BEING PREPARED FINANCIALLY
WHAT IT IS Do you know what you can and can’t afford?
Once you’ve done the necessary prep work, you’ll know what your monthly budget would look like once you stop paying rent and start paying a monthly mortgage, plus all the expenses that will be your responsibility as a homeowner.
WHAT YOU NEED TO DO
Calculate your monthly budget Step
1. Add up your monthly finances Take your after-tax earnings (called disposable income), add up your payments and outgoing costs (living expenses), subtract the latter from the former, and voila! This shiny new dollar figure (discretionary income) is a good start to figure out what you can afford.
Step 2. Figure your housing expenses Instead of paying rent, you’ll be paying a mortgage. There are more monthly expenses you’ll need to account for, like property taxes and homeowner’s insurance. Figure out how much you’ll spend on housing each month with Guaranteed Rate’s mortgage calculator at rate.com/mortgagecalculators.
Step 3. Add in the extras You’re already aware that you’ll need to budget for your home’s gas, electric and water. But owning a home comes with expenses that you’ve never had to worry about. As a renter, it’s a pain when water pipes burst, the A/C goes out or the roof starts leaking, and any other mishap occurs—but it’s your landlord who deals with them
When you’re the homeowner, you’re now responsible.
You’ll need to have emergency funds to account for unexpected problems, so plan on setting aside $100 to $200 each month for…whatever.
Add up all your expenses, and then use the Guaranteed Rate’s mortgage calculator to figure out how much home you can afford based on your monthly budget. This exercise ought to give you an idea of how much of your disposable income you can commit to owning a home.
BEING PREPARED EMOTIONALLY
WHAT IT IS
There are many reasons to buy a home, but since this is the biggest financial decision that you’ve likely ever made, you want to make sure you’re buying for the right reasons and that you’re prepared for the responsibilities of homeownership.
WHAT YOU NEED TO DO
Embrace the benefits of homeownership
While renting might be the right choice sometimes, over the long-term, homeownership offers benefits you can’t find anywhere else, like:
Never throwing away money on rent Your monthly mortgage payments actually help strengthen your financial future. As you steadily pay down your mortgage, you also build up home equity.
Enjoying fixed housing expenses If you opt for a fixed-rate mortgage (more on this later), you can rest easy knowing that your costs will remain the same for years, maybe decades.
Personalize your property Being a homeowner means you have the freedom to create a home that reflects your unique taste and preferences, and are free to paint, landscape and renovate.
Potential tax benefits While eligibility for tax benefits vary, homeowners can sometimes deduct the interest they pay on their mortgages and their property taxes up to a certain amount.
Putting down roots in a community Buying a home helps you connect to a specific neighborhood and community. Volunteer in community organizations, sponsor block parties, get involved at school... Anything you do to benefit your community can also indirectly help raise your home’s value.
Be prepared for the responsibility.
As a homeowner, you’re in charge of the upkeep of your property and fixing anything that breaks. That includes daily, weekly, monthly and yearly maintenance inside and outside of your home. You don’t need to be a skilled handyman, but you do need to be a problem solver and stay ahead of issues before they become problems
FIRST, GET PRE-APPROVED
WHAT IT IS
Pre-approval is a game-changer. It is a letter from a lender saying that they have evaluated your finances and are tentatively willing to lend to you. It shows sellers you mean business.
You’ve done your research; you know your budget and you’re ready to plunk down some serious cash on a brand-new home. More than that, a pre-approval shows a seller that you’ve spoken with a lender and you have a crystal clear idea of the loan you’ll likely be approved for.
WHAT YOU NEED TO DO
For most lenders you can start either with an online application or speak to a loan officer. An official mortgage application will supply your lender with the necessary documentation to perform an extensive check on your financial background and current credit rating.
Online mortgage applications, like Guaranteed Rate’s Digital Mortgage, make the collection of this information simple and seamless. If you haven’t found a home yet and the application is asking for details about the property, you can probably leave that blank.
Pre-approvals come with an expiration date, usually 60 to 90 days after being issued. You can also ask your loan officer if you can lock your rate in case mortgage rates increase while you’re shopping. That lock can last anywhere from 15 to 60 days.
PowerBid Pre-Approval from Guaranteed Rate*
The basic formula of pre-approval remains similar from lender to lender. A lender reviews your credit report and financial information to determine your approved loan amount. But to compete in today’s tight real estate market, you need every advantage you can get to stand out.
With a PowerBid Pre-Approval from Guaranteed Rate, you’ll have the homebuying horsepower you need to outbid the competition and compete with cash buyers.
PowerBid Pre-Approval offers you:
• Speed 24-hour turnaround means you can become a power buyer overnight.
• Strength Full-underwriting commands respect and helps you compete with cash buyers.
• Flexibility Renewable and lasts for 90 days, giving you time to find the home right for you.
It allows you to waive mortgage contingencies to make your offer even stronger.
What about pre-qualification?
Pre-qualification doesn’t carry the same authority as pre-approval. To get pre-qualified, a lender usually only evaluates your debt, income and assets to give you an estimate for how much you’d likely to be approved. This quick procedure doesn’t include an analysis of your credit report, an in-depth look at your ability to buy a home and isn’t underwritten. We’ll explore the entire process of getting a mortgage in another section, because pre-approval is just the beginning. But with your pre-approval letter in hand, you’re ready to compete with other bidders and find your home.
*Red Arrow Approval Express (the “Approval”) is contingent upon receipt of executed sales contract, an acceptable appraisal supporting value, valid hazard insurance policy, and a re-review of your financial condition. Guaranteed Rate, Inc. reserves the right to revoke this Approval at any time if there is a change in your financial condition or credit history which would impair your ability to repay this obligation and/or if any information contained your application is untrue, incomplete or inaccurate. Receipt of an application does not represent an approval for financing or interest rate guarantee. Not all applicants will be approved for financing. Restrictions may apply, contact Guaranteed Rate for current rates and for more information.
KNOWING WHAT YOU WANT
Now that you know what you’ll be able to afford, you can start figuring out what you’ll need in a home.
What matters most to you when buying a house? Location? School district? The size of the yard? A chef’s kitchen?
You should go into your house search with a clear idea of what you absolutely need in a new house vs. what you would like to have. Lay out what your deal-breakers are so you and your real estate agent are on the same page and can make the most of your time when looking at houses.
That said, two aspects of your new home that will have the biggest impact on your life there are your neighborhood and the type of dwelling you live in. Here are some hints for finding the right location and the type of home you want.
Choosing the right neighborhood
There are many online resources that can provide you with neighborhood-level information, including rate.com/research. You can find helpful data there, including information about these five factors that you should consider when choosing where to live.
If you have children, the school district is the natural starting point of your search for the best neighborhood.
Some people like to be in the thick of things, while others seek a little more solitude. If you like museums, theaters and the trendiest restaurants, a neighborhood closer to the city is a no-brainer. If you want a good balance between isolation and the cultural hubbub, you’ll be better suited for a suburban community. And don’t forget the importance of parks and playgrounds for outdoor activities.
Factor in proximity to public transportation, grocery stores, day cares or everyday necessities when you consider your daily commute and getting to the attractions you frequent.
You can see crime and violence reports at more than a few online resources to gauge the relative safety of a neighborhood. But there are additional factors that influence safety, such as air and water quality and their relationship to nearby factories, refineries and power plants. Also important is an understanding of the area’s prevalence for extreme weather like hurricanes, tornados and floods.
Are the neighbors friendly? Will your kids have playmates? The community you’ll find yourself in is one of the hardest elements to quantify without actually living in the neighborhood. So why not ask someone who does? If you see your prospective neighbors outside, ask them what they like about the neighborhood. You can ask your agent or the seller’s agent about the neighborhood. You can also find friends who live nearby through social media and ask them to give you the scoop.
What type of home?
You should research the different types in your area and in your price range to narrow down your options. Here are some typical home types that are popular for first-time homebuyers due to their size and relative price tag. '
Single-family homes might sound self-explanatory, but there are a few characteristics that differentiate them. In addition to being used as a private dwelling, these structures usually feature their own yard, private entrance and exit and are free of any shared walls with neighbors. Two common types are ranch homes and bungalows.
At one point in the United States, ranch homes were the most popular housing option for first-time buyers. As demand has shifted to larger homes, the ranch style has fallen a bit out of style. However, these low, long homes offer a number of special qualities such as open dining rooms, spacious living rooms and sometimes full basements. Despite not seeming huge from the outside, this classic style of living has a lot to offer.
Bungalows offer a small, usually square shaped, single-story home. A lot of the time, this single floor is slightly raised with a porch or several steps leading to the front door. Like ranch homes, this single-family style has been popularized in urban and suburban settings.
These attached housing units come with multiple floors and provide affordable and spacious living options in urban settings while sharing walls with other units. Like apartments, townhouses are usually part of a larger complex. A major difference between apartments and townhouses, however, comes down to ownership. Townhouse owners have additional responsibilities more similar to single-family homeowners, like managing exterior maintenance and landscaping any outdoor space surrounding the home.
A condo is another kind of privately-owned residence attached to a larger complex. These units allow you to enjoy the advantages of homeownership without the added hassle of buying a full-scale house. You’ll have to pay for these condo-specific perks however, like general exterior maintenance and shared communal areas, through a condo association fee.
Now that you have some goals in mind for your home and your community, it’s time to go through the online listings, visit open houses and tour prospective homes until you find the one that checks all of the boxes for you. Once you do, you’re ready to make an offer.
MAKING AN OFFER
MAKING AN OFFER
Once you’ve found the one, work with your real estate agent to make an offer that you both think the seller would accept—while remaining within your pre-established budget. A good tool for finding the approximate value of any home is with Guaranteed Rate’s Home Valuation Tool* . Keep in mind that your offer is not just about the money that will be changing hands, it also may include the terms and conditions of the transaction, like proposed move-in date.
Typically, your agent will make the offer to the seller’s agent, with all the necessary terms and conditions included. Some typical topics that may be included in the terms and conditions include:
• Financing (which should be less of an issue if you’re already pre-approved)
• Seller’s assist or concession—a credit used to pay some of your closing costs
• Which party is responsible for specific closing costs • Home inspection • Fixtures and appliances to be included in the purchase • Closing date
Hiring a professional to walk through the home, examine every nook and cranny and assess the state of the structure and major appliances protects yourself. That’s why almost every homebuyer orders an inspection before they finalize the purchase.
WHAT IT IS
The objective of a home inspection is to uncover any existing issues with the house before purchase. This is typically done once under contract but before final closing. Essentially, you’re hiring a trusted expert to walk through the home and examine the following:
• Walls • Windows • Floorboards • Plumbing • Major appliances • HVAC system • Electrical systems and wiring In addition, the inspector will assess the home room by room, floor by floor, including: • Bedrooms • Bathrooms • Kitchen • Basement • Attic • Roof
When the inspector is done, they file a report describing any and all issues with the house. In general, an inspector may uncover issues that can be approached one of three ways:
• Fix it yourself (not a big deal, but should be fixed) • Ask the seller to remedy the issue (kind of a big deal, but not enough to squash the sale) • Ask to lower the purchase price or back out of the deal (huge red flag)
At no time does the inspector offer an opinion on the value of the home, whether the agreed-upon price is fair or anything else beyond the specific purview of inspection.
WHAT YOU NEED TO DO
It’s your responsibility to schedule a home inspection— not the seller’s. This benefits you. And once the inspector hands you the report, you need to understand what it says and decide if the home has any red flags that will make you pull out of the deal. Once you close on the home, it’s too late to opt out or renegotiate terms.
Once you make an offer, you and the seller may go back and forth negotiating different aspects of the deal. In a seller’s market, when demand is high and inventory is low, buyers often have to go above and beyond to make sure their offer stands out from other offers that the seller may receive. This can result is what is known as a bidding war.
WHAT IT IS
A bidding war is when two or more buyers are bidding against each other to buy a home.
WHAT YOU NEED TO DO
While there’s no science behind winning a bidding war, there are things you can do to increase your chances.
1. Be prepared and fully pre-approved A pre-approval, especially one underwritten from Guaranteed Rate, will show the seller that you are ready to buy the home and silence any concerns about your offer.
2. Trust your real estate agent The most important thing you can do is work with a great real estate agent and listen to their expertise.
3. Raise your offer A bidding war often comes down to who’s offering the most money, so this tactic is a bit of a no-brainer. But before you raise your offer, calculate how the new price may affect your monthly payment, and ask your agent if you are in danger of overpaying what the home is really worth.
4. Understand your options around contingencies Contingencies are certain conditions that must be met in order to close on a property. If they’re not met, the buyer is allowed to back out without losing any money. In a seller’s market, some buyers will waive contingencies to make their offer more attractive.
A word of warning though: waiving a contingency like an inspection can cause some serious financial headaches down the road if something is wrong with the home. Only explore this option after speaking to your agent.
Home Inspection Contingency The home has to pass a professional inspection.
Mortgage Contingency The buyer has to secure a mortgage loan.
Appraisal Contingency The home’s appraised value must be at or above the sale price.
Title Contingency The title of the home must not be in dispute.
Home Sale Contingency The buyer has to sell his or her home before the sale is final.
5. Line up your dates Find out what is important to the seller in terms of timeframes. Some sellers want to close quickly. Others need time to find a house themselves or pack up and move. Have your agent find out what timeframes work best for the seller and tailor your offer to their needs.
6. Offer earnest money When a seller takes their house off the market when they’ve received your offer, they’re taking a risk on you. Earnest money, usually somewhere around 1% or 2% of the purchase price, shows sellers you’re serious about buying their house. If the sale falls through for certain reasons, they could get to keep your earnest money.
7. Be careful writing a personal letter This practice is now frowned upon as it can lead to issues with fair housing standards. Instead of writing a letter, you could let the seller know how much you love the house through your agent.
8. Know when to say no A final important tactic is to know when not to enter a bidding war. Know how high is too high to go for you personally and financially and then stick to it. As any good card player will tell you, you need to know when to hold ’em—and when to fold ’em.
FINDING THE RIGHT TYPE OF LOAN FOR YOU
WHAT IT IS
There are many types of mortgage loans available offering different terms and conditions, and some may be better for your situation than others.
Your interest rate will never change with these home loans, so you can expect to pay the same amount each month through the life of the loan. By far the most common options are 30-year or 15-year fixed-rate mortgages, although some lenders may offer 10-, 20- or even 40-year options, as well.
Adjustable-rate mortgages (ARM)
After an introductory fixed rate period, interest rates on adjustable-rate mortgages are recalculated according to a predetermined schedule. Among the most popular options are 5/1 and 7/1 ARMs, in which interest rates are readjusted every year after the fixed rate term of five and seven years, respectively. Recently, however, 5/6 and 7/6 ARM options have gained popularity. With these mortgages, interest rates are reset every 6 months, rather than every year, following the fixed-rate period.
Different loan lengths
The most common mortgage in the United States is the 30-year, fixed-rate loan. In fact, the Consumer Financial Protection Bureau found that just over 80% of homeowners went with a 30-year term in a 2018 analysis of Home Mortgage Disclosure Act data. The second most popular mortgage term is for 15 years, and many lenders also offer a 20-year term. The benefits to shorter-term mortgages are that they tend to offer lower interest rates and allow you to pay off the loan with significantly less paid in interest over the life of the loan. But in order to get that advantage, you’ll have to pay more per month.
HOW A LENDER DECIDES
Every lender has a different process to decide who they’ll fund for a home loan. While they may weigh the following factors differently, here are the elements of your application that they will take a close look at before approving you for a loan.
While there is no specific credit score minimum for first-time homebuyers, you’ll have a much better chance of securing a mortgage on the terms you want if your score falls into the following ranges:
Very Good 740-799
While credit scores alone do not determine whether you are approved for a mortgage, they certainly play a large role and can influence such things as the mortgage rate offered and overall costs and fees. The average credit score for first-time homeowners is 716.*
Before you make an offer on a house, make sure you’ve been exercising the kind of financial maturity that’s typically associated with a healthy credit score. It takes time to build good credit, and it’s your No. 1 ally when applying for a mortgage.
If credit scores reveal the likelihood of making future payments on time, then income (and savings) are the engines that enable you to make those payments. It’s very important that you can show lenders that your income is stable and consistent over a period of time.
You can’t mention income in the context of mortgages without quickly pivoting to debt-to-income ratio (DTI), a measurement of monthly income vs. recurring monthly expenses (including the proposed mortgage premium) expressed as a ratio or a percent.
For conventional loans (those backed by Fannie Mae and Freddie Mac), it’s recommended that DTI does not exceed 45%. This can be extended to 50% in some instances for individuals with high credit scores, savings and liquid assets.
Savings and assets
Savings are the backbone of any large purchase, and lenders will need to know how much money you have in reserve. Having enough savings on hand shows your mortgage provider that you’re prepared to make monthly payments even if an emergency arises.
Keep in mind, however, there’s a vast difference between how large a loan a lender may approve you for and how much you’re willing to spend on a home. Ultimately, it’s up to you to decide what you’re comfortable spending each month and overall on your house as a first-time homeowner.
*Source: U.S. Department of Housing and Urban Development
WHAT YOU’LL NEED TO GET A LOAN
Getting a loan involves sharing plenty of documents with your lender. Start digging through your files for these common documents that you may be asked to provide. Some of this information may be pulled by your lender from a third-party, like your credit report:
Evidence of earnest money, like a deposit receipt
Asset verification, like bank accounts, stocks, deeds to property, etc.
Borrower letter of explanation (LOX) detailing any salient details in your financial or employment history
Gift letter, if needed, from friends and family An explanation of any large deposits in your bank statements
Verification of employment (VOE) from your employer
Fully executed sales contract, signed by you and the sellers
Other ancillary documentation pertinent to the loan
Photo identification at closing
Personal check or bank check from an approved account to cover the closing costs and down payment (unless the money was wired)
NOTE: Your mortgage team will advise you on the best way to transfer funds for your closing
LOCKING IN A RATE
Closing on a mortgage loan can sometimes take weeks, and the rates offered at the start of the application process can change before the closing of the loan. That’s why borrowers can decide to either lock or float their interest rate when they first agree to a mortgage contract.
Locking a mortgage interest rate means that the rate attached to your mortgage won’t change before you close on your home. If mortgage rates go up before closing, you’re in the clear. You won’t pay more.
Floating a mortgage rate might be a better option if rates are expected to drop and you hope to get a better deal down the line.
If you lock your rate, then interest rates go down, you may be able to get a new, lower rate before you close. Ask your lender about a “float down option.” These usually require you pay an additional fee at closing in order to get a lower rate if the current market supports that.
The interest rate your loan officer offers you is not set in stone. You can do something called “buying down the rate” by purchasing mortgage points.
WHAT THEY ARE
Mortgage points are credits you can buy from your lender to lower your interest rate when you take out a loan. They are also called discount points, lender credits or simply “points.” For every point you buy, your lender will lower your mortgage rate, usually one-quarter of a percentage point.
WHAT YOU NEED TO DO
Ask your lender if they allow borrowers to buy mortgage points, then ask how much it would be for your loan. Compare that dollar amount, which would be due at closing, with how much you will save in interest over the life of the loan. If you can afford a little more up front, it may make sense to pay for points and save money in interest. Guaranteed Rate offers a Mortgage Point Calculator to help you understand your options, and you can also ask your loan officer for more information.
Most of what you hear about is the mortgage rate, which is determined by economic data in combination with your credit score. But that number won’t actually tell you how much you’ll pay each month. That all important number is called the APR, or Annual Percentage Rate.
WHAT IT IS
APR is the total cost of borrowing money from your lender. It’s determined by your mortgage rate plus additional charges and fees your lender includes. Typical fees/charges rolled into APR include the following:
• Origination charges • Most closing costs • Costs for discount points • Mortgage insurance
WHAT YOU NEED TO DO
Comparing APRs between lenders is a good way to conduct an “apples to apples” comparison of your options. Both mortgage rates and APR need to be weighed as you talk to lenders. Understand which costs/fees are included and which ones are not.
Alright, you’ve found a home, made an offer, negotiated, had your offer accepted and locked in a rate. Now the action shifts from you and your real estate agent to your loan officer and their team. While you’re not as involved with the progress now as you were before, there’s still a lot happening.
The mortgage loan process may seem far from simple, so let’s break down every step of the process so you’ll know exactly what’s happening with your loan from now until closing.
1. Loan is submitted to processing The Mortgage Consultant collects and verifies all documents necessary to prepare the loan file for underwriting. These documents provide your loan officer with everything they need to know about you and the property you are financing
During processing, the Mortgage Consultant:
• Begins verifying assets, income and employment
• Orders a home appraisal to determine the value of the property (if/when needed)
• Runs various compliance and eligibility checks to ensure the process advances quickly and smoothly
2. Loan is submitted to underwriting The Underwriter begins the loan underwriting process, reviewing all documentation to determine whether you qualify for a mortgage.
While the Loan Officer and Mortgage Consultant will do their best to submit a complete file during loan underwriting, an Underwriter may still have questions and/or require additional documentation to satisfy any conditions for a final approval.
In addition to the loan file submitted by processing, the Underwriter examines:
• The completed appraisal
• Credit report
• Other ancillary documentation pertinent to the loan
If the loan is approved, the borrower receives a list of conditions required to be met before receiving final approval and notification of Clear to Close.
3. Loan is conditionally approved A conditional loan approval means that the Underwriter has signed off on the parameters of the loan and most of the documentation, but still needs a few more items before fully approving the borrower for the loan.
The Loan Coordinator will contact you to review the conditional approval mortgage and discuss any additional required items, as well as any extra documents that are needed to finalize the loan. Common extra information that could be requested includes:
• The completed appraisal (or updates to the existing report)
• Additional verifications
Once all conditions have been met, the Loan Coordinator will send the file back to the Underwriter for a final review and approval.
4. Clear to Close Clear to Close means the Underwriter has signed off on all documents and issued a final approval.
The mortgage team schedules your closing and reviews the Closing Disclosure (CD).
• The CD is the standardized document that details the finalized terms for the loan, including a breakdown of all costs and fees.
5. Closing Closing processes vary slightly depending on the type of transaction, as well as local, state and municipal laws.
• You can receive estimated figures for the closing costs and down payment from your loan officer or their team, but they’ll need to speak with your local title company or real estate attorney for a final amount.
Bring funds to cover the closing costs and down payment.
Prepare to sign a lot of documents!
6. Loan has been funded The final step on the loan process is now complete: Your loan has been funded.
Collect your keys and schedule your mover, the house is now yours!
At this time, all documentation is complete and the funds for the loan have been disbursed to the seller
WHAT IT IS
A residential appraisal is an unbiased opinion of the market value of your home today. The appraised value is based on an appraiser’s analysis of the property’s condition and similar home sales. Appraisals happen after an initial offer is accepted and is one of the first steps towards closing the sale of a home.
WHAT YOU NEED TO DO
Sit tight and cross your fingers.
As a later phase of your mortgage approval, appraisal can be nerve-wracking, especially when the outcome determines your future mortgage payments for years to come.
Usually, the appraiser will base the estimated value of your home on in-depth research, taking factors such as site inspections, amenities, condition, quality and sales of similar properties.
Lenders will always seek an impartial appraisal to ensure an accurate market value estimate of the property and to make sure that the home’s value will be sufficient collateral to support the terms of the loan. In the event of foreclosure, an appraisal guarantees that the lender can repossess the property and sell it back on the market to make back their initial investment of the loan.
Your appraiser’s report will include a detailed description of several factors:
Interior and exterior condition • Number of rooms • Improvements, repairs and renovations • Plumbing and electricity • Age of the structure • Local market trends • Condition of surrounding properties
indoor elements such as square footage, quality of construction and recent upgrades also contribute to the report. If the appraised value comes back less than the listed price, the sale can be renegotiated or canceled altogether
PRIVATE MORTGAGE INSURANCE
WHAT IT IS
Private mortgage insurance, or PMI, is an extra fee your lender may ask you to pay every month, usually when your down payment is less than 20%, to offset the lender’s risk. It covers them if you’re unable to continue to make mortgage payments for any reason.
WHAT YOU NEED TO DO
Recognize that PMI is actually helping you get the home you want, but then you should cancel it as soon as you can.
The Power of PMI For many homebuyers, the idea of paying PMI is frowned upon. It’s extra money you’ll pay each month, but it doesn’t cover your principal or interest; it’s just another fee. But PMI serves an important purpose, especially for first-time homebuyers who may not have the necessary 20% down payment they’ll need to purchase the home that they want.
PMI gives you greater purchasing power by making it possible to buy a home with a smaller down payment in exchange for an added monthly cost. By providing lenders with a promise of reimbursement, PMI lets lenders issue you a loan that they may otherwise decide is too risky for their approval.
How much is private mortgage insurance? The cost of your PMI policy will be relative to current insurance rates and your own financial situation, but to give you a rough estimate, average PMI policies cost about 0.5%-1% of your loan amount each year.*
Canceling PMI In order to remove PMI from your monthly payments, you’ll need to gain some equity in the home. If you can bring down your principal balance to 80% of the home’s value, contact your lender and request to eliminate PMI. If you have an FHA loan, you'll need to refinance into a conventional loan to eliminate PMI. You may have to have your home reappraised to determine your home’s new value. Automatic PMI termination is a legal requirement that requires your lender to cancel your PMI on the expected date that your remaining principal balance hits 78% of your original home value.
HOMEOWNERS INSURANCE AND OTHER TYPES OF INSURANCE
One aspect that every type of closing includes are closing costs. At the start of your loan application, your lender will provide an “official Loan Estimate,” laying out the expenses associated with processing and finalizing the loan. In addition to information about interest and monthly payment amounts, this Loan Estimate also includes a breakdown of the closing costs that you’ll need to be prepared to pay at closing.
WHAT THEY ARE
Closing costs are the expenses paid at the very end of the homebuying process to finalize the real estate purchase. This collection of fees covers the expenses associated with underwriting the loan as well as the amount paid to any third-party service providers that were involved in the sale.
WHAT YOU NEED TO DO
You need to pay them. But more than that, you need to have the funds ready to pay them and factor them into your budget when preparing for closing. How do you calculate closing costs on a house? For a better understanding of how to calculate closing costs, we’ll need to take a closer look at each fee that is included. Here’s what some of the common closing costs would look like for a typical buyer and how each of these aspects will impact your mortgage. You can also use our closing cost calculator.
Property appraisal The fees associated with hiring an appraiser are covered by the borrower.
Credit report Fees for pulling a credit report can vary.
Flood certification is a mandatory mortgage step in certain locations and is usually an additional $15-$25 fee.
Tax services are provided by third-party organizations that monitor your taxes and will alert your lender of any delinquent tax payments. The associated fee for tax services varies from lender to lender, so ask your loan officer.
Title services provide all parties involved in the real estate deal with peace of mind that the ownership of the home can legally be transferred from one owner to the other. Another individual who shares ownership of the property or a bank that has an ongoing lien on the home can upend the mortgage process, costing the buyer, seller and lender valuable time and money.
our lender will require their own title insurance policy in order to approve a mortgage. This policy protects your lender from any issues that can arise from an additional legal claim on the property. Although this policy only protects the lender against claims that impact the loan, the coverage is still paid for by you.
Title insurance for buyer Your own title insurance policy, on the other hand, protects your claim to the property in the event that another individual comes forward with their own claim. Mortgage lenders might require you to have your own title insurance policy. The buyer’s policy is customarily covered by the seller, but these details can vary and are settled in early negotiations for the home sale. It is possible for you to pay for your own title insurance.
Government recording charges When a property’s title changes hands, government agencies will need to legally record the change in ownership and any documents related to your mortgage. Processing a home sale and filing your deed with your local government comes with a fee. This extra charge can be covered by either the buyer or seller and can be settled during the negotiation process. This fee is paid at closing and the amount can vary depending on your location.
Transfer taxes When ownership of a property is transferred from one individual to another, the city or state will charge a transfer tax, as well. The amount paid in transfer taxes can vary between locations, but it’s usually calculated as a percentage of the home’s appraised value. Depending on negotiations at the beginning of the deal, transfer taxes can be covered by either you or the seller.
What does the seller usually cover? When it comes time to settle closing costs, the person you’re buying the home from covers fewer individual costs, but the total amount they pay can be more. Sellers will usually pay the commissions due to both their real estate agent, as well as your agent. This amount is negotiated by the seller when they list their home and is usually about 6% of the purchase price.
Depending on what was agreed to during your negotiations with the seller, and what is customary in your market, the seller may also cover your title insurance policy and property taxes if they have not already been paid for that year.
Also, you’ll likely use an escrow agent to hold funds until the purchase can be finalized. The buyer and seller will hand over documentation and finances throughout the homebuying process, which are held in escrow until the deal is finalized. Escrow fees can cost up to a few thousand dollars, usually 1%–2% of the purchase price. Since it’s used by both the buyer and seller, the fees are usually split 50/50.
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