First-Time Home Buyer

Due Diligence Money

Next, you will sign a purchase contract and agree to pay the seller a non-refundable amount that is usually $1,000 to $5,000 for the due diligence period. Your real estate agent will advise you how much due diligence money you should offer. The seller will cash this check and keep the money.

The due diligence period acts as a deadline for you. You have responsibilities and are committed to acting on your offer. Your responsibilities during this time are to 1) get a home inspection and negotiate repair costs with the seller, 2) get the house appraised by your lender to verify the home’s current value, and 3) get your mortgage application processed.

A home inspection costs you about $500. You pay another $100 for a pest inspection. You also pay for the appraisal  which determines the home’s value and can cost from about $550 to $850 depending on the property location and loan type. Some of these costs may be added to the amount you want to borrow. Talk to your loan officer about these options.

As mentioned above, you and the seller decide who pays for repairs identified in the home inspection. An appraisal report verifies the home is worth the purchase price. If not, you and the seller renegotiate the purchase price. Your mortgage lender gets your loan request conditionally approved during this period. This means you can get a mortgage if you satisfy all the requests for additional information.

Just remember, if you walk away, you cannot get a refund on the money you paid for due diligence. If you buy the house, the money counts toward the down payment. That may sound unfair, but the seller is taking the property off of the market and may be losing another buyer.

Earnest Money

Also in the purchase contract, you pay the seller a refundable amount that is usually $1,000 to $5,000 in earnest money. Your real estate agent will advise you how much earnest money you should offer. The check is not cashed but held by a third party, like an attorney or real estate agency.

Remember, the due diligence period acts as a deadline for you. You have responsibilities and are committing to act. Be aware of your deadline. You can ask to extend the due diligence period, but if you miss it, you can lose your earnest money!

If you decide not to buy the house for any reason during the due diligence period your earnest money will be refunded. If you do buy the house, both the due diligence and earnest money count toward your down payment and other closing costs.

Residential Mortgage Credit Report

For a home loan, you need a tri-merge score or a residential mortgage credit report (RMCR). A tri-merge score includes the scores from the three largest credit-scoring agencies, Equifax, Experian, and Transunion. An RMCR is not free, but we do not charge up front for the RMCR. The RMCR includes three scores, and we use the middle score. There is additional information on your borrowing habits to help a lender decide how much you can borrow. The RMCR is a stricter look at your ability to repay a mortgage.

The RMCR report and your Credit Karma score are not ever the same. Usually, the report we use will show a lower score. The lower score does not matter much if you have a score of 780, but if your free score is 625 and our free RMCR shows 575 that is the difference between getting a mortgage and not getting a mortgage!

The higher the score, the better your interest rate. Advertised interest rates are just the typical rate for most borrowers. You will find that if you have a low score, the lender wants to charge a high rate, and if you have a high score, the lender wants your business and offers you a lower rate. As noted, you need a score of 620 or higher for a conventional mortgage.

Auto loans, credit card debt, and student loans are a good credit score indicator for lenders if you paid them on time. Late payments, on the other hand, lower your credit score.

We use different credit score minimums for different products. In general, you need to meet the following minimum scores.

Down Payment

A down payment is a percentage of the final purchase price of the home. The percentage depends on your loan product. Saving for a down payment is the number one concern of people interested in purchasing a home. Government-sponsored loans such as FHA and USDA offer you lower down payment options in exchange for insuring your mortgage. US veterans can get a VA loan for NO money down. Typical loans, known as conventional loans, require 3 percent or more down.

If the purchase price is $300,000 and the down payment the loan type requires is 5 percent, then the down payment is $15,000.

If you can afford a higher down payment, it saves you money during the loan term, usually 15 to 30 years. Ways to increase your down payment include adding a co-borrower to the mortgage, getting money as a gift from family members, or taking money out of a retirement account.

You can explore these loan products by visiting Products.

Closing Costs

Any required down payment money and closing costs are wired to the attorney the day you sign all the mortgage documents, called closing, and get the keys to your new home. Or you must bring a cashier’s check payable to the attorney to close. You choose the real estate attorney. Make sure he or she provides verbal instructions to you! Emails can be hacked.

Let’s review. As an example, you have purchased a home for $300,000. You chose a loan that requires a 3.5 percent down payment. Before you get to the attorney’s office to sign for the mortgage, you have spent.

To learn more visit Closing Costs

Helpful Suggestions

1. Get your taxes up to date. If you are self-employed, you should be in the same line of work for two years and have submitted one tax return. You will also need to provide a signed YTD profit and loss statement and 3 months of recent business bank statements.
2. Check your credit report. Federal law allows you to get one free credit score every 12 months. The biggest credit reporting agencies are Equifax, Experian, and TransUnion. You can get one free report from each agency. You will need your social security number, your name and birthday, and your address. Go to www.annualcreditreport.com to order. Resolve any errors that you see. This is just the beginning. For more information, see Credit Score.
3. Find the documents you’ll need. It seems like a lot, but all lenders require the following documents from you (and your co-borrower if there will be one). Copy of pay stubs from the last 30 days.

• Copy of most recent W-2.
• Copy of all pages of bank account statements from the last two months. Be sure to save all pages, even the page that reads, “This Page Left Intentionally Blank.” Do not black out or white out any information.
• Copy of pay stubs from the last 30 days.
• Copy of all pages of the last retirement account statement. Again, save all pages and do not mark the pages.
• Copy of drivers’ license.
• A letter if you need to explain any recent activity on your credit report.
• Copy of your two year’s tax returns if self-employed.

Please budget monthly living expenses, including food and fuel, and payments in order to see how much more you have left after rent. Owning a home can bring unexpected expenses, like a roof or heater that needs replacing, so make sure you can cover those expenses as well as your mortgage payment. The 1% rule of thumb is a good place to start. This involves setting aside 1% of the home’s purchase price annually for repair and replacement costs. It really is important to determine not only how much you can spend, but how much you want to spend.

Experiment with our Mortgage Calculators to see the costs you might incur. Please call us. We want to help you and can offer free advice on improving your credit, a free analysis of your financial health, and even refer you to a local realtor. We’re local and have been since 2000. We know the communities we serve.