Thursday, February 9, 2012

Crossing your t's and dotting your i's

(originally written June 28, 2011)
Once you’ve saved up a considerable amount of money (at least $5,000 is a good start) get all of your paperwork organized and get preapproved (some use the term prequalified) for a mortgage. There are TONS of really great deals out there (agian, people want you to buy a house) and it’s a good idea to look into all of them to make sure you pick one that’s right for you.
If you’ve never purchased a home you can qualify for an FHA loan. They typically have low interest rates (right now they’re around 4.5%), allow you to use grant and gifted money (time to hit up the “bank of mom and dad” and remind them of how your were really a good child all those years) AND they only require you to put down 3.5% of the purchase price toward a down payment. There are other programs out there that don’t require any down payment. If you are a veteran you should look into VA loans which require 0% down payment and offer good rates like FHA.
You can learn which mortgage “product” is best for you by shopping around with different mortgage brokers or banks. Each will offer different programs with different rates. Be sure to look into brokers, banks and credit unions and make sure they explain everything to you that you need explained. A lot of this you will learn in your first-time homebuyer class. Again – they want your money, so make sure they’re telling you everything you need to know.
Your mortgage broker or banker will let you know everything they need to have to process your application, but expect to have 2 months of pay stubs, 2 months bank statements, last 2 year’s W-2 forms, 2 forms of ID (driver’s license and SS card are good) and confirmation letters if you recently paid off  a debt as it may not have shown up on your credit report yet.
Getting preapproved for a mortgage is great for a few reasons. 1. It lets you know what your price range is so you know how much of a house you can buy. 2. It’s a great bargaining tool – letting the seller know that you’re preapproved (if you put an offer on a house) is one less obstacle to deal with later on the in the process. If you are bargaining for a lower price than what the seller is asking (and you should) the seller is more likely to accept your offer if they know financing won’t be a problem. They want to sell their house… well, yesterday. 3. It takes less stress off of you. If you find a house that you LOVE more than a hybrid of puppies, kittens AND bunnies you will be very sad if something goes wrong with the financing.
Yesterday Garry and I met with our mortgage broker to fill out our (formal) mortgage application. We were prequalified once-upon-a-time, but at this stage we needed to fill out a formal application with the property address and all of the pertinent information.
It wasn’t nearly as frightening the first time we went in there to do the process, but that’s because this time around we knew what to expect and we knew it would be significantly less than what we were quoted for on the other house that fell through.
We gathered all of our paperwork and trotted off to the broker’s office.
It’s a lot of paperwork to sign – a lot of disclosures and general legal stuff the mortgage office needs. What you’re going to be (most) interested in – is the good faith estimate.
Ours came back a little higher than we were originally anticipated. It wasn’t *awful* but it was a little annoying.
Like seller’s agents – the mortgage brokers make money off of how much of a mortgage you take out – the higher the better. They WANT you to get a mortgage at the top of your budget. So – in order to get the ball rolling a lot quicker, when you make your appointment with your broker let them know how much of a down payment you’re planning on doing. That way they can write up the appropriate amount for you. You can change the paperwork later on if need be – but it’s easier that you and your broker are on the same page.
In our case – Garry and I wanted to put an extra $5,000 on our down payment. While our broker said it would only lower our monthly payment by $25 a month – that’s still $25 a month for 30 years – which ends up being $9,000 we’re not paying overall – saving us $4,000 total. That’s a lot of money! (Think about how long it would take you to save up $4,000)
If we don’t put that extra $5,000 toward the down payment we can use it toward our house fund and get more of the equity-building projects out of the way. Ideally – we’d be able to insulate and finish the walk-up attic which would add a TON of square footage right off the bat. I’m not sure how much equity we would build from that, but it would be a good idea to investigate which would be the better investment before making a decision.
While Garry and I are planning on staying in our home at least 10-15 years (but hopefully more) we do want to make sure that if we decide to sell some day that we take our time with projects and that they are projects that will increase the value of the home – without pricing it out of the neighborhood. Lucky enough for us – the neighborhood we’re purchasing in is a full of single-family homes where the houses are estimated and priced above what we’re paying for our house. Adding to it will bring it up to par with the rest of the neighborhood.
Surprising to most people – we’re also planning on not using credit for the majority of our projects. It’s much more satisfying knowing that we don’t have a crazy-large debt hanging over our heads. Paying with cash (we’ve found) is very gratifying and allows you to really enjoy your purchase. Plus, we have plenty of time. We’re planning all of the major renovations before we have children (which isn’t for another 4-5 years) in order to get those large investments out of the way before we have a wee-one to look after. Besides – it would be nice to NOT be doing construction with a toddler running around getting into everything.
Thankfully since Garry is a building manager right now for our apartment the folks at the local home improvement stores know us by name and are always happy to give us advice. Places like Lowes and Home Depot also have classes every now and again as well (which I’m hoping we’ll start regularly attending). Double lucky for us we have loads of friends that work in various contracting businesses that will work for pizza and beer or to trade services (I LOVE to paint walls and Garry is always good for any kind of manual labor – mainly yardwork). We plan on tackling as many projects ourselves (or with friends) as we can to save some cash.
Okay… a little bit of a tangent there.
Our application is filled out and complete. The next step is to schedule the appraisal – which we HIGHLY suggest you wait until AFTER you review the inspection report. Some brokers will try and schedule it immediately, but you don’t have to. As my parents told me “you’re in the driver’s seat” (well for most of the process).
The appraisal will cost somewhere between $300-$400 and like the inspection that’s money you can’t get back if the deal falls through. It’s best to wait until you’re happy with the inspection report before deciding to move forward. We (luckily) did that with the last house where the deal fell through and managed to not lose that extra $300.