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Author: Shantanu

Dream home with garage Perspectives

The Path to Homeownership

Here are the 10 steps to keep in mind in your journey to homeownership:

  1. Checking credit report
  2. Budgeting
  3. Getting familiar with the mortgage process
  4. Planning for the right mortgage
  5. Getting a pre-approval letter
  6. Comparing loan estimates
  7. Selecting the right loan
  8. Making an offer
  9. Finding a closing agent
  10. Closing the deal

Step 1: Checking credit score

Having a good credit score is an important part of buying a home. Lenders will use this information, and the information in your credit history to find out if you qualify for a loan, what type of loan and the interest rate.

Errors in the credit report can unnecessarily lower your credit score. It is a good idea to check the report thoroughly, and have any errors corrected as quickly as possible.

Credit scores range between 300 and 850. Having a higher credit score typically means a lower interest rate, and more options when choosing a home. There is a difference between soft credit check and hard credit check:

A hard check occurs when a financial institution checks your credit for making a decision on granting a loan. A hard check will likely lower your credit score by a few points. A soft credit check happens when a person or company checks the credit score as part of a background check or monitoring changes in credit score. They will not affect your score and might not even be reflected on your credit report. 

Step 2: Budgeting

Have a budget, and consider the total monthly payment, which includes mortgage principal, interest, property taxes, homeowner’s insurance and mortgage insurance, and other expenses and making sure that it is payable is vital. Also take into consideration utility bills, emergency savings and other goals.

It is very important to be realistic when considering the amount you’re willing to spend on your home, and making sure it accounts for all the upcoming costs. Also consider how much you can have to use as a down payment, and the cost of closing the deal.

Step 3: Getting familiar with the mortgage process

The mortgage process may seem like a daunting task, but it doesn’t have to be. It takes research to get to know which loan is right for you and your circumstances. While you can begin looking at homes early in the process, it is better not to wait until you find the home you want before thinking about loan options. Another thing to consider are the closing costs that are associated with the mortgage.

Step 4: Planning for the right mortgage

There are many types of mortgages available, with fixed or adjustable rates, short- or long-term loans. Exploring your options will give you a good feel of the market. An experienced mortgage broker can help you understand the pros-and-cons of different mortgage options.

Once you have an idea of what sort of loan you’d like to get, it is time to contact a mortgage broker. Your mortgage broker will help present your application to multiple lenders and help you compare the deals they offer. Consulting with experienced loan officers will help you a better view of what is required  to complete the loan application.

The next step is to request formal loan estimates, which will help you compare costs across different lenders. 

Step 5: Getting a pre-approval letter

While pre-approval and pre-qualification letters the two terms are used interchangeably, there are key differences between them. A pre-qualification is an estimate given to you by a lender estimating what loan you qualify for. A pre-approval usually requires a hard check on your credit report, and verification of your assets, income and debt. These letters are conditional and do not guarantee a loan offer. They assure the seller that you’ll be able to get financing for your home, once the conditions are addressed. Getting this documentation early in the process is helpful in spotting potential mistakes and correcting them. 

A pre-approval letter doesn’t commit you to a lender, but helps spot any issues early on and tells the seller that you’ll be able to get financial assistance.

Step 6: Comparing loan estimates

Many people are picky about different things, the amount of milk in their coffee for instance. But they might not be picky about something much more important, their mortgage. A 2018 study done by the U.S. Consumer Financial Protection Bureau found “Mortgage interest rates and loan terms can vary considerably across lenders. Despite this fact, many homebuyers do not comparison shop for their mortgages. In recent studies, more than 30 percent of borrowers reported not comparison shopping for their mortgage, and more than 75 percent of borrowers reported applying for a mortgage with only one lender.”

Contact an experienced mortgage broker and compare different mortgage products that are available to you. You will save by shopping around and getting offers from multiple lenders and then decide on the one that is best suited to you. Click To Tweet

By shopping with only one lender, homebuyers lost out on better deals, lower interest rates, and a large amount of money lost over the lifetime of the loan. All of this adds up to thousands and thousands of dollars being lost. A difference of even 0.5% in the interest rate can amount to thousands, which can either be saved, or be lost.

Contact an experienced mortgage broker and compare different mortgage products that are available to you. You will save by shopping around and getting offers from multiple lenders and then decide on the one that is best suited to you. Also keep in mind the variety of costs involved in the mortgage, as some may have a lower interest rate, but a higher closing cost. When reviewing the loan estimates, check if the interest rate is locked. By getting loan estimates from lenders, you are not obligated to proceed with them.

Step 7: Selecting the right loan

Once you have compared loan offers and found the one that is best for you, it is time to choose a loan and a lender. Contact the broker and convey your intent to proceed. 

Getting to this stage in the mortgage process is time consuming, stressful, and takes an enormous amount of paperwork. It would be convenient if there was a group of experts willing to work through this process for you, giving you the options that are best for you. Luckily there is! With Stem Lending, you enter your information once, and they go through this process for you, saving you time and money.

Step 8: Making an offer

When making an offer on a house, it is important to keep in mind your budget and priorities. You will come across houses that you’d love to buy but which stretch your wallet. Keep in mind your priorities and how much you can afford comfortably as monthly payments.

Step 9: Finding a closing agent

Now that you have selected your mortgage lender and the loan, the lender will proceed with underwriting and revert back with conditions to be resolved prior to closing. They might request for additional verifications, so it is important to promptly address closing conditions.

Ask for price quotes and references from past customers. Once you have chosen your closing service, it is time to notify the lender and move on to the final step.

Step 10: Closing the deal

Before signing anything final, take your time to review the Closing Documents. Ensure that the information is accurate. If there are discrepancies, promptly consult your mortgage broker to get them resolved.

 

Contributed by Suzan Akinyemi

parents help you get your mortgage and home Perspectives

Can My Parents Help Me With My Mortgage?

Buying your own home, especially your first home, is an incredible achievement. For some, it takes years of squirreling away cash to come up with the required down payment. But what if you need help from your parents to get that down-payment & mortgage? In 2018, home-buyers no longer need 20% down to secure their mortgage, but parents’ help can be a significant advantage. At STEM Lending, we’re here to help you understand the pros & cons to bringing your parents into your home-buying decision.

Despite recent encouraging news regarding wage growth and unemployment rates being as low as they’ve been since 2000, it’s still very hard to become a homeowner in 2018. Today’s young adults (Millennials, Gen-Zs) have more student loan debt vs. their income than their parents. Today, it’s difficult to envision covering your daily expenses, minimum student loan debt repayments, and saving for a home.

Can I Access My Retirement Funds Instead of Using My Parents Money?

An alarming trend for many millennial home-buyers has been tapping into their retirement funds early to buy a home. This is generally a bad idea for many reasons (potential tax penalties for example), yet it seems to be gaining traction. In fact, according to a recent Bank of the West’s survey of over 600 U.S. adults ages 21-34, Two in ten millennials who plan to buy a home expect to dip into retirement accounts to fund their purchase.

Today's young adults (Millennials, Gen-Zs) have more student loan debt vs. their income than their parents. Today, it's difficult to envision covering your daily expenses, minimum student loan debt repayments, and saving for a home. Click To Tweet

The compounding effect of investing through your Roth-IRA, 401(k), or other retirement funds should be used to help you grow your wealth. Withdrawing funds early in order to become a homeowner is very risky. If you are younger than 59.5 years old, however, you are technically allowed to borrow up to $10,000 without penalty if you’re a first-time homebuyer.

It’s clear Millennials are overwhelmed with big decisions like homebuying. In the same above Bank of the West survey, 68% of them have regrets about how prepared they were for the home buying process. If you’re struggling to save for your down-payment, make sure you’ve spent time researching all of the federal, state & local programs that can help you. We’ve even written a blog post on just that in the past.

Can My Parents Help Me With My Mortgage?

There are plenty of reasons to look to the “Bank of Mom & Dad” for help in securing a mortgage, if you have that option. Today’s ‘helicopter’ parents view helping their children launch into adulthood differently than those of the past. The average renter is spending ~45% of their after-tax income on rent. Parents would rather help their children get settled while building equity in a home.

But what are the rules for parents when it comes to your mortgage?

Parents Helping With A Down Payment

Many mortgage programs, especially loans from entities like Fannie Mae, Freddie Mac or GNMA (FHA), do not require home-buyers to make their down payments out of their own bank accounts.

As long as your down payment is at or above 20%, all of your down payment can be in the form of a gift, if you’re getting a mortgage backed by Fannie Mae or Freddie Mac (aka, a “conventional” loan). If your down payment will be less than 20%, however, you can’t have 100% of the down-payment as a gift, and the final percentage split will be based on the specific loan type you choose.

With respect to a GNMA loan, specifically a FHA or Veterans Affairs (VA) mortgage, you can also use 100% of the down payment as gift funds, provided you meet the required minimum credit score.

Also important to note, these rules around gift-funds pertain only to homes that you (the borrower & potential homeowner) will be occupying as a primary residence.

To get gift funds approved before closing, your parents must prove that they have the money to give, and that is actually going to be a “gift.” This is often referred to as a “gift letter” where the parent(s) state the name of the donor, the beneficiary of the funds, the time & date, and officially state that the money is a gift and that repayment is not required.

As for proving funds, the parent(s) generally will need to provide 1-2 bank statements showing that the funds are available within the account. Prior to closing, when funds are being transferred into an escrow account, the parents would transfer the money directly into that escrow account.

*Extra Tip* — from a tax perspective, your parents should be aware that the IRS has an “annual exclusion” on gift taxes up to $14,000 for 2018, which means that a parent can give a child up to that amount, without incurring any additional taxation. If your parents are married and have filed or will file a joint tax-return, then the amount that they can give to any child or family member without incurring an additional gift tax goes from $14,000, up to $28,000 (2x).

Parents Helping With Added Cash “Reserves”

Another factor that affects younger home-buyers trying to buy a home in 2018 is “reserves.” Many first-time home-buyers aren’t even aware that they’ll need to have additional funds in their account beyond the down payment, to close on their home.

Mortgage lenders want to be sure that you can afford to still repay your mortgage, even in the event that something unexpected happens to you such as losing your job, or an unexpected emergency. The amount of cash reserves will vary depending on the mortgage and the size of your loan amount, but expect to need 2-6 months of “Reserves.”

Example: Suppose your total monthly mortgage payment with taxes and homeowners’ insurance is $3,000 a month. If you have $18,000 in savings after closing on the house, you’d have six months of reserves. ($18,000 divided by $3,000 equals six months.)

While we’re not suggesting that you do anything untoward, if a parent adds his or her adult child to a savings account or a checking account for over 1-year, that could take your application over the threshold from “deny” to “approve.” There are also many legitimate reasons that a parent would want to have an adult child added as a co-signer on the account; if that parent is elderly, he/she may need help paying bills monthly in a timely fashion. Or, if the parent is living abroad and still maintains a US domestic account, he/she may add an adult child to help with any issues that come up.

Mortgage lenders generally want to see 2-3 months of prior bank history when verifying income and assets, though some of the online mortgage lenders can go back as far as 2 years, so the earlier the better.

When it comes time for verifying those assets as your own to qualify for the mortgage, your parent(s) will likely have to write a letter stating that you (their child) has access to and ownership of the funds as you’ve agreed upon.

Takeaways

Getting a mortgage is easier than ever with today’s online mortgage process making it possible to apply with a full application in under 20 minutes. See STEM Lending’s website for proof of this.

However, qualifying for a mortgage with a 20% down payment or the right amount of cash on hand is often harder than ever for home-buyers who are saddled with student loan debt. Leveraging their parents for help with either the down-payment or cash reserves is a smart option, if you’re lucky enough to have it to use! Call us if you have any questions, 646-798-1800, or email us at lending@stemlending.com