Buying Your Lehigh Valley Home
Whether you are purchasing your first home, moving up to a larger home, making a move to a new neighborhood, or downsizing after the children moved out, purchasing a home may be the largest investment you will make in your lifetime and one of the most important. For that reason it is crucial to work with an experienced and knowledgeable real estate professional to guide you every step of the way.
The following topics are addressed:
- What is the Consumer Notice, Agency Relationships, and a Buyer's Agent?
- Financing Your New Home
- Prequalifying for a Mortgage
- Loan Application and Checklist
- Earnest Money
- Down Payment
- Closing Costs
- Miscellaneous Expenses
What is the Consumer Notice, Agency Relationships, and a Buyer’s Agent?
In an effort to enable consumers of real estate services to make informed decisions about the business relationships they may have with real estate brokers and salespersons (licensees), the Real Estate Licensing and Registration Act (RELRA) requires that consumers be provided with the Consumer Notice at the initial interview.
Licensees may enter into the following agency relationships with consumers:
- Seller’s Agent
- Buyer’s Agent - as a buyer agent, the licensee and the licensee’s company work exclusively for the buyer/tenant even if paid by the seller/landlord. The buyer agent must act in the buyer’s/tenant’s best interest, including making a continuous and good faith effort to find a property for the buyer/tenant, except while the buyer is subject to an existing contract, and must keep all confidential information, other than known material defects about the property, confidential.
- Dual Agent
- Designated Agent
- Transaction Licensee
Feel free to review the Consumer Notice in its entirety.
Financing Your New Home:
The most important first step in the process of buying a home is to start with a lender. A reputable lender will review your financial information and check your credit history. They will also tell you how much you can borrow and the maximum loan you can afford. What you can afford depends on your income, credit rating, current monthly expenses, down payment, and the current interest rate.
When you are looking for the right mortgage loan, you must choose between getting a Government-Backed loan or Conventional financing.
There are several choices in Government-Backed loans including:
- FHA 203(k)
- Reverse Mortgages for Seniors
An example of a Non-Government-Backed loan is:
- Conventional Mortgage
Below is a brief description of the above loans, along with the associated Website for additional information.
FHA (Federal Housing Administration)
FHA Loans offer low down payments (can be gifted), low closing costs, and easy credit qualifying. The down payment can be as low as 3.5% of the purchase price, and most of your closing costs and fees can be included in the loan. The FHA – which is part of the Department of Housing and Urban Development (HUD) – insures the loan, so if you default, the Government will pay, putting lenders at ease.
For more information on FHA Loans refer to https://www.hud.gov/federal_housing_administration.
FHA 203(k) and FHA Streamlined 203(k) Loans
The FHA 203(k) loan is a program for the rehabilitation and repair of single family properties. It is an important tool for community and neighborhood revitalization, as well as to expand homeownership opportunities.
FHA's Streamlined 203(k) loan permits homebuyers and homeowners to finance up to $35,000 into their mortgage to repair, improve, or upgrade their home. Homebuyers and homeowners can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or an FHA appraiser. Homeowners can make property repairs, improvements, or prepare their home for sale. Homebuyers can make their new home move-in ready by remodeling the kitchen, painting the interior or purchasing new carpet.
For more information on FHA 203(k) Loans refer to https://www.hud.gov/program_offices/housing/sfh/203k/203k--df.
VA (Veterans Affairs)
VA Loans are open to veterans, reservists, active-duty personnel, and surviving spouses. To be eligible, you must have a good credit score, sufficient income, a valid Certificate of Eligibility (COE), and meet certain service requirements. VA loans are available with no money down for qualified borrowers under specific circumstances. These loans are provided by private lenders, such as banks and mortgage companies, and VA guarantees a portion of the loan, enabling the lender to provide you with more favorable terms.
For more information on VA Loans refer to http://www.benefits.va.gov/homeloans
USDA (U.S. Department of Agriculture Rural Development Guaranteed Housing Loan Program)
USDA Loans offer a low-cost and low rate mortgage for people who want to become homeowners in rural areas. This type of mortgage is very similar to an FHA loan when it comes to credit and a 30-year fixed interest rate, but with no money down. These loans are insured by the U.S. Department of Agriculture.
For more information on USDA Loans refer to https://www.rd.usda.gov and to check a home's eligibility at https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do.
FHA Reverse Mortgages for Seniors
FHA Reverse Mortgages for Seniors are another alternative if you are a homeowner age 62 or older and have paid off your mortgage or paid down a considerable amount, and are currently living in the home. This loan program enables you to withdraw some of the equity in your home with limitations, or a single disbursement lump-sum payment at the time of mortgage closing. You can also use this program to purchase a primary residence if you are able to use cash on hand to pay the difference between the proceeds and the sale price plus closing costs for the property you are purchasing. Make sure the loan is federally insured.
For more information on FHA Reverse Mortgages for Seniors refer to http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/hecmabou
Conventional Loans are not guaranteed nor insured by the above Government agencies and, therefore, will have stricter requirements. The lender will want to make sure you are invested personally in your home so the down payment requirement may be higher. You are required to have excellent credit.
It is always a good idea to look at all your options when getting a mortgage loan. Shop and compare all the costs involved, before settling on the type of mortgage.
Prequalifying for a Mortgage:
To some potential buyers, especially first-time home buyers, the prospect of meeting with a mortgage lender may seem a little scary because the lender will ask a lot of questions. However, the questions are crucial in determining how much you can afford without creating a financial hardship. Several of the areas lenders will review include:
- Your employment history and job stability.
- Income and how you earn it - for example, income from bonuses, commissions, and overtime may vary from year-to-year so your lender will want to know the reliability of these sources.
- Relationship between your income and expenses - generally, your fixed housing expenses (mortgage payment, insurance, and property taxes) should not be more than 28% of your gross monthly income. Your lender will also consider other debts including car and college loans.
- Credit history - this allows the lender to make a more informed decision regarding your loan prequalification. Through the credit report, lenders acquire the borrower’s credit score. The credit score represents the statistical summary of data contained within the credit report. It includes bill payment history and the number of outstanding debts in comparison to the borrower’s income.
The higher the borrower’s credit score, the easier it is to prequalify for a mortgage. If the borrower routinely pays their bills late, then a lower credit score is expected. A lower credit score may persuade the lender to reject the application, require a large down payment, or assess a high interest rate in order to reduce their risk.
Therefore, before house-hunting begins, it is important to become prequalified for your loan before time is wasted on homes which you cannot afford.
Loan Application and Checklist:
Below is a list of items your lender may require. These forms are required from you and your spouse, if both are applying for the loan.
- Full name, Social Security Number, address, and phone number
- Driver’s license or photo identification
- Employer's name, address, and phone number, along with your most recent consecutive pay stubs for the last 30 days
- Annual income before taxes and your W-2 statements; if self-employed, a copy of most recent quarterly or year-to-date profit/loss statement
- Signed personal tax returns (all pages and relevant schedules required)
- Value of assets, including banking, retirement and investment statements (all pages in statements are needed)
- Expenses, including housing, credit card and other loan payments; if you are currently renting, your address, monthly rent, and name and address of your landlord
- Most recent monthly statement for any mortgage, home equity loan or line of credit you hold on your home
- The address and sale price of the property being purchased and a copy of the signed Purchase and Sale Agreement (for purchase transactions only)
Depending of your lender, you may be asked for additional information.
Your lender must supply you with a Loan Estimate which will give you an accurate description and amount of all the fees associated with your loan. This document must be supplied shortly after you apply for your loan and it is intended to give you an opportunity to shop around for the best mortgage deal.
The earnest money is a deposit and an important part of the home buying process. It indicates to the seller you are a committed and serious buyer.
Earnest money is submitted along with your offer and prequalification, and in most cases is held in escrow, until settlement, by the seller’s real estate broker. The amount you pay in earnest money depends on several factors including the current real estate market and what the seller requires. At closing, the earnest money is applied to your down payment and closing costs.
If your offer is rejected the earnest money is returned to you. If a deal falls through, the purchase agreement will determine how a refund would be handled.
A down payment is a percentage of your home’s value. The type of mortgage you choose determines the down payment you will need. It can range from 0% to 20%, or more if you wish.
Below are several creative ways to come up with a down payment. It is important to remember the source of the monies must be fully documented with a paper trail from start to finish.
- Gift Money - Gift money is simply a gift from family or documented close relationship. The gifter needs to provide a gift letter and paper trail of the monies they are gifting for the benefit of the buyer.
- Retirement Savings Plan - Borrowing money from your 401(k) or equivalent retirement account is an acceptable form of down payment.
- Sale of a Good - Selling your motorcycle is also an acceptable form of down payment. Be sure to save the Bill of Sale - including the bank statement depositing the funds, to formalize the paper trail from start to finish.
- Trust Funds and Settlement Awards - Monies from an inheritance, settlement, lottery winning, trust fund disbursement, etc., are acceptable forms of down payment as long as the source of the money is fully documented with a paper trail from start to finish.
- Line of Credit - You may take out a line of credit or a personal loan, deposit the full funds into your bank account and after two months the funds will be eligible for your down payment.
- Life Insurance - If you have a cash value policy, it may have matured enough for a down payment. Again, maintain your documentation from start to finish.
- Stocks and Bonds - Selling your stocks and bonds may be a consideration. Again, maintain the documentation from start to finish.
Closing costs, which are paid at settlement, are the costs associated with processing the paperwork to purchase your new home. They include various fees your lender charges, title insurance, and other processing expenses. The Loan Estimate, which you received after your loan application, will give you an accurate description and amount of all the fees associated with your loan.
Affordability is a major factor when purchasing your new home. Aside from the actual purchase price and the costs discussed earlier, (Earnest Money, Down Payment, and Closing Costs) knowing all of your costs can help you adequately plan your finances in advance. This can help you in your home purchase decision, enable you to avoid a lot of stress, and even reduce the possible need to go into debt at a later date. Below are several expenses which may have been overlooked:
- Inspections, after approval of offer
- Property taxes, if paid separately and not part of your mortgage
- Maintenance and renovations
- Homeowner’s Association Fees
- Moving costs
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