Home Buying 101 Program Recap

Buying a home can be a stressful experience, especially for first-timers, so it is important to be well-informed and choose the right agents along the way.

A big thanks to James Goodman, Home Finance Consultant for The Credit Union of New Jersey, for his comprehensive overview of the homebuying process.

While buying a home can be a major milestone in your life and serve as an investment for the future, it is important to ensure that you can financially afford it.

Key Players

There are many people that are involved in the home-buying process:

•  Buyer and seller (can be an individual person or an organizations such as a bank)
• Realtor – often referred to as a buyer’s or seller’s agent responsible for finding homes and drafting your offer.  They often earn a commission on the sale of a house.
• Lender – Organization that is providing you with any money needed to purchase the house.  This will include a loan officer in charge of your account and processor who takes all your information and determines if you qualify for a loan and how much.
• Attorneys – It is required in New Jersey to have a real estate attorney who will finalize the contract, ensure all documents are signed, ensure that all money is appropriately distributed, and ensure your receive your keys.
• Home Inspector – Does a walk-through of the home to ensure that the home is up to code and can identify current and potential problems with the home.
• Appraiser – Assesses the value of the home to determine the fair market value of the home.

Pre-Qualified vs. Pre-Approved

It is recommended to receive a pre-qualification letter from a lender before shopping for a house.  A pre-qualification letter will give you an idea of how much you can afford and determine if you will qualify for any of the lender’s loan programs.  Generally, this involves a verbal account of your income and debts as well as hard inquiry on your credit.  Many sellers like to see a pre-qualification letter since it indicates that you are a suitable candidate.

Pre-approval is a more in-depth process that actually approves your for a specific loan amount.  This requires the submission of a variety of documents including your past 2 years of tax returns, a month’s worth of pay stubs, statements from your bank accounts, a hard inquiry on your credit, and other documentation as required by the lender.  Your account then undergoes an underwriting process where all of your financial information is examined to determine what your debt to income ratio is to see if you actually qualify for a specific loan.  Often referred to as PITI, the pre-approval process will take into consideration the Principle, Interest, Taxes, and Insurance related to the house and corresponding loan and compare that your current income and monthly debt.  The calculation consists of your:

• Monthly Income/12 months
• Total monthly debt
• Front end ratio – Mortgage (PITI) is no more than ___ % of your monthly income
• Back end ratio – Mortgage (PITI) and your monthly debt is ___ % of your monthly income

While the ration can range between lenders, a good rule of thumb is 29% front end/45% back end.   If you are over these numbers, especially the back end ratio, it is likely that you will not be approved for the loan; however, if you are on the cusp, you may receive approval.

Types of Lenders and Loans

When shopping for loan, there are many types of lenders out there.  Conventional lenders are often private lenders, such as bank or credit unions, in which the loan is not sponsored or secured by a government entity; the exception to this are the federal agencies Fannie Mae and Freddie Mack.  There are also unconventional or governmental lenders such as FHA (Federal Housing Administration) and VA (Veterans Administration) that offer loans to those that may not qualify under a conventional lender, but may also require additional monthly payments called PMI (private mortgage insurance) to help the lender in the event you default on the loan.

Generally there are 3 types of loans – fixed, adjustable, and jumbo.  Fixed rate loans have a set interest rate for the life of the loan, which can be 10, 15, 20, 25, or 30 years.  Generally, the longer the length of the loan, the lower the monthly payments, but the more you will pay in interest.  Adjustable rate loans start off with a lower interest, but will be adjusted at certain intervals based on market conditions.  These can be 3/1, 5/1, 7/1, or 10/1, with the first number being the interval at which the interest rates are adjusted.  However, as you build equity in the home, you may qualify to refinance your loan at a lower interest rate or transfer to a different loan type.  Jumbo loans are loan amounts generally over $424,100 in most counties, and may required certain restrictions in order to qualify, such as a larger down payment or higher PMI.

Closing Costs

Many people are unaware that they will owe money at the closing, above and beyond any down payment, which can lead to a host of problems.  During the entire home-buying process, especially when you are under contract, there are many agents that are performing a variety of tasks that will need to be paid during the closing.  Here are some of the costs that may appear:

• Lender fees – these can include application fee, processing fee, appraisal fee, and others
• Inspections – some home inspectors require up-front payment at the time of inspection or some may be filed with your attorney.  These generally range from $500 – 700.
• Pre-paid interest – You will have to pay for the interest on your loan for the remainder of the month in which you purchase the home.  Many people try to close at the end of the month to reduce this amount.
• Title – Fee for the title agency to run a title check to ensure that the property is free and clear of any liens and judgements.
• Escrow – Mortgage company will ask you to prepay your first property tax payment in case the seller has not paid property taxes for the current term.
• Attorney fees – These generally range from $900 – 1,000.
• Survey – In conjunction with the appraisal, a survey is done of the property to determine your property lines.  This survey may be needed for future improvements such as fences.
• Recording fees – Fees charged by the county to register the deed in your name.

Generally, the total of these fees range from $4,500 – 6,000, but can be more.  Additionally, at the time of closing, you will be required to furnish the amount of your down payment.

The Mortgage Process

So what does the entire mortgage process look like?

1. Application – You will fill out an application for a specific loan with a specific lender.  It is important to shop around before filing out any application since each application will cause a hard inquiry on your credit and can potentially lower it if too many are made in a short period of time.
2. Processing and documentation – Your loan officer will request a variety of documentation from you to submit to the underwriter.  These will include tax returns, pay stubs, bank statements, and proof of identity.
3. Home Appraisal – The value of the home will be assessed and if it is appraised lower than the seller’s asking price, you attorney may use this to negotiate with the seller.  If the seller refuses, you can use this discrepancy to back out of the contract without penalty.
4. Underwriting and Approval – Once both parties agree to the contract and final price of the house, the underwriting process starts to approval you for the requested loan amount.  During this time, you may be required to explain large deposits in your bank statements, such as gifts or settlements.  Additionally, if you are receiving funds for a down payment as a gift from someone else, you will need to provide a gift letter to explain those funds.  Additionally, you should not make any major purchases using your credit or open any new lines of credit as your credit score will be checked again at the end of the process.  After the underwriting process, if you meet the ratio requirements from the lender, you will receive your approval letter.
5. Closing – You will meet with your attorney to sign a variety of paperwork to finalize the sale.  Additionally, you will need to bring all money owing and due, including down payment and closing costs.  Once all papers are signed and money is parceled out, you will receive the keys to the house.

More Information

If you have any questions on the home buying process, please reach out to James Goodman at JGoodman@mortgagedept.com.  You can view a recording of the webinar at https://youtu.be/w0EPyVT9GpA.  You can download a copy of the presentation slides at https://www.njstatelib.org/wp-content/uploads/2023/04/Presentation-Slides.pdf.