So you want to buy a home? When should you start the process? One month out? Three months? Six? What’s the average timeline of events when you buy and most importantly what’s the biggest mistake almost everybody makes in their first home?
Well, there might be more than you think but is it a waste of time to talk to someone this far out? Many people will find it surprising to hear that I suggest you talk to a lender as far out as you can. Literally, right when you decide you want to buy a home, one of the first steps that will help you is talking to a good lender, not your uncle who’s out of the biz and did it 10 years ago, but wasn’t even good at it. There’s a reason that old loan officer isn’t a loan officer anymore.
Nick, if I can’t buy for two years why the heck would I talk to someone now? I don’t want to waste their time or mine. Well I’m glad you asked, you’re a very considerate person.
For instance, your pay type plays a big role in what you can qualify for. If you switch from salaried income to commission-based income because you expect to make more money. Well that seems like a good idea but it’s actually a disaster for qualifying for a home loan. This is because salary and full-time work typically don’t require a two-year history, where other pay types could. So even though you might be making a lot more, we might not be able to use any of it until you have a two-year history of receipt. Yuck! This goes for second jobs, bonus income, self-employment, shift work, and a whole lot more.
What if you have a decent savings amount? Would it be better to pay down some debts with that or just put a larger down payment? This can completely depend on your scenario. Sometimes it’s better to pay down your debts. This can get us to the credit score goal you need to get a better loan rate. Other times, it’s better to allocate that money towards your down payment instead.
A professional with good experience can look at your scenario and within a few minutes be able to put these options side by side for you, so you can clearly see the advantage of each. Oftentimes there’s a clear winner. Along these lines, sometimes there’s errors or issues with your scenario or credit that have an easy fix but that can take a little time to clear them up.
Sometimes, it might make sense for us to open a new line of credit because our what if simulator we ran your credit through, says your score would likely benefit from a little more credit history. You can’t get six months of credit history in three weeks. That’s science.
It all comes down to a good plan. We don’t want you to accidentally make an honest mistake that kicks you out of being able to buy a home when you’re ready. And something I’ve seen over and over and over again in this business is when people put a goal in their mind, they usually move a lot faster than they think they’re going to.
So many times someone has said, hey Nick we’re definitely not moving for six months. Our lease isn’t up until May. But then three weeks later they’re like, we found the perfect house, so how quick can we get qualified?
We don’t want to get caught flat-footed and miss out on your dream home when it’s so easy to put a plan together today and get you ready.
There’s also no worse feeling in this process than the one that got away. Okay, you’ve decided to start the loan home process. Here’s a quick overview of what that looks like.
First you’re going to fill out a loan application. That’s probably only going to take you about 10 minutes. We’re going to gather some basic supporting documentation. Like your pay stubs, some W-2s, tax returns, bank statements, a pint of blood, your right pinky finger. I’m just kidding, we don’t always need tax returns.
We’re gonna give these thanks to your loan originator. He or she is your quarterback for the loan process and will guide the team down the field. Pick a good one. They are not all Tom Brady.
Next your loan officer will come up with the best options and structure for your unique scenario. Then you’ll go over these details of the plan. Now beware, this is where most lenders stop. And one of the biggest mistakes most buyers make, over half of buyers make this mistake. This is the pre-qualification or pre-approval step.
So what should happen instead? A good lender is going to take the application and documents and send them to the decision maker. In lending, that’s the underwriter. The underwriter is like the referee in the loan world and will tell us if it’s good or not. This is known as a TBD underwrite.
Most big box and radio lenders don’t do this step. It costs a lot of precious underwriter time to take hours out of their day to do this, knowing full well you may not ever buy a home and that work might have been a waste. But a good lender gets this doing this.
Work up front will help in many ways including removing the stress, clarifying exactly what you can afford, speeding up the process once you find a home, and overall making your offers so much stronger in today’s competitive home market. Sellers love to hear that the loan piece is done and that offer will get accepted way more often than someone with a pre-qualification from a rookie loan originator. Who started last week and can’t even spell loan. It’s l-o-n-e, duh.
This last piece doesn’t require any extra effort from you. So find a lender who does this, like us. It typically only takes a lender a few extra days to get this depending on how complex your scenario is. The more complex your scenario is, the more important this step is to do up front.
This is the fun part. Side note, it’s no cost to you as a buyer to have a realtor. Really? They work for free? Well, no. The seller pays realtor fees for both the buyer and the seller sides. So definitely take advantage of this.
Sellers aren’t likely to give you a discount just because you don’t have one. And their agent doesn’t want to work twice as hard trying to educate both sides on the steps, and the process, and negotiating inspection, and appraisal, and etc.
For that reason your offer could even get tossed right away if you don’t have an agent who knows what they’re doing. So pick a good one. If you need a recommendation, your lender probably has a few that are really good. Again, just like LOs, they’re not all equal, they’re not all Tom Brady.
If the seller signs your contract, you’re under contract! Yay! Contracts are typically written with a 30-day time frame but this can be longer or shorter. This 30-day window between going under contract and actually going to the closing table to sign and get keys, is used for a few things.
First, your lender and you will lock in your rate and loan terms. You can’t lock in your interest rate without a home under contract. So your lender will update the loan options he sent at the beginning and you will review them and lock in the interest rate. We want to know what our rates gonna be and our payment before we get to the closing table and locking it in does this.
Second, you’ll need to shop for home insurance. This needs to be done and in place prior to the closing table. So we’ll want to get this lined up beforehand. The very first weekend. You’ll typically do a home inspection. A home inspection is optional, but even with a new build and especially with an older home, I’d highly suggest it. Once you buy a home, it’s on you. So spend the money on this.
The price varies by area but smaller homes typically cost less than larger ones. And these can be anywhere from a couple hundred dollars to around a thousand dollars for a more expensive, larger home. But honestly, it’s worth every penny. The inspector will check everything in the home to see what’s broken. They’ll look for the major and minor issues. Everything from appliances and water heaters, to the foundation, roof, electrical, sewer, even radon. Down to the little things too. Like the outlet grounding and if the door rubs when it closes.
Once the inspection comes back, usually a few days later, the buyer and seller can negotiate on what should be fixed and what’s okay. The agent will help with a lot of this part and really earns their money here. If both sides can’t agree, the buyer can back out and get that earnest money back as long as they back out prior to the inspection resolution date stated on the contract.
If both sides agree to move forward, next the appraisal will be ordered. The appraiser doesn’t so much care about what’s wrong with the home, but instead gives a value estimate based on the most similar homes in the area that have sold the most recently. This is to protect the buyer and the lender from overpaying. No lender wants to or will put a loan on a home that isn’t worth what they’re lending.
Again at this stage, if the appraisal comes in lower than the price offered to pay, the buyer and the sellers will negotiate depending on what they stated in the contract. And if they can’t come to an agreement, the buyer can once again back out as long as they haven’t passed the agreed-upon appraisal deadline in the contract.
The final piece that happens in the 30-day contract period, is to finish the underwriting step. If you took my advice and used a company that does this before you find a home, you’re pretty much done. All that’s left is for the underwriter to review the property related items like the appraisal, the home insurance, the title report. And since the other stuff is cleared, it’s smooth sailing.
Like the inspection and the appraisal, contracts can have a back out date written into this as well. If there’s something wrong with the loan, like you lose your job and you can no longer qualify, and you’re not past the loan approval deadline, you can back out and get your earnest money returned. If at any step you pass the back out date but then still decide you don’t want to buy the home, your earnest money can be kept and likely will be kept by the seller.You’ve technically wasted their time after all and now they have to start all over for no reason. So be careful with these dates. A good agent and a good lender will catch these and watch these for you too.
Finally, if all goes well on the inspection, appraisal, and the loan, then you’ll get what’s called the loans clear to close. This is where confetti flies and everything is approved. The lender will send you the closing disclosure that breaks down all the numbers that you agreed to and the fees associated with home buying.
It will also show the final figure you’ll need to bring to the closing table when you go and sign. Your LO will go over the numbers with you as well. You will need to sign this three business days prior to closing by law. So make sure to do this. Because you can’t waive this waiting period.
Once that’s done, the last thing is to go to sign the closing papers. Different states do this part a little differently, but you’ll either go to a lawyer’s office in some states or the title company in others. Now, you’ll bring your funds for closing and an ID and a smile and you’ll sign a stack of papers until your hand falls off and then you’ll be a homeowner. Yay!
Now there’s even a better way to make your offer stronger than the TBD underwrite in this video. The next video here breaks this down. So check that out next.