Texas Home Buyers Guide
Being Pre-Approved lets you know your price and term limitations and therefore removes some of the stress of finding the perfect home.
Being pre-approved also empowers you during the negotiation process. It gives the seller confidence in knowing your finances are one less aspect of the transaction they need to worry about. You’ll need a pre-approval to bid on a bank owned or short sale home. Your offer won’t even be considered if there are several offers on a home if you don’t have a pre-approval.
A pre-approval gives the seller assurance you can afford their home and therefore your offer is given serious attention. This is achieved after the lender has verified all information you have submitted in the application process.
8 Things to Know when Shopping for a Home
1. Have a checklist
Whether you are a first-time homebuyer or an experienced owner, buying a house requires a “preflight check,” in the words of Barry Zigas, director of housing policy for the Consumer Federation of America.
Here is a six-item checklist, including tips on two types of savings you need, plus advice about what’s more important than buying a house for its resale value.
2. Strengthen your credit score
“It’s a brave, new world with respect to credit requirements for mortgages,” says John Ulzheimer, president of consumer education at CreditSesame.
One old rule still applies: The higher your credit score, the lower your monthly payments.
“Below 660 or 680, you’re either going to have to pay sizable fees or a higher down payment,” Zigas says. And that’s pretty much the cutoff score for getting a mortgage, he says.
Vicki Bott, a former official at the U.S. Department of Housing and Urban Development, says that her office noticed much the same thing. “While there are many qualified borrowers in the 580 range, the market today is probably (looking for) 640 to 660, at a minimum,” Bott says.
On the other end, a score of 700 to 720 will get you a good deal, and 750 and above will garner the best rates on the market, Ulzheimer says.
Improve your chances by: pulling your credit reports and ensuring you’re not being unfairly penalized for old, paid or settled debts, Zigas says.
Stop applying for new credit a year before you apply for financing. And keep the moratorium in place until after you close on your home, Ulzheimer says.
3. Figure out what you can afford
The buyer’s mantra: Get a home that’s financially comfortable.
There are various rules of thumb that will help you get an idea of how much home you can afford. If you’re using FHA financing, as almost one-fifth of buyers get FHA-insured loans, your home payment can’t exceed 31 percent of your monthly income. But with some mitigating factors, FHA will let you go higher.
4. Realistic debt-to-income ratio
For conventional loans, a safe formula is that home expenses should not exceed 28 percent of your gross monthly income, says Susan Tiffany, director of personal finance information for adults for the Credit Union National Association.
For a rough assessment of how much house you can afford, check out our Mortgage Calculator.
Improve your chances by: trying on that financial obligation long before you sign the mortgage papers, says Tiffany. Before you home shop, calculate the mortgage payment for the home in your intended price range, along with the increased expenses (such as taxes, insurance and utilities). Then bank the difference between that and what you’re paying now.
Not only does it allow you to build a nice nest egg, but “you can back away from it,” or scale back, if the payments start to pinch, she says.
5. Save for down payment, closing costs
Depending on your credit and financing, you’ll typically need to save enough money to put anywhere from 3.5 percent to 20 percent down.
If you’re using FHA financing, then you need a score of 500 or higher. And in the 500 to 579 range, if you can find a lender, you’ll have to put 10 percent down instead of 3.5 percent.
One exception: Veterans Affairs loans, which require no down payment.
Don’t forget loan fees
Another cash expense: closing costs. Whatever your loan source, you’ll also need money to pay closing costs, which run (depending on where you live ) from $2,300 to $4,000. Get the average closing costs in your state at Bankrate’s closing costs map.
Improve your chances by: Along with banking your own money, search out down payment assistance, Tiffany says. Often it’s location-based or tagged to a certain type of buyer, like first-timers, she says. So do an Internet search with the city name, then the county name, along with word combinations such as “down payment assistance,” “first-time homebuyers” and “homebuyer’s assistance.”
In a buyer’s market, you can also negotiate to have the seller pay a portion of the closing costs.
6. Build a healthy savings account
Building your savings is over and above your money for the down payment and closing. Your lender wants to see that you’re not living paycheck to paycheck. If you have three to five months’ worth of mortgage payments set aside, that makes you a much better loan candidate. And some lenders and backers, like the FHA, will give you a little more latitude on other factors if they see that you save a cash cushion.
That money will also help you with maintenance and repair issues that come up when you own a home. While repairs are sporadic, items such as a new roof, water heater or other big-ticket items can hit suddenly and hard.
Improve your chances by: setting aside money every month. A good rule of thumb: On average, you’ll spend 2.5 percent to 3 percent of your home’s value annually on upkeep, repairs and maintenance, says Joseph Gyourko, professor of real estate at the Wharton School of the University of Pennsylvania. If you’re buying a $250,000 home, aim to bank $520 to $625 per month.
7. Get pre-approved for a mortgage
For serious home shoppers, “the No. 1 thing is they better have everything in order,” says Dick Gaylord, broker with Re/Max Real Estate Specialists in Long Beach, California, and former president of the National Association of Realtors. That means that, before the real home shopping begins, you want to get financing in place, he says.
And the preapproval process is “much more extensive” than it was a few years ago, he says.
Bott agrees. “That documentation around income and assets is very essential, more so than in the last five years,” she says.
Improve your chances by: getting financing in place “before you walk through the first house,” Gaylord says. Otherwise, he says, “How do you know how much you can afford?”
8. Buy a house you like
If you’re buying today for yourself and your family, you want a home that will make you happy for the next few years.
Gone are the days when you could count on a quick sale, Tiffany says. And depending on how much you put down, and how much you have to shell out to sell and relocate, short-term ownership can be a pretty expensive proposition.
Improve your chances by: stepping back, Gyourko says, and making certain “you like the house.”
Home Loan Process Fees
A down payment is the amount of money you spend upfront to purchase a home and is typically combined with a mortgage to fulfill the total purchase price of a home. In addition to your down payment amount, your credit score, credit history, total debt and annual income will influence how much house you can qualify for.
How much do I have to save?
Typically you will need to save 5 to 20 percent of the sale price in cash in order to qualify for a conventional loan. If you put down less than 20 percent, you will have to pay mortgage insurance (either private or public depending on the type of loan). See more information about mortgage insurance. Check out this down payment resource center to see if you are eligible for down payment assistance.
Popular low down payment financing options:
Saving for a 20 percent down payment might be too difficult or take too many years for many first-time home buyers or borrowers with lower household incomes. Popular alternative programs allow for a 0 to 3.5 percent down payment.
The most common programs for lower down payment mortgages come from the Federal Housing Administration (FHA). Most FHA loans require a minimum 3.5 percent down payment.
In a rare number of special circumstances, you may be able to qualify for a mortgage with no down payment through the Veterans Affairs (VA loan) or the Department of Agriculture (USDA loan) programs. Both programs have eligibility restrictions that are outlined on their websites.
In addition to FHA and VA, there are state and local down payment assistance programs that help people with low down payments.
Down payment assistance and other home buyer programs:
Saving for a down payment remains the No. 1 obstacle to home ownership. However, what many people don’t know is that there are more than 1,000 down payment assistance programs available across the U.S. that may help you buy a home sooner than you think. There are also other types of home ownership incentives you should know about whether you need help with the down payment or not. These programs can be as unique as the home buyers and communities they serve ranging from grants for closing cost assistance to rehab loans, below market-rate first mortgages, mortgage credit certificates and more.
Three most common types of programs:
Down payment assistance program: They are normally soft second or third mortgages or grants, providing benefits such as zero percent interest rates and deferred payments. The assistance amounts will range from a few thousand to tens of thousands of dollars and can be used towards closing cost assistance, prepaid, and/or principal reductions. Most home buyer assistance programs are provided through municipal or quasi-government agencies or non-profits. Some are sponsored by employers and you may find programs that offer additional funds for rehab work on a home.
Below-market first mortgages: Many larger housing finance agencies, particularly at the state level, offer first mortgages to accompany their down payment assistance program(s). These first mortgages typically offer a below market interest rate and may even have reduced closing costs or reduced fees. They are often funded by state housing finance agencies and may offer rates below what the normal market can provide, helping to lower buying costs and monthly payments.
The USDA also has two first mortgage programs for each county, where applicable: the Rural Direct Loan and the Rural Guaranteed Loan. Both loans are primarily used to help low-income individuals or households purchase homes in rural areas. Funds can be used to acquire, build (including purchase and site preparation to provide water and sewage), repair, renovate or relocate a home. These programs allow financing of up to, and sometimes more than, 100 percent of the selling price with no mortgage insurance requirements.
Tax Credit or Mortgage Credit Certificate (MCC): A tax credit is designed to help first-time home buyers offset a portion of their mortgage interest on a new mortgage as a way to help qualify for a loan. Because it is a tax credit and not a tax deduction, mortgage lenders will often use the estimated amount of the credit on a monthly basis as additional income to help you qualify for the loan. The amount of mortgage credit allowed varies depending on the state or local government issuing the certificates, but the IRS cap is $2,000 per year.
If a home buyer were to receive an MCC that offers a 30 percent credit on a $200,000 loan for 30 years with a rate of 6 percent, the allowable tax credit would be figured as follows (all numbers rounded):
Mortgage interest paid (1st year): $11,933 x MCC credit: 30 percent = Total credit: $3,579
Because the total credit in this example exceeds the IRS limit of $2,000, the home buyer would report a $2,000 credit on their tax return. The buyer may continue to receive a tax credit for as long as they live in the home and retain the original mortgage.
Qualifications and requirements for these programs:
While qualifications and requirements vary, many programs are for first-time home buyers — defined as someone who has not owned a home in three or more years. Eligibility is most commonly based on the buyer’s income and sales price limits which vary by city or county.
Assistance programs are for home buyers, not investors. The providers of these programs will require that the home is used as a primary residence only.
Home buyers purchasing a home in areas targeted for revitalization may receive special benefits such as higher assistance amounts, more lenient income requirements, and if there is a first-time home buyer requirement, it may be waived. There are often additional benefits, or even entirely separate programs, for educators, protectors, health care workers, veterans of the armed forces, and households with disabled members.
Most programs will require a little money down from the home buyer, as well as home buyer education, especially for first-time home buyers.
Benefits of using a home buyer program
Helps home buyers purchase a home sooner: It immediately builds your buying power and can help you take action on a purchase more quickly. Down payment assistance programs also gives home buyers an important cash cushion so savings and reserve funds are available for home maintenance and other unexpected emergencies.
Makes the purchase as affordable as possible: Home buyers of all income levels have seen the housing crisis up close and want to ensure their purchase is an affordable and sustainable one. Home buyer programs can help more families build some equity when they purchase and take advantage of record low interest rates.
Helps offset increases in FHA premiums: Over the years, FHA has been the primary place for many first-time home buyers to get a low-cost, low down payment loan. In fact, FHA sustained housing markets nationwide during the economic and housing downturn. However, FHA recently took steps to stabilize the fund, including increases to premiums, increased down payments for some borrowers, and greater risk controls. Many don’t know that FHA loans can be combined with a down payment assistance program, helping offset increases in the down payment requirement and premiums.
Makes it possible for working families to live close to their work: All communities need public service employees. These are the police officers, firefighters and teachers who, especially in high-cost areas, often live far from the community where they work. Important note: You don’t need to be a teacher, nurse, police officer or fireman as long as you work for one of these institutions. These programs are designed to help keep these vital professionals in the community and reduce commuting costs.
Provides valuable home ownership education: In order to qualify for an assistance program, most require home buyers to complete home ownership education. It typically covers the logistics and steps of buying a home as well as financing basics, home ownership responsibilities and contract obligations. This valuable, upfront education helps prepare buyers for the home buying process and sets you up for long-term home ownership success.
Ask your agent and lender about programs in your market. Do your homework on assistance programs before you begin shopping for homes. It will help you understand all your mortgage options and what you may be able to afford.
List of Closing Costs and Fees
Closing costs and fees are part of a mortgage, and knowing what they are and how much they should be is a good idea. This will put you in a position to challenge a cost or fee that seems exorbitant. Even if everything is correct, you have the right to ask, and your mortgage company has the duty to explain — in detail — each and every closing cost and fee.
If you’ve ever gone through the mortgage process, you know about closing costs. Most likely you were given a list of costs associated with the mortgage and told to either bring the money to closing or roll the costs into your mortgage. But, if this is your first mortgage, you’re still getting used to the concept of paying more money, beyond your down payment. Usually, closing costs are paid by the person purchasing the home, but with some mortgages (VA for example) the seller can pay closing costs. A little-known fact is that a big part of costs and fees actually go to third parties who process the mortgage, as well as local governments as taxes. The money doesn’t go to the mortgage company.
Most people take closing costs and fees for granted and just pay what they are told. They don’t question the mortgage or title company about the costs associated with a mortgage closing. That’s too bad, because they should.
As an informed mortgage customer, you should make your mortgage banker walk you through each cost, and explain in detail what you are paying. The bottom line is that you don’t want to be surprised at the last moment. Imagine getting a call from your mortgage banker the day of your closing with a message that your closing costs are $1,200 more than you thought. And the only explanation is that the title company made a mistake. Chances are you may have to reschedule your closing to get the money together for the difference, or have your mortgage adjusted to have the amount rolled in.
To avoid a situation like this, it’s a good idea to know exactly what the costs and fees are, how they are calculated, and why you (or the seller) have to pay them. Here’s a breakdown of the most common closing costs and fees with a rough estimate of average cost:
- Appraisal (up to $450) – This is paid to the appraisal company to confirm the fair market value of the home.
- Credit Report (up to $30) – A Tri-merge credit report is pulled to get your credit history and score. You cannot supply your consumer pulled report and the scores pulled form the internet from any place other than myfico.com are not real scores nor are they accurate.
- Closing Fee or Escrow Fee (generally calculated a $2.00 per thousand of purchase price plus $250) – This is paid to the title company, escrow company or attorney for conducting the closing. The title company or escrow oversees the closing as an independent party in your home purchase. Some states require a real estate attorney be present at every closing
- Title Company Title Search or Exam Fee (varies greatly) – This fee is paid to the title company for doing a thorough search of the property’s records. The title company researches the deed to your new home, ensuring that no one else has a claim to the property.
- Survey Fee (up to $400) – This fee goes to a survey company to verify all property lines and things like shared fences on the property. This is not required in all states.
- Flood Determination or Life of Loan Coverage (up to $20) – This is paid to a third party to determine if the property is located in a flood zone. If the property is found to be located within a flood zone, you will need to buy flood insurance. The insurance, of course, is paid separately.
- Courier Fee (up to $30) – This covers the cost of transporting documents to complete the loan transaction as quickly as possible.
- Lender’s Policy Title Insurance (Calculated from the purchase price off a rate table. Varies by company) – This is insurance to assure the lender that you own the home and the lender’s mortgage is a valid lien. Similar to the title search, but sometimes a separate line item.
- Owner’s Policy Title Insurance (Calculated from the purchase price off a rate table. Varies by company) – This is an insurance policy protecting you in the event someone challenges your ownership of the home.
- Natural Hazards Disclosure Report – Required by law in the state of California for the seller to give the buyer. Reports run between $90 to $150. May be required by other states
- Homeowners’ Insurance ($300 and up) – This covers possible damages to your home. Your first year’s insurance is often paid at closing.
- Buyer’s Attorney Fee (not required in all states – $400 and up)
- Lender’s Attorney Fee (not required in all states – $150 and up)
- Escrow Deposit for Property Taxes & Mortgage Insurance (varies widely) – Often you are asked to put down two months of property tax and mortgage insurance payments at closing.
- Transfer Taxes (varies widely by state & municipality) – This is the tax paid when the title passes from seller to buyer.
- Recording Fees (varies widely depending on municipality) – A fee charged by your local recording office, usually city or county, for the recording of public land records.
- Processing Fee (up to $1,000) – This goes to your lender. It reimburses the cost to process the information on your loan application.
- Underwriting Fee (up to $795) – This also goes to your lender, covering the cost of researching whether or not to approve you for the loan.
- Loan Discount Points (often zero to two percent of loan amount) – “Points” are prepaid interest. One point is one percent of your loan amount. This is a lump sum payment that lowers your monthly payment for the life of your loan.
- Pre-Paid Interest (varies depending on loan amount, interest rate and time of month you close on your loan) – This is money you pay at closing in order to get the interest paid up through the first of the month.
- Property Tax (usually 6 months of county property tax)
- Wood Destroying Pest Inspection and Allocation of Costs – If required by the lender or buyer, the inspection generally runs up to $125.00. Repairs can get expensive if evidence of termites, dry rot or other wood damage is found. example: Fumigation of a typical 1500 square foot house could run around $2,000.
- Home Owners Association Transfer Fees – The Seller will pay for this transfer which will show that the dues are paid current, what the dues are, a copy of the association financial statements, minutes and notices. The buyer should review these documents to determine if the Association has enough reserves in place to avert future special assessments, check to see if there are special assessments, legal action, or any other items that might be of concern. Also included will be Association by-laws, rules and regulations and CC & Rs. The fee for the transfer varies per association ,but generally around $200-$300.
Last, but not least, you probably will get your own home inspection that usually costs around $225 – $450 to verify the condition of a property and to check for home repairs that may be needed before closing.