First Time Home Buyers Roadmap

Budget

 

The first step in buying a house is determining your budget and how much you can afford to pay for a home. Home buying is not just about your mortgage payment, so you will want to crunch some numbers to figure out all of the potential costs associated with owning a home. You will begin the process by (1) adding up every source of income that comes into your checking account each month. Next, you will subtract what you will deposit into your savings account every month. Most experts say 20% of your income (50/30/20 rule). (2) How is your credit? Do you pay your bills on time? Are you in good standing with creditors? Are there any errors on your credit report? (3) Debt - Write down all your monthly expenses such as utilities, food, gas, clothing, medical, personal, recreation, student loan payments, car payments, etc. and subtract that number from the total.

 

Find the Right Lender

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Shop around for the right lender. Find a local Birmingham based lender who offers a loan that fits your needs and get pre-approved. A pre-approval means the lender has checked the potential buyer's credit and verified the documentation to approve a specific loan amount (the pre-approval usually lasts for a particular period, such as 60 or 90 days). Final loan approval occurs when the buyer has an appraisal done and the loan is applied to a specific property. A pre-approval letter, preferably from a local Birmingham lender, will need to accompany any offers you make. A pre-approval letter helps you show sellers that you are a serious buyer. It doesn’t commit you to a lender.

 

Closing Costs

 

What are they, who pays them and what do they cover?

Closing costs are the miscellaneous fees separate from the real estate agent fees that must be paid at closing. They cover things such as the following:

 

• Loan processing

• Title company fees

• Surveyor costs (if needed)

• Recording of the deed

• Insurance

 

Any taxes or homeowner’s association fees will need to be prorated if they have already been paid. The amount of the closing costs will vary with each home sale/purchase. Closing costs in AL typically amount to about 1% of the sale price of a home.

 

Your real estate agent will provide you with a ‘buyer’s net sheet’, which is an estimate that lays out the closing costs, and by federal law you must receive what’s called a “good-faith” estimate of your closing costs from the lender you use.

 

There is no rule about who, the seller or the buyer, pays the closing costs. In a buyer’s market, sometimes the buyer will ask the seller to pay the buyer's closing costs up to a certain percentage or amount.

 

If the closing costs are too steep and the sellers won’t chip in as much as buyers would like, the buyers can contact their lender to see if the closing costs can be rolled into the mortgage.

 

Closing costs are defined as miscellaneous fees charged by those involved with the home sale such as:

• your lender for processing the loan,

• the title company or closing attorney for handling the paperwork,

• a land surveyor,

• local municipalities for taxes, recording the deed, etc.. 

 

The following is a breakdown and estimate of the typical costs associated with closing a residential mortgage, along with a brief description of the service the buyer is going to receive:

 

Lender Related Closing Costs:

 

Loan Origination, Application (or a dozen other names) Fee: A fee charged to process an application for a loan and covers predominantly administrative costs associated with the loan. ($150 - $1,200). Any fee in section A of your closing disclosure (CD) is negotiable with your lender, and the larger the loan the more leverage you have. Ask the lenders you are interviewing this question, "If I decide to proceed with you as my lender, what are all of the ‘origination charges’ that will be listed on the Loan Estimate under Item A, Loan Costs on my CD?"

 

Credit Report: The cost of obtaining credit history reports from the three major reporting agencies. ($75-$150)

 

Private Mortgage Insurance: If the buyer’s down payment is less than 20% of the purchase price, lenders require PMI insurance to protect them if they have to repossess and can’t sell the house for the remaining loan balance. Typically, the annual policy for the first year is paid at closing.  In addition, the lender may collect up to three months’ worth of the following year’s premium at closing and deposit the money into the escrow account.  This becomes part of the buyer’s reserves.  A buyer can expect to pay up to 1.75% of their loan amount.

 

Initial Interest: This is to cover the interest from the date the buyer closes until the end of the month.  For instance, if the buyer closes on March 15, he or she will pay interest for the period of March 15th through the 31st.  The buyer’s first payment will be due on May 1, which covers the interest in April, because interest always paid in arrears, that is, after it becomes earned by the lender.  Depending on the interest rate, amount financed and down payment, the interest may accrue anywhere from $20-$40+ daily.

 

Document Preparation Fee: Charge for the cost of preparing documents such as the mortgage, note, truth in lending, etc. ($550)

 

Lender’s Title Insurance Policy: Lenders require the purchase of a title insurance policy that protects their mortgage interest in the real estate.  Title insurance rates proscribed by law depending on the locality of the real estate and the loan amount. ($375)

 

Other Items Potentially Required by Lenders:

 

Survey: Lenders often require a registered land surveyor to conduct a survey of your property to define the property size and boundaries, and to see if any part of the building or other improvements are “encroaching” on a neighbor’s property — or vice-versa.  Surveys would also show any setback violations or other material matters considered problematic. ($400-$500)

 

Appraisal: Lenders will require an appraisal to ensure the collateral is worth as much or more than the loan amount. ($500+)

 

Homeowner’s Insurance: (first year premium) Lenders will require payment of the first year’s hazard insurance (homeowner’s insurance) premium to protect, against fire, windstorms, and natural hazards.  In order to bind the coverage, the premium becomes often paid in advance of closing.  If the homeowner’s insurance is to be escrowed going forward, the lender will also likely collect several months’ worth of the following year’s premium in advance at closing, which will become deposited into the escrow account.  Amounts can vary by company, but 2%-3% of the sale price is not unheard of.

 

Flood Zone Certification: Determines the flood zone of the property and the base flood elevation. ($20)

 

Title Related Closing Costs:

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Homeowner’s Title Insurance Policy: A homeowner’s title insurance policy protects the owner’s interest in the real estate from claims of ownership or other interests by others.  Like the lender’s policy, the rates are mandated by law depending on the locality and the purchase price. It is a one-time premium for a policy that is generally issued and paid for at closing.  There is no requirement that an owner’s title policy be purchased, especially on brand new homes. (I can calculate this for you)

 

Settlement Fee: A fee must be paid to a closing attorney or title company that has prepared all of the documents, calculated figures, and who oversees proper execution of closing documents.  This fee becomes split between buyer and seller. ($995)

 

Document Preparation Fee: Charge for the cost of preparing legal papers.  ($450-$550) Documents related to the immovable property.  ($100-$200 depending on the length and complexity of the abstract)

 

Government Recordation Charges: The recording fee becomes paid to a government entity, which enters an official record of the change of ownership.

 

Proration of Property Taxes: Typically, the buyer will pay that percentage of the property taxes corresponding to the percentage of the year that the buyer will have owned the property.  The lender may also collect property taxes on a monthly basis in the escrow account.  If your property taxes are escrowed, you may pay up to several months in advance, which will be collected at closing, and deposited into the escrow account.  In addition, the amount will vary depending on how long for that year the buyer will own the property and the assessed value of the property.

 

Other Common Costs:

Wire Transfer Fees: In most instances, the lender is funding the transaction with a wire, as opposed to a check, so additional fees apply. ($25-$50)

 

Purchasing a home can often feel intimidating, especially if the buyer is unaware of the associated fees. Working with a REALTOR who works with a lot of first-time home buyers and enjoys educating first-time home buyers will help put you at ease. Hopefully this outline gives you a better understanding of what to expect throughout the home buying process, but I if you are looking for an agent who enjoys working with first time buyers, I would love to help you through the process!