Game plan for buying a house

What happens next?

Buying a house might seem scary, but the truth is there are experts who hold your hand all along the way. The only hard part for the buyer is to choose the house and apply for the mortgage. Other than that, most of the work is done by someone else on your behalf. Here are 14 common steps along the path to buying a home. In reality, you will probably skip several of them, and several others are just a phone call or fax. Don't be scared!

Get pre-qualified

Before you go house shopping, it’s a good idea to speak with a loan officer and see if you qualify for a mortgage. If you are planning to use the USDA Rural Development program to get 100 percent financing, I recommend Phil Davis at Mortgage Network in Elkton (www.phildavishomeloans.com) . He can check your credit and give you an answer over the phone.  There is no charge for this service.

Sign sales contract

Once Phil (or your chosen loan officer) says you should be able to qualify for the mortgage, we get together and sign a simple one-page contract . At this time you will need to write a check for an “earnest money” deposit, usually $500 which will be applied toward your purchase price or closing costs. The purpose of this is to show that you are “in earnest” and intend to go through with the deal. If for some reason you cannot get the mortgage after all, the money will be refunded to you. However, if you get cold feet and change your mind, the seller gets to keep the money.

Apply for loan

Even though you were pre-approved over the phone, you need to formally apply for your mortgage. This usually involves a meeting with the loan officer. He will tell you ahead of time what paperwork you need to bring to support your application, usually your last two pay stubs, last two checking account statements, and two years of income tax returns. You will probably need to give the loan officer a check to cover the appraisal fee, generally around $400.

Appraisal

The bank will arrange for an appraiser to meet with the seller to take a look at the house and make sure it’s worth the amount of money they are lending. You do not have to be present for this.

Commitment letter

Once the bank has all the necessary paperwork and the appraisal has been turned in, they will send you a formal letter of commitment, telling you that they will give you the mortgage. This can take 2 to 3 weeks from the time you apply. From this point on, most of the work is done by the experts and you just wait for the date of settlement.

Title search

Once you have the commitment letter, you need to send a copy of the sales contract to an attorney or title company and ask them to open a file. They will check to make sure the title is clear and they will handle all the paperwork from this point on.  Their fees are part of your closing costs; you don’t have to pay out-of-pocket.  (If you don’t have an attorney or title company, I can recommend one. Your lender may also have a suggestion.)

Home inspection

You might want to hire a home inspector to inspect the house for faults. You can ask friends or neighbors for a recommendation or find someone in the Yellow Pages. Your loan officer may be able to recommend someone. You do need to be present at the inspection, and generally the home inspector wants a check at the time of the inspection; cost is generally $350 to $400. (USDA does not require this. Their appraiser looks for any major problems and will call for additional inspections if required.)

Termite inspection

You may also need to hire someone to do a termite inspection. Some home inspection companies are certified to do both, or you might need to hire two different companies. Again, the loan officer can probably recommend someone. It’s generally a good idea to schedule all inspections for the same time period so you don’t have to make extra trips.

Well/septic inspection

If the property is out in the country you will need to have a licensed professional certify that the well and septic are functioning properly. Again, the home inspector may be able to perform this task. If you are on town water and sewer you skip this step.

Property survey

The bank will send someone out to survey the property. This is to protect you as well as the bank –  to make sure, for example, that a neighbor hasn’t put a shed or fence on your property. You don’t need to be present for this, and the fee will be part of your closing costs.

Take first-time homebuyer class

With some government loans, you will be required to take a first-time homebuyers class. This can be done in one or two sessions at several places on the Eastern Shore including Goldsboro and Salisbury. The class is also available online. The purpose is to make sure you understand everything about your mortgage and the responsibility of owning a home. (USDA does not require this.)

Get insurance

As the closing date approaches, you will need to get a homeowner’s insurance policy. Your loan officer and the title company will be able to advise you on this. You might be able to get a multiple-policy discount if you use the same insurance provider that you use for your vehicle.

Schedule utilities to be changed over

Call the electric company (Delmarva Power) to have the electric put in your name as of the date of closing. Schedule the phone company, cable, etc. if you want them to be hooked up the day you move; otherwise, this can wait until after closing.

Closing

Closing or “settlement” is when the buyer and seller sit down together with the attorney or title company representative and sign all the paperwork. With a good title company, this process is painless and each piece of paper will be explained to you before you sign. After closing you will walk away with the keys to the house and a copy of all your paperwork. The actual deed will be sent to the county courthouse to be filed, and you should get the original back in the mail within a couple of weeks.

What's in a mortgage payment?

Your monthly mortgage payment

Mortgage payments can generally be divided into four parts: principal, interest, taxes, and insurance. These are often referred to with the acronym PITI.

• Principal refers to the amount of money you borrow to buy a home, and to the outstanding loan balance at any point during the mortgage term.
• Interest is the cost of borrowing money. The amount of interest you pay each month is determined by your interest rate and the length of time you're borrowing the money.

The amount that you borrow is amortized over the length of the loan, generally 30 years, so that each month a certain percentage of your payment is paying back the principal and a certain percent is interest. In the early years, the amount of principal that you are paying back each month is very low and the bulk of the payment is interest. (The good news is -- you get to write that interest off on your income taxes!) As the years go by, the amount of principal grows with each payment. By the very last month of those 360 months, the last payment is the small final amount still due on the principal.

In addition, you can elect to pay an extra chunk of principal each month or any month. If you do that, make sure you mark it as "additional payment of principal" so it goes toward the principal and is not simply counted as your next payment. You can save a great deal of money over the years if you pay a little extra on the principal each month. To calculate how much, visit this site:

http://www.bankrate.com/finance/mortgages/early-payoff-mortgage-calculator.aspx

In addition to the principal and interest that you pay each month, the bank will collect the amount that you owe each year for property taxes and homeowners insurance. They divide this amount by 12 and collect 1/12th of the amount each month. Then when the bill comes due, they pay it for you. If you get a bill in the mail, it is probably just a copy for your records. If it looks as though you are being asked to pay it, contact your lender and make sure they are taking care of it. Again:

• Taxes assessed by your local government will be collected by your lender as part of your monthly payments, and then paid annually on your behalf. This process is known as an "escrow."
• Insurance, like property taxes, is also collected by the lender in an escrow account.

Obviously this additional amount that is added to your payment each month is going to vary according to the house you buy, how much the local taxes are, etc. But in the case of these houses on Plum Drive you can figure roughly an extra $150 each month for taxes ($100) and insurance ($50).


The most important thing to remember: When you are discussing your mortgage with your lender, make sure you know what they are talking about when they quote you a monthly figure. Is it just P and I, or is it PITI?

Help with financing

Help with financing


Do you have money saved for a down payment?

If the answer is YES:

If you have a 20 percent down payment, go to any bank and get a “conventional mortgage” for 80 percent of the purchase price.

If you have a small amount for a down payment, go to a local bank or to one of the lenders listed below and ask about getting an FHA mortgage, which requires a 3.5 percent down payment.

If the answer is NO:

Call one of the lenders below and ask about getting a USDA Rural Development mortgage, which requires no down payment.

Rural Development mortgages are backed by the U.S. Department of Agriculture for the purpose of helping people buy in rural areas. To qualify, the house must be in a designated rural area – and all of Kent County, MD, qualifies. There are other guidelines, but the houses on Plum Drive meet all of them.


Do you qualify for 100 percent financing?

To qualify for any mortgage, you must earn enough to be able to afford the mortgage payments. The usual guideline for FHA and USDA loans is at least $25,000 to $30,000 annually for a single person or double that for a couple. NOTE: There is also an upper limit on how much you can earn -- around $46,000 for a single person, $92,000 for a couple.

Secondly, you need to have a decent credit score -- generally 620 or above. Don’t know what your credit score is? The easiest way to find out is to contact a mortgage lender and ask to be pre-qualified. They will take some basic information, check your credit, and give you an answer right away as to whether you qualify for a mortgage. There is no charge for this service.

I highly recommend these mortgage lenders, both of whom are very familiar with government loans:

Dinah Reardon, First Home Mortgage
driordan@gofirsthome.com
Office:  410-758-6632
Cell:  410-490-3342
Phil Davis, Mortgage Network Corp.

Pdavis@mortgagenetwork.com
Office:  410-398-5607
Cell:  302-528-2144
Fax:  866-310-1767
www.phildavishomeloans.com



How to check your credit


If you would prefer to check your credit on your own before you contact a lender, here’s how to do it.

Go to www.annualcreditreport.com and get copies of your credit report from the three credit-reporting agencies. Read them carefully to see if the information is correct. If you find errors, try to get them corrected ASAP (the website has information on how to do this).

Be aware that there are many “free credit report” sites on the web, but the only one which is backed by the government and highly regulated is Annual Credit Report. Most of the “free” sites are actually trying to sell you something. This is the only one that is directly linked into the three big agencies and gives you a free report.

However . . .  it will not give you your credit score for free. A credit REPORT is just that – a long report showing who you owe money to, whether you have made payments on time, how often you have applied for credit, that sort of thing. A credit SCORE is a score based on how well you use your credit. Most lenders never even glance at the entire report, they just look at the score. Anything under 600 is bad, 600 to 700 is OK, over 700 is good, over 800 is excellent.

There are three ways to get your credit score for free:

1. Contact a lender as explained above and let them check your credit. They will have to pay a fee of about $20 but they usually don’t charge you up front. If you do wind up getting a mortgage from them it might be added to your closing costs later.

2. Go to a site like www.freecreditreport.com and sign up for their service, which costs about $15 to $20 per month. Most of these sites have a trial period that allows you to get your score for free and gives you 30 days to cancel. As long as you get the score and cancel immediately, it is “free” – just be sure to watch your credit card bills and make sure you’re not being charged for an ongoing membership. (I believe the government site www.annualcreditreport.com also gives you a chance to pay for your credit score when you are re-directed to each of the three agencies.)

3. Go to www.creditkarma.com and register for your free score. Unlike the other sites, this one truly is free. It is not as accurate, but they generally give you a fairly good guess within about 10 point either way. (They make their money by trying to get you to sign up for credit cards and other offers. Try to put blinders on and ignore all these offers!)

Additionally, if you have been denied credit within the past 60 days you have the right to see the credit report and credit score. For example, if you applied for a loan to buy a car and were turned down, go back to the dealership and tell them you want to see your credit score.

Don’t have any established credit? Assuming that you don’t qualify for a regular credit card or auto loan, the easiest way to “get in the system” and get a credit score is to apply for a secured credit card. This means you deposit a certain amount, usually at least $100, with the credit card company and then you get a credit card that allows you to draw against that amount. Even if you just spend a few dollars each month and then pay it back, this will build up your credit.


One last word . . . be  very careful with credit repair companies. They are almost always a rip-off, charging you to “fix” your credit and in fact being no help whatsoever. There is no easy fix. Just try to pay down your credit cards, make regular payments, and pay on time. After a few months these good habits will make your score start to go up.

What are "points" on a loan?

When you're shopping for a loan you might hear the lender talk about "paying points" or "buying down the interest rate." What does that mean?

A “point” is equal to one percent of the loan amount. So on a mortgage of $150,000, for example, one point would be $1,500; three points would be $4,500. Most lenders give you the option of paying points up front (at closing) in order to get a cheaper interest rate.

Should you do it? It depends on how long you plan to stay in the home – and whether you have enough cash to pay this chunk of interest up front.

As an example, let's say you are borrowing $150,000 to buy a house. You are given the choice of

   an interest rate of 4.50 percent and pay 0 points at closing   OR

   an interest rate of 4.00 percent and pay 3 points (an extra $4,500) at closing

What should you do?  

The difference in the monthly payment would be $44.  If you take the first option you will pay $760 a month in principal and interest. If you pay the points and buy down the interest rate your monthly payment will be $716.

You would have to stay in the house 8 years and 5 months for that extra $44 a month to add up to $4,500 and pay back your upfront investment. After that, you would be saving $44 a month.

So is it worth it? If you plan on staying in the house more than 10 or 12 years, yes. If you stay in the house the entire period of the 30-year loan you will save $11,396 in interest (the remaining 21 years and 7 months at $44 a month).

But if you only plan in living in the house a few years you will not make back the money you paid up front for the lower rate.

Remember -- YOU are the customer. You can just say no. Don't be pushed into paying points if you're not comfortable with the idea.

Progessive Farmer says we're number one!

In 2008, Progressive Farmer magazine ran their fourth annual list of "Best Places to Live in Rural America." Lo and behold, Kent County, Maryland, sat at the very top of the list! Here's a link to the story:

http://www.tabpi.org/2009/f9.pdf