information on your credit report, is a number that ranks your creditworthiness. Lenders use this number to determine whether or not they’ll loan you money and, if so, at what rate of interest. The higher the credit score, the better – and the lower the interest rate you're likely to be offered.

FICO (Fair Issac and Co.) credit scores are the most commonly used by lenders. FICO scores range from 300 to 850. Lenders will rate or grade credit based on a variety of factors; credit score being the most prominent. For example, many lenders rate a credit score of 720 or higher as A+. Scores in the 575 to 650 range are given a C grade (average).

According to CreditKarma.com, the average Maryland credit score is 671.

Here’s how your FICO credit score is determined:

  • Previous payment history – 35%
  • Amount of debt owed - 30%
  • Length of credit history – 15%
  • New credit obtained recently – 10%
  • Types of credit used – 10%

As you can see, paying your bills on time is the single most important thing you can do to positively influence your credit score. Alternatively, paying your bills late (or not at all) is the biggest detriment to your credit score (aside from a bankruptcy or foreclosure).

  • Learn more about FICO credit scores at MyFICO.com.

Your free annual credit report does not include your FICO credit score. There are many providers from which you can purchase your credit report and score.

If you’re considering a home purchase, start and/or maintain healthy credit behavior now. This will help raise your credit score. A high credit score means a lower interest rate which equates to a higher borrowing capacity, a lower monthly payment and lower overall loan costs.

Specifically, you should:

  • Pay bills on time
  • Avoid applying for new credit (no new car or credit cards)
  • Check your credit report and address any errors/negative marks
  • Avoid closing any credit accounts

 

 


 

 

 

 

 

 

 

 

 

PRE-APPROVAL

The mortgage qualification process begins with determining your purchasing power. The initial step is to obtain a pre-qualification, based on a quick review of basic financial information. This is often done over the phone or online and is different from a pre-approval.

You can skip the pre-qualification and begin with getting a pre-approval. Pre-approval involves a detailed look at your financial information including your income, assets, liabilities, employment history, size of down payment and credit (among other things). Most lenders will "lock you in" to a specific interest rate when they do your pre-approval (SECU's pre-approval lock period is 90 days).

SECU will issue you a formal pre-approval letter which you will submit with your purchase offer. With a pre-approval, you’ll know exactly how much you can borrow. This will save you the time and frustration of looking at homes that are beyond your price range.

Additionally, when you find "the one", having a pre-approval means you’ll be ready to act quickly.

When it comes to your purchasing power, a general guide is that your monthly mortgage payment, installment payments and revolving (credit card) debt payments should total no more than 43% of your gross monthly income (income before taxes, Social Security, and other deductions).

While SECU will loan you the money to purchase your home, buyers can count on needing to bring some cash to the deal, in terms of a down payment and closing costs. It’s wise to have an understanding of these expenses as you begin your home search.

Down Payment

Lenders like to see a down payment from you becuase it helps reduce their risk. The more you put down, the less you’ll have to finance – which means a smaller monthly payment and lower total interest costs.

One of the biggest hurdles for home buyers, especially first-time buyers, is coming up with enough cash to cover the down payment and other up-front costs. A 20% down payment was long considered the standard - but that’s changed in today’s highly competitive lending environment. Five and 10%, or even lower, down payments are now common.

What Do You Have?

Consider all possible sources of down payment funds available to you, as listed in the chart below. Perhaps there are some you hadn’t thought of. For example, if you’re a two-car family, can you get along with one car and sell the other? Can you ask for money from your parents or other family members? If so, you’ll need a letter stating that the money is a gift, not a loan. Are there any grants available to you? Research programs that provide down payment assistance to specific groups such as teachers and firemen. 

Be realistic about how much you can put down. You’ll also need cash for closing costs, unforeseen major home repairs, and other things in your life.

Down Payment Sources

  • Savings
  • CDs
  • Money Markets
  • Commission check/Bonus
  • Gift from family
  • Tax refund
  • Secondary financing (example: 80/10/10)
  • Retirement account (401K & IRA)
  • Cash value of life insurance policy
  • Equity from a proceed of sale
  • Stocks
  • Bonds
  • Mutual Funds

Closing Costs

Closing costs are expenses related to the completion of the transaction and are in addition to the purchase price of the home. Both buyers and sellers will typically incur closing costs, which can include lender fees, title expenses, transfer taxes, etc. These costs will vary based on several factors including the location of the property. A ballpark guide for buyers’ closing costs in Maryland is somewhere in the range of 3% to 5% of the purchase price.

A large chunk of closing costs are lender fees. These fees can vary significantly so it pays to shop around. The below chart lists many of the different fees lenders charge for mortgage related services. Some of these fees are often referred to as "junk fees" - they're just money-makers for the lender. This is where SECU's value really shines.

LENDER FEE COMPARISON
 Fee   Industry     SECU 
 Application Fee  $100 – $410  $0
 Administrative Fee  $45 - $725  $0
 Appraisal   $350 - $500  $395 - $455*
 Broker Fee  1% - 8% of loan amount  $0
 Commitment Fee  $100 - $450  $0
 Condo/PUD Courier Fee  $150 - $275**  $200**
 Courier Fee  $75 - $150  $0
 Credit Report  $7.50 - $95  $16.95
 Discount Points  1% - 3% of loan amount Optional
 Document Preparation Fee  $35 - $350  $0
 Document Review Fee  $75 - $395  $0
 Flood Determination  $50 - $195  $5.25
 Funding Fee  $40 - $300  $0
 Lock-in Fee  $100 - $450      $0
 Notary Fee  $25 - $75  $0
 Origination Fee  1% - 5% of loan amount  $400
 Processing Fee  $195 - $395  $0
 Tax Service Fee  $55 - $110  $77 - $109
 Underwriting Fee  $175 - $595  $0
 Wire Transfer Fee  $10 - $100  $0

*Can vary with loan product (Conventional vs. FHA), as well as with type and location of property.

**If applicable. Can vary with third party condominium/PUD.

You will receive an estimte, called a Good Faith Estimate (GFE), of these costs when you submit your loan application. The GFE is a document you can use to compare lenders.

Got questions? Send us an email or contact one of our Mortgage Loan Officers to get pre-approved now.

 

 


 

 

 

 

 

 

 

 

 

RESEARCHING THE MARKET

Before making appointments to view homes, do a little research to get familiar with the local/regional market. The goal is to get an idea of which areas and neighborhoods fit your priorities. This discovery process can turn up some neighborhood options you may not have considered or didn't even know about.

Before focusing on properties, research your commute, amenities, services you use frequently, and schools. These things have a significant impact on your day-to-day quality of life.

Alos, look at the types of homes available and their prices. You may be thinking of buying a detached 4 bedroom rambler but your first choice of neighborhoods only has 3 bedroom townhouses in your price range. Flexibility and compromise are important components of a successful home search.

Your Wants and Needs

Make a list of must haves and wants and talk it over with your significant other/family beforehand.

As you zero in on neighborhoods, you’ll become familiar with prices and how quickly (or slowly) properties there are selling. This (along with your pre-approval) can help prepare you for quick action when the right house comes on the market – particularly if it’s a hot market.

Keep an eye out for a high volume of distress properties (foreclosures and short sales) in any one neighborhood. This may be an indication of declining property values.

Resources

There are many online resources for researching neighborhoods and properties. Here are just a few to get you started:

  • Homebuying360 powered by CU Realty - In addition to all active property listings from the MLS, CU Realty offers a variety of data to help you research neighborhoods, including recent sales, home values, rates of appreciation, demographics, school information, crime stats and even weather patterns.

  • Zillow - Zillow is a database of (practically) all properties - not just properties that are for sale. Zillow incorporates data from a variety of sources, including public records. The site is welll known for it's "Zestimates", which are estimates of individual property values however the accuracy of these estimates varies widely and they should not be used as a substitute for comparable sales data assembled by an experienced Realtor.

  • Trulia - A residential real estate search site and data aggregator. The website displays properties for sale and for rent. You'll also find a variety of local data, statistics and maps.

  • Maryland HomeTownLocator® - Provides profiles of Maryland counties and cities, as well as physical, cultural and civic features. The site includes a variety of maps including school attendance boundary maps. 

With all the real estate data available to homebuyers, you are likely to encounter conflicting information. This is where your Realtor comes in; she/he can help make sense of it all.

 

 


 

 

 

 

 

 

 

 

 

FINDING THE RIGHT REALTOR®

Your choice of Realtor to represent you is one of, if not the most important decisions in the home purchase process. This is a step many buyers overlook.

With so many moving parts, the home search and purchase process can be incredibly confusing. The right Realtor can be the difference between getting your dream home and settling for less.

Representation

Among the many services your Realtor provides, the most important is representation in the home purchase transaction. Through buyer agency, your agent is legally and ethically bound to serve you – not the seller.

Many times, uninformed buyers will contact the listing agent for a property in which they have interest (the agent whose name is on the sign in the yard). This agent has signed an agreement with the seller and is legally and ethically bound to represent them - not you! This is why you need a buyer’s agent.

Any agent can serve as your buyer’s agent but it should be in writing via a signed buyer agency agreement (that the agent will provide). Your Homebuying360/CU Realty agent can show you any property listed for sale on the MLS. More importantly, your agent will provide advice, submit offers, and negotiate on your behalf - all with your best interests in mind.

The agent whose name is on the yard sign will be happy to help you as a buyer, but she/he is working for that seller.

How Real Estate Agents Get Paid

There are typically two real estate agents involved in a purchase transaction; the buyer’s agent (your agent) and the listing agent (the seller’s agent).

Through broker cooperation, the broker/agent who secures a real estate listing and the broker/agent who brings the purchaser agree to share the commission – which is typically paid by the seller. The actual commission percentage is negotiated between the listing agent and the seller but is typically 6% of the purchase price.

That 6% is split equally between the two agents (their brokers, actually), which means the seller is paying your agent’s broker 3% of the sales price (your agent’s broker takes a percentage of that amount and the rest goes to your agent).

Here’s an example for a home purchase of $250,000:

$250,000 x 6% = $15,000 (total commission paid by seller) ÷ 2 (listing agent and buyer's agent) = $7,500 – 40% (to agent's broker, this varies) = $4,500 (to buyer’s agent)

So, in most cases, you get representation along with all the services your Realtor provides and you don’t have to pay a penny for it.*

 

*Important Note: If a listing agent is "not cooperating", she/he is not offering a commission to the buyer’s agent. In this case, the buyer is responsible for paying their agent’s commission. This is detailed in the buyer agency agreement. Be sure to ask your agent about this. It is very unlikely, however, that your agent would show you a listing where the seller is not offering compensation. Would you work for free?

Working with Your Realtor

One of the most important aspects of a successful home search and purchase is communication between you and your agent. There will be a lot of back and forth communication; much of it urgent and time sensitive, therefore having an agent who communicates effectively is essential - but you must also be communicative.

Choose an agent who communicates on your terms; be that via phone, text message or email, or all of the above. Make sure you ask before you enter into a buyer agreement. Realtors are very busy people; they receive lots of phone calls and emails from their clients (buyers and sellers), prospective clients, their broker, administrative staff, colleagues, etc. Be sure to set your communication expectations from the get-go.

Realtors are salespeople. The vast majority of them are on 100% commission, meaning they don’t get paid until they sell a house. They work with many clients simultaneously. Time is their most important commodity.

A buyer’s agent does a lot of work without the certainty of getting a paycheck. Being aware of and mindful of this can make for a better home buying experience. For example, asking your Realtor to show you six houses on a Saturday afternoon is better than asking to see those same six houses over the course of three weekday evenings. Your Realtor will appreciate you for it. In turn, you’re likely to be her top priority; being the first client she calls when returning messages, giving you preference when scheduling showings, etc.

Of course, you want a real estate agent who knows their stuff too. All Homebuying360/CU Realty approved Realtors are knowledgeable, experienced real estate professionals. They know the neighborhoods, they’re on top of market trends, and they're experts on the ins and outs of the homebuying process.

Click to find an approved Realtor.

 

 


 

 

 

 

 

 

 

 

 

SEARCHING FOR PROPERTIES

An effective property search begins online. With the Homebuying360/CU Realty property search engine, you have access to virtually all properties listed for sale in the local MLS. This is the same database Realtors use.

Start with the map search because it shows you exactly where the properties are located. Since you’ve already done your market research, you’ll save time and effort looking at homes for sale in your target areas. 

Some things to keep in mind when viewing properties online:

  • Photos are very helpful but they don’t show everything
  • A lack of photos means the property is probably not in good condition
  • The property descriptions is written to sell the property
  • Most of the listing information is entered by a person and can be incomplete or inaccurate 

The vital search criteria includes status, location, price, number of bedrooms and baths, and square feet.

The status of a listing will be either Active or Contingent (also called Pending or Under Contract). Active means the property is available. Contingent/Pending/Under Contract means the seller has accepted an offer but the sale has yet to close.

Scheduling Showings

Your Realtor will schedule appointments to view properties. She/he will identify properties for you to see and you can let your agent know about specific listings you want to view. You may not be able to get access to all the properties you want to see on the date you want to see them. That usually depends on the seller. Unless the property is vacant, seller's typically require 24 hours notice.

Make the best use of your time by viewing several properties that are relatively close to each other.

The more properties you see, the better. You’ll develop a good idea of what you get for the price and of what’s generally available in each neighborhood.

As a general rule-of-thumb, properties priced low (relative to like properties in the area) likely have some kind of issue(s) or are in need of updating/work.

Viewing Properties

Only your agent can legally take you into properties for sale (unless it’s an open house). View properties with a critical eye. An updated kitchen with granite counters is very eye-catching but what about the roof and the windows? Look for signs of wear or neglect, particularly when it comes to the more mundane things like furnaces – which can be very expensive to repair or replace. Try opening a few windows and checking the water pressure.

Tell your agent what you like and don’t like about each property. This helps her/him understand your wants and needs, and narrow the search to find a better match.

Consider resale when viewing prospective homes. This purchase will probably not be your last. When it comes time to move again (job transfer, growing family, downsizing, etc.), will the house you just bought be easy to sell? A built-in hot tub in the living room may be just what you want right now, but will your prospective buyers want the same feature?

Resale considerations include location, configuration (layout), size, and major features (swimming pool, addition, etc.). 

Ready to start looking at properties?

 

 


 

 

 

 

 

 

 

 

 

MAKING AN OFFER

When you find "the one", you’ll know it right away and you’ll want to act in a timely manner (faster, if it’s a hot market). Your Realtor will assist you with your offer price and any contingencies for the purchase contract. She/he will "pull the comps" (recent comparable sales data) as a starting point to determine how much to offer.

Recent comparable sales data provides an apples-to-apples comparison with other like-properties in the area that have recently sold. This is the best indication of a property’s market value. Keep in mind comparables only include SOLD properties, and not actively listed or pending properties.

In addition to price, your contract will include contingencies - conditions upon which the sale depends. The most common contingencies are a home inspection and financing. This means you have recourse depending on the results of the home inspection or if you’re unable to obtain a loan. Too may contingencies can make an offer unattractive to a seller. Too few can put you at risk.

Everything is negotiable. In your offer, you can ask the seller to include the furniture – if that’s what you want. It’s more common to ask for repairs, a credit (cash) in lieu of repairs, or a seller contribution to help you pay closing costs. You should keep it reasonable in order to increase the chances of your offer being accepted. In a hot real estate market, frustrated buyers may waive all contingencies. This strategy can be very risky.

There’s much more to your offer strategy, with many variables to consider, including market conditions and competition. Your Realtor will provide guidance.

Contract

Your agent will write the purchase contract. In addition to the name of the buyer(s) and price, it will include:

  • Contingencies
  • Type of financing you’re using
  • The closing date
  • Proof of funds (your SECU pre-approval letter)
  • Earnest money deposit (your personal check)

 

 

Your agent will communicate with SECU and the title company regarding the type of financing and a closing date. The time it takes to process the purchase will vary but averages around 45 days from the contract acceptance date (much longer if you’re buying a short sale).

You’ll give your agent a copy of your proof of funds letter and a personal check for your earnest money deposit. Your deposit shows the seller you are serious about buying the property. A rule of thumb for the deposit is about 1% of the purchase price. Your deposit will be held in escrow by a 3rd party – it does not go to the seller - and will be applied to the purchase price, should your offer be accepted.

Your agent submits your contract to the listing agent, who presents it to the seller. The seller may accept, reject, or counter your offer.

Some kind of negotiation is normal but try to avoid too much back and forth. Keep the big picture in mind. If you absolutely love and got to to have the house, you probably don't want to quibble (and risk losing it) over a relatively small amount of money.

Home Inspection

A home inspection is one of the final steps in the home purchase process. Preformed by a licensed professional, a home inspection is highly recommended. The cost will vary based on the size of the home but ranges from around $300 - $500. It is money very well spent.

An inspection (w/ contingency) is your "out" in case the house has serious problems that you don’t wan to take on. This alone makes an inspection more than worth the cost.

The home inspector will thoroughly examine the property from chimney to basement, checking the condition of the structure, all mechanical systems, the electrical system, appliances, windows, etc. and provide a detailed report, with photos. He/she will inspect items you never knew existed and will tell you what, if anything, needs repair, replacement or attention.

If the property has a well and/or septic system (as opposed to being connected to the public water and sewer systems), you'll want to have separate inspections of these important systems.

A typical home inspection takes about 2 – 3 hours to complete. You should plan on attending the inspection, as you will learn a great deal about the house that will likely be your home. Ask the inspector lots of questions and take notes. You’ll be glad you did.

It's standard practice to pay at the time of inspection, typically with a personal check.

You can ask the seller to repair or replace items that come up on the inspection but the seller has no obligation to do so. Alternatively, you can ask for a credit for the cost of addressing the issue(s). You can also void the purchase contract and walk away based on the results of the inspection.

You will review the inspection report with your Realtor, who will make any recommendations for requests to the seller. Don’t go crazy here. It’s not practical to ask the seller to make cosmetic changes or address minor items like light switch covers. Items more likely to come into play include replacing a roof that is beyond its reliable life, badly worn carpet, or a non-functioning appliance.

If the property is being sold "As is", the seller will not make any repairs - regardless of the inspection results.

 

 


 

 

 

 

 

 

 

 

 

GETTING A MORTGAGE

Mortgages fall into two broad categories: fixed rate and adjustable rate.

Fixed Rate Mortgages 

With a fixed rate mortgage, the interest rate remains the same throughout the life of the loan. Fixed rate mortgages (FRM) are generally available in 30, 20, 15 and 10 year terms.

The advantage of a fixed rate mortgage is certainty; you know what your rate will be from year to year. The loan is amortized, meaning you repay the loan in equal installments over the term of the loan. Part of each payment is applied to interest and part is used to reduce the principal (the amount you borrowed).

Your monthly principal and interest payments won’t change, right up to the day many years from now when you make your last payment. Of course, your total monthly payments are apt to go up as property taxes and insurance premiums rise (see PITI).

A fixed rate mortgage is also a hedge against inflation, since it is not tied to an index that can go up or down. Mortgage interest may also be tax deductible.

The downside of a fixed rate mortgage is that the interest rate and your monthly payment are usually higher than with adjustable rate mortgages.

Adjustable Rate Mortgages

An adjustable-rate mortgage (ARM) has an interest rate that varies over the term of the loan. The initial interest rate is lower than the going market rate, but can increase (or decrease) after a specific period of time. Rates are tied to a financial index to which the lender adds a margin or markup. Any change in the interest rate is based on market conditions.

For example, a 3/1 ARM has a set interest rate for the first three years. After the 3rd year, the rate is adjusted each year and your payment is recalculated. It may go up, down or remain the same, depending on market conditions.

ARMs typically include two rate caps—one that limits how much the rate can be raised at each adjustment, and another that limits how much the rate can climb over the life of the mortgage. For example, an ARM may cap the annual increase at two percentage points and the lifetime increase at six percentage points. Thus, a 3% ARM could climb to no more than 5% after the initial fixed rate period, and to no more than 9% over the life of the loan.

The big advantage of an ARM is that you’ll start out with a lower interest rate, and therefore a smaller mortgage payment. That lower rate may make it possible for you to qualify for a larger loan amount than you could get with a fixed-rate mortgage.

The risk is that in a few years your payments may rise, and you don’t know how high the rate may climb up to the specified cap. Of course rates, and therefore your payments, could decrease too. It’s smart to look at the worst-case scenario in deciding if an ARM is right for you.

Which is best for you?

That depends on you and your circumstances. Can you live with uncertainty about future rate changes? What income increases do you realistically expect in the coming years? How long do you plan to live in the house? If, for instance, you’ll be moving in a few years, you might consider an ARM. But if you plan to stay put, a fixed-rate might be a better choice.

Application

One you have a ratified (accepted) home purchase contract, the next step is to apply for a mortgage.

Although lending standards have tightened recently, an affordable mortgage is still within reach for many borrowers – particularly those with good credit and stable income. When considering your request for a mortgage, lenders (including SECU) will evaluate your application based on the four "C"s of lending:

  1. Credit refers to your history of paying bills and past debt obligations.
  2. Capacity is about how much debt a borrower can comfortably handle. Lenders look at income, employment, savings and debt/obligations.
  3. Collateral refers to the condition and value of the property used to secure the loan.
  4. Capital includes assets that are readily available, including investments, other real estate and savings.

Documentation

You will need to provide documentation to support the information on your loan application. Below is a checklist of the document you may be asked to provide.

  • The complete signed purchase contract including all exhibits/amendments and/or counter-offers.
  • A receipt for earnest money on deposit with the seller’s real estate agent or escrow company (usually a copy of the check).
  • Proof of income; your two previous pay stubs and W-2 forms for the last two years. If self-employed, bring copies of at least two year’s worth of tax returns and a year-to-date profit/loss statement.
  • Statements for all checking, savings and deposit accounts.
  • Stock/bond statements if being used for down payment.
  • If applicable, award letters (Social Security, disability, retirement).
  • If you’re divorced, a copy of the divorce decree and proof of receipt of payment for alimony and/or child support (bank statements showing deposits).
  • A check for the cost of the appraisal (usually $325-$350).

PITI

You will receive your Good Faith Estimate within three business days of applying for the loan. It will include an estimate of your monthly mortgage payment, which is comprised of Principal, Interest, Taxes, and Insurance (PITI). Your lender will typically escrow your taxes and insurance expenses. This means they will collect funds for your property taxes and homeowner’s insurance each month as part of your mortgage payment. They will then make your tax and insurance payments for you.

It’s a good idea to research both of these expenses prior to closing. If the lender’s estimates are on the low side, you may get an unpleasant surprise – in the form of a higher than expected monthly payment - when you go to closing. The annual property tax amount is typically included on the MLS listing. Double check the tax year to ensure it is current.

Both property taxes and homeowner’s insurance premiums tend to rise over time, so you can expect your monthly mortgage payment to rise as well. Your lender will notify you of any adjustments to your monthly payment.

Private Mortgage Insurance (PMI)

Mortgage insurance may be required by your lender if you put less than 20% down (a loan-to-value of less than 80%). PMI protects the lender in case you default on the loan. The insurance premium is built into your monthly mortgage payment. PMI costs vary depending on the loan and size of your down payment.

Generally, you can drop PMI once your equity level reaches 20% of the value of your home. Your equity level typically rises as you make mortgage payments and as the property appreciates in value.

The Federal Housing Administration (FHA) is the primary government mortgage insurer. Recent changes (effective April 1, 2013) now require mortgage insurance for 11 years and, for some loans, the entire term. So for FHA loans, you must pay PMI for at least 11 years, regardless of how much equity you have.     

 

 


 

 

 

 

 

 

 

 

 

CLOSING THE TRANSACTION

The closing, or settlement as it’s sometimes called, is the grand finale—the process that makes that house officially yours.

The buyer, buyer's agent, seller and seller's agent attend the closing, which is often held at the title company's office. At the closing you will sign and initial many documents. You will also provide a check for closing costs.

The title attorney conducts the closing proceedings and ensures the transaction is completed. This includes the confirmation of the electronic transfer of purchase funds from your lender - the actual purchase.

Closing Checklist

  • Schedule the Closing - Once you have your loan approval and your commitment letter, it’s time to set a date for the closing. In most cases, your Realtor specifies this date in the contract, and will schedule the closing for a time that suits all parties. The closing must be before the expiration of your commitment letter and rate lock, if you have one.
  • Select a Closing Agent - The closing (or settlement) agent is usually a title company or attorney that you select. Your Realtor can provide recommendations.
  • Meet Conditions – Check your commitment letter from your lender. Does it mention any conditions to the loan offer, such as additional deposit information or income documentation?
  • Get Homeowner’s Insurance – Homeowner’s insurance covers fire, theft, certain natural disasters and personal liability if someone is injured on your property. Shop around and compare insurance companies. You may be able to save by obtaining a joint car/house policy. Usually, you need to pay one year’s premium upfront and provide a receipt to your loan processor to verify it has been paid. The monthly premium will be escrowed and paid by your lender.
  • Final Walk Through – The day before or day of closing, you will do a final walk-through your new house. Make sure everything is as you expect it to be. Were any appliances or furnishings supposed to be left behind for you? Have all the repairs you asked for as a condition of sale been completed to your satisfaction? If you find any problems, you have the right to delay the closing until these are corrected. You may also want to schedule a guided tour of the house with the seller, either before or right after the closing, in order to learn even more about the property.

Other Preparations

SECU will attend to various other matters before closing. We will obtain a title search to be sure the title to the home is clear. The title search verifies that the seller is the owner and also turns up any liens (legal claims) against the property, such as an IRS lien for taxes owed or a contractor’s lien for unpaid bills. The seller must pay any such claims before or at closing.

The lender will also get a survey of the property’s boundaries to ensure they are correctly described on the purchase-and-sale agreement.

The costs of the title search, title insurance and the survey are your responsibility. You will pay them as part of the closing costs at settlement.

Bring Along on Closing Day 

  • Government-issued photo ID of all the owners-to-be (those whose names will be on the deed).
  • Information about any transfers of property or pro rations (such as for utility bills) between you and the seller. Your Realtor will typically take care of this. Just be sure someone has attended to it before your closing day.
  • A certified or cashier’s check, rather than a personal check, to pay closing costs.

Closing Costs

Closing costs should not be a surprise to the buyer on settlement day. Your lender will have already provided you with the Good Faith Estimate of settlement charges within three days of your loan application. The title company will provide a written statement of the actual closing costs just prior to closing.

Remember, all told you can expect closing costs to amount to 3% to 5% of the loan amount. And like the down payment, closing costs are due in full on the day of closing; they are not part of the mortgage. You may have to pay all of closing costs listed below, or the seller might pay some of them if it was specified in the contract.

Below are some of the settlement charges that may appear on your HUD-1 settlement sheet: 

  • Loan discount points - Or just "points." Points adjust the lender’s yield on the loan to market conditions. Each point equals 1% of the loan amount. For example, if you have a $100,000 loan with 1.5 points, that’s $1,500. You might opt to pay points to get a lower interest rate.
  • Appraisal fee - The lender hires someone to appraise hte house to verify that its value is enough to cover the loan. You most likely already paid this to the lender when you applied for your loan. The cost can vary but usually falls somewhere between $350-$450.
  • Credit report fee - To assess your creditworthiness (cost varies, usually $35-$50 or more).
  • Flood determination fee - Paid to the lender to determine if the property is in a flood hazard area and needs flood insurance coverage.
  • Tax service fee - A fee collected to set up third-party monitoring of the borrower's property tax payments. This is to ensure that the payments are made on time and to prevent tax liens from occurring to the detriment of the lender.
  • Pre-paid interest - You will need to pay the interest covering the period from the closing date to the date of your first mortgage payment. For instance, if you close on June 12 and your first mortgage payment won’t be made until August 1 (for amounts accrued in July), you’ll need to pay the interest covering June 12 to July 1.
  • Private mortgage Insurance - if you need PMI because your down payment was less than 20%, you may have to pay the first year’s premium at closing. Typically, however this is not required, and the PMI premium is added into your monthly payment.
  • Reserves or escrow accounts - At closing, your lender may set up an escrow account into which you will make monthly deposits to cover your premiums for PMI (if you have it), hazard insurance, and property taxes.
  • Settlement or closing fee - Fee the title company (or escrow company) charges to conduct the closing duties.
  • Document preparation fee - Paid to lender or title company/attorney for preparing the closing documents.
  • Title search - Assures that the seller is the legal owner of the property and that there are no liens (legal claims) against the property.
  • Title insurance - Title is proof of ownership. Title insurance (for both buyer and lender) is a one-time fee that protects against problems or defects with the title, such as outstanding liens or errors.
  • Recording and transfer fees - State or local governments often have a tax on property transfers.
  • Survey - The lender may require this to confirm the property’s legal description.
  • Pest inspection - Fee for termite inspection, which your lender may require. 

Homeowner’s Insurance

Also called hazard insurance, this protects your home against fire, storm, etc. and is required by your lender. The dollar amount of coverage should be equal to the house’s replacement value (what it would take to rebuild it in the current marketplace, excluding the cost of the land, which is considered indestructible.) A policy for 100% of replacement value will, of course, give you the best protection; it will also cost you more in premiums.

Most homeowner’s policies consist of two types of insurance: coverage against loss or damage to the house itself (and outbuildings), and personal liability insurance to protect you if you are sued when someone gets injured on your property.

You may also be required to obtain flood insurance, if your house is located in a federally designated flood hazard area.

Closing Documents to Keep

At the closing, you will sign and inital many documents, and you will be give copies. It is advisable to keep any document you sign however all closing documents will be assembled in a folder for you. These documents include:  

  • HUD-1 settlement statement – This is the form that itemizes everything covered in the closing; it shows which costs were paid by the seller and which were paid by the buyer.
  • Truth in Lending statement – This document is required by federal law, the idea being that borrowers should know the details about the loans they take. On this document, you’ll see an annual percentage rate (APR). This will be higher than the rate stated on your mortgage because it factors in points and other fees you pay. The Truth in Lending statement also spells out the total amount you’re financing, the total amount of interest you’ll pay over the life of the loan, what your monthly payments will be.
  • Note – This represents your promise to pay the lender according to the agreed-upon terms. It details all the terms of the loan, including any penalties the lender will impose if you default. It also explains your right to prepay the loan (that is, pay up your mortgage before your loan period is up) and specifies if there are any prepayment penalties.
  • Mortgage Deed of Trust – This is the legal document that secures the note and gives the lender the right to take your house if you default. It spells out all your responsibilities as a borrower.
  • Deed – One of the most important papers in the packet; this is the document that transfers the ownership of the property from the seller to you.
  • Affidavits – On closing day, you will sign many affidavits, such as stating that you intend to occupy the property and so on.
  • Riders – These detail any additional requirements that apply—for example, an ARM rider or a condo or PUD rider for condominiums or planned unit developments.

 

 

 

 

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