Financing Guide for Home Buyers

Financing Guide: Everything you need to know to secure financing to purchase a home

So, you’re ready to buy a home – congratulations!

Whether you are buying your first home, upgrading, relocating, or considering an investment property, the professional real estate team here at Tampa Home Group is here to help.

We live and breathe helping valued customers like you buy and sell property every day. While the financial end of the real estate world can be stressful, intimidating, confusing, even overwhelming at times, the guidance and expertise we provide you to simplify the journey of getting you into the property of your dreams is one of the most important things we do on your behalf.

Making sure you are prepared, including getting your financial life tidied up and having proper documentation gathered, can make the difference between a clear path to owning the home of your dreams or hitting any number of frustrating delays or diversions on the way to a smooth, successful closing. We’re here to help avoid setbacks and delays and ensure that you, the seller, and everyone else involved in the process can rest assured you’re completely prepared from start to finish.

Read on to learn more about what to expect along the way and how you can be ready well ahead of time – which puts you, and us, your partners here at Tampa Home Group, in the best possible position to get you in the home you want.

Start A Green File

A simple first step to get a head start on securing financing is to make a Green File. Your Green File holds all of your important financial information and documents. No matter what type of loan you may apply for, your lender will require some specific, detailed information about your finances, including your credit history, tax returns, what assets you hold, current bank accounts, your income and debt.

Make copies of recent (three months is a good rule of thumb) financial statements for this file, including details on:

  • Any assets you own, including:
    • Bank accounts;
    • Investment accounts;
    • Mutual funds;
    • Real estate and automobile titles;
    • Brokerage statements; and
    • Records of any other investments or assets.
  • Current mortgages and any other loans (HELOC) or liens on real estate;
  • Details on any debt you owe, including balances and minimum monthly payments for:
    • Credit cards;
    • Student loans;
    • Automobile loans;
    • Child support payments;
    • Any court judgements against you; and
    • Any other loans of financial obligations you may have.
  • Documents to verify your income, such as:
    • Recent pay stubs (for the last two months);
    • Profit and loss statements or 1099 forms, if you own a business;
    • W2s for the last two years, if you are employed and collect a paycheck;
    • The last two years of your federal tax returns.
  • Other documents related to special circumstances may be requested, such as if you: are retired;
    • have new, recent debts that are not yet part of your credit report;
    • have ever filed for bankruptcy and have had that discharged; or
    • have assets that you have or will be selling/liquidating to use for this real estate purchase or other purposes.

Your lender will also ask, of course, for your name and contact information, and you may also be asked for addresses of where you lived the last two years and contact information, if you rented during that time, for the landlords or managers of those properties.

You may wish to include any credit reports you obtain, as well, though any lender you work with to pre-qualify or obtain an approval letter or written loan commitment will pull your credit report as one of the first steps in the process.

If you plan to contact more than one lender to see what your options are to finance this purchase, you may want to have one or more extra copies of this set of documents on hand to share on short notice, if needed. In some cases, you will be asked fax or share these documents electronically, at least initially, by emailing them or uploading them using a website. We are happy to help you with that.

Check Your Credit Rating

Your credit score will largely determine your ability to obtain financing, how much you can borrow, and the rate you will pay to borrow those funds. Knowing your credit score is a critical piece of information to know as early in the home buying process as possible.

A credit score is a three-digit number based on the analysis of your credit files, information gathered on what you earn and how you have managed your finances and debt in the past, as well as how much debt you now hold, and what additional credit do you have the ability to access.

The three major credit reporting agencies each have their own secret formulas that use this information to give each consumer a score that is a rating of “creditworthiness.” That is an attempt to pin down how big a risk it is to loan money to any specific individual. The lower your score, the bigger a risk it is to give you a loan. The higher your score,

Credit scores range between 400 and 800. A score of 620 or higher is considered “good.” A score of 680 or higher is considered “premium” and may help get you a lower interest rate.

There are three major credit bureaus that track and gather data on you and everyone else. They are:

  • Equifax – www.equifax.com – (800) 685-1111
  • Experian – www.experian.com – (800) 392-1122
  • Trans Union – www.transunion.com – (800) 888-4213

Any lender you choose to work with will pull your credit report and credit score, for a fee of less than $50. Each time you apply for credit, that information appears on your credit report and may have a negative impact on your credit score, so be selective about choosing your lender and moving forward with the application process.

There are a few ways you can personally access your credit score. In some cases these are “educational” scores, or estimates / approximations of your score, and not the official score used by a lender when considering your request for a loan. You may see your credit score on your monthly credit card or auto loan statement. Non-profit credit counseling services can provide a free credit report and review it with you.

You can also use a service, including one of the many online services. One option is to buy your score directly from MyFICO.com. You don’t have to purchase any add-ons or additional services, do don’t feel obligated. Be cautious of websites that promise a free credit report or score, but require a credit card or sign up for a free trial period, then charge you a monthly fee if you don’t cancel during the trial, or that pressure you to pay for other services.

You are entitled, by federal law, free access to your credit report once a year. You can access that information at AnnualCreditReport.com. They won’t give you your credit score, but the free reports you can access here from each of the credit provide you important, detailed information on your credit history, and may also reveal some errors, and you can ask that those be corrected. You can also ask your bank, credit union or favorite financial institution for advice on how you can improve your credit score. Going forward, treat your credit like gold.

Savings & Debt

When you are planning to buy real estate, you should focus on accumulating funds to use for your down payment, closing costs (appraisal, miscellaneous fees, escrow, title insurance, etc.) and expenses such as inspections. At the same time, focus on paying down any existing revolving and high-interest-rate debt like credit cards.

Toe the Line

Now is not the time for changes or surprises (for you, us, or anyone who may loan you money for your home purchase). When you are preparing to find, put in an offer, and purchase real estate, steady, consistent, and predictable is good.

Now is the time to change jobs or careers, move your money around, or buy big-ticket items. Lenders like stability. If you are considering any major changes in your life or career, it is wise to meet with a lender before making any of those moves. Discuss you options, their impact, and how to proceed before you make any changes!

If you are tempted to buy a big-ticket item, remember that you can get that new car or take that fabulous trip and “only” pay $500 a month; or you could keep that $500 a month free and avoid the obligation to pay off new debt. That $500 a month could get you into a home that is worth $83,000 more, based on a 30-year mortgage loan at 6% interest.

Finding a Lender

You can find lenders in a number of different ways. You might find ads on the newspaper, television or radio. You can also find myriad options on the internet. As your professional Realtor partners, we are happy to refer you to lenders we’ve worked with successfully and who have served our valued clients well, proving themselves competitive and capable, even with challenging circumstances like distressed properties or less-than-ideal credit.

Choose The Right Lender

Interview several lenders to evaluate the following:

  • Their ability to explain things clearly and return your phone calls in a reasonable time period;
  • Competitiveness of interest rates, costs & fees;
  • Availability of loan programs that suit your credit profile and desired property;
  • Access to local loan approval committee that understands the kind of property you are buying; and
  • Loan choices and whether they have the right kind of loan for you.

There are so many types of loans on the market today that it is beyond the scope of this page to list or explain them all. Your lender is the best person to help you select a loan that best suits your needs. Below is a summary of the three most popular loan types we see in practice.

  • Fixed-rate loans: A fixed-rate loan means your monthly payments stay the same over the life of the loan, typically between 15 and 30 years. Fixed-rate loans may be best if you intend to hold the property for a longer period of time – for example, seven years or more.
  • Adjustable Rate Mortgages (ARMs): ARMs start out with a slightly lower interest rate, then adjust up or down at defined periods based on a specific benchmark interest rate like the Federal Funds Rate or the interest rate paid by Treasury Bills. An ARM may be suitable if you plan to sell or refinance your home within the next few years. It is important to understand how and when the rate will adjust and how that will impact your monthly payment based on the index, the readjustment interval, the capitalization rate and downside risks of an ARM before choosing this type of loan.
  • Intermediate ARMs: Also called hybrid loans, intermediate ARMs can offer a fixed interest rates for 3, 5, 7 or 10 years. Then, the interest rate adjusts with the market, like ARMs, every six or twelve months.

Costs & Fees

Credit Report

Typically, it costs less than $50 to check your credit. With your permission, a lender will order a review of your outstanding loans and your repayment history from a third-party credit reporting agency.

Application / Processing Fee

This cost, typically a few hundred dollars, is charged to cover the lender’s work to evaluate your ability to repay the loan. Some lenders will credit this back to you upon closing.

What Is APR?

The APR, or annual percentage rate, is the sum total of all your borrowing costs expressed as a percentage interest rate charged on the loan balance.

For example: After fees, the original interest rate quote of 5.875% might work out to a 6% APR loan, where the interest costs about $6,000 per year for every $100,000 borrowed, and the principal payments are calculated based on the length of the loan term (for example 15, 20, or 30 years).

Indexes

The interest rates on variable loans (ARMs) adjust periodically based on changes in an index. Typical indexes include the Federal Funds Rate, the Treasury Bill rate, and any number of other standard interest rates set by the government, financial institutions, or other regulatory agencies based on a number of variables and economic indicators.

Points

When mortgage companies compete for business by offering lower interest rates, they may charge you a one-time pre-paid interest payment calculated as a percentage of the loan. Called “points,” they may range from 0.25% to 2% of the loan balance. They are usually paid up front. Points are tax-deductible. Consult with your tax advisor for details on how that is handled when preparing taxes.

Appraisal

Lenders hire experienced, often independent appraisers to evaluate a property’s purchase price, condition and size compared to similar recent neighborhood sales. This helps ensure the purchase price is not too high based on market conditions, and gives the lender more confidence that they will be repaid if the borrower defaults and the lender is forced to take over and sell the property. Appraisal costs vary depending on the property, type of appraisal, and region.

Miscellaneous Fees

Expect to see various charges incurred in the processing of your loan which might include notary, courier, and county recording fees.

Prepayment Penalties

These vary widely, so be sure you know in advance if your lender will charge a penalty if you refinance or sell, and the certain period during which the penalties apply.

Does it help to be pre-qualified by a lender?

The pre-qualification process can be quick and straightforward, and requires less information than pre-approval. While it is fast and it does help, a pre-qualification letter is an opinion from a lender of the maximum amount of real estate you can qualify for. If you find a home you like and make an offer, you still need to be approved for a loan. In a competitive seller’s market, an offer from a buyer with a pre-qualification letter could lose out to an offer from someone who is pre-approved.

The advantages of pre-approval

There are several benefits to going the extra mile and getting a pre-approval letter. First, you know exactly how much real estate you can afford. When you find a property you want to buy, your offer will be in a better position than someone less prepared. Being pre-approved is also more efficient. It reduces the amount of time it takes your lender to fund your loan. Be prepared to provide comprehensive documentation (get out your Green File), which the lender may independently verify, including but not limited to:

  • Job and career status
  • Income
  • Monthly debt payments
  • Cash available
  • Total assets and debts

Mortgage Brokers and Lenders – Who does what?

A mortgage broker is the person or company who is your main contact throughout your loan. They often work with a number of lenders to provide funds to you and other borrowers. A lender is the entity that actually provides the funds for the loan. Typically, the lender pays the mortgage broker a fee for acting as the intermediary and providing the customer service to you, the borrower, from application through closing.

Filling Out the Application

There are standard forms to be completed when applying for a loan. Some mortgage brokers post these on their websites so you can fill out and submit the forms online. The information you provide will be verified and used to qualify you for your loan, so take the time to answer all questions completely and accurately.

Documentation

The mortgage broker will need copies – refer to your Green File – of documents you already gathered in the first phase of the loan process, including:

  • Two years of W-2 forms from your employer; or two years of tax returns if you are self-employed;
  • Recent pay stubs;
  • Three months’ bank and money market statements;
  • Brokerage, mutual fund and retirement account statements;
  • Proof of other income sources (alimony, trusts, rental income, etc.);
  • Credit card statements;
  • Auto /boat / student / miscellaneous loans;
  • Drivers’ license or form of ID;
  • If you’re not a US citizen, a copy of your green card or visa; and
  • A copy of any existing mortgage debts if you are applying for a home equity line of credit or another mortgage.

Stay in Communication

The lender will have an analyst, usually called an “underwriter,” review the information you provide, crunch the numbers, and verify your documentation to confirm your ability to repay the loan. Once you have a contract on a property, there may be a loan approval committee that meets to review the underwriter’s conclusions about your creditworthiness, and to evaluate the property on which they are lending. This is called the underwriting process, and new questions often come up at this time. Be sure to return your mortgage broker’s calls promptly to keep the process moving forward smoothly, and check in with them periodically in case they need anything from you.

Signing/Closing

When the lender is ready to “close” or “fund” your loan, your real estate agent and your mortgage broker will have you sign the final loan documents. Signing will typically take place in front of a notary or an escrow officer. Ask your mortgage broker if there is anything you need to do to prepare for this. You should bring a photo ID and in some cases a cashiers’ check for the down payment on the property you are purchasing. Allow yourself enough time to review the documents for accuracy.

If funds are being wired: “Wiring instructions” direct the electronic transfer of money between financial companies. If possible, arrange to have the wiring instructions in place ahead of time and checked for accuracy by both the sender and recipient of the wire transfer. It is critical that these instructions be exact, and, even when they are, delays are not unusual.

***Congratulations!***

Your mortgage broker will probably call you to confirm that the money has been transferred and the loan has closed. Always follow up with a phone call to confirm that your loan funds went where they were supposed to go. It is a good idea to keep records of this critical phase of the transaction once completed.

Have questions? Want to learn more?

Of course, we, your team at Tampa Home Group, are always happy to hear from you, and we love to answer any questions you may have and help expand your knowledge and understanding of the world of real estate – particularly when it comes to financing.

You can also find some other great sources of detailed information about obtaining home loans and other areas of finance at your local bank or credit union, or on the web at places like the Consumer Financial Protection Bureau (ConsumerfFinance.gov), AnnualCreditReport.com and others that offer truly free information, service and advice. You may even find a local organization that provides non-profit credit counseling services – check the web for local options, and we may be able to suggest some to consider.

Be careful about sites that ask you to provide a credit card number, as some may pressure you to purchase other products or services, or sign you up for a trial membership that later converts to a monthly membership charge.

It may be helpful to check with the home loan experts you know and trust at a banking institution you already do business with, either for your personal or business banking needs. In today’s competitive market, it can also be useful to check with other institutions that provide financing.

If you need any advice or recommendations on organizations we trust and financial professionals with whom we have long-standing, productive relationships, please let us know. And, as always, please visit the “Professionals” page on our Tampa Home Group website to find experts in this and many other fields that have worked successfully with our many clients in the past.