For most of us, a home is the biggest purchase we’ll make in our lifetime—one that carries a lot of emotional and financial value. Having a detailed budget is the first step of the process. Next comes working with a lender to secure financing. Here are some key factors for your buyers to consider.
- Proof of income: W-2 forms, pay stubs, bank statements, and any other proof of income. This information will be required in order to determine if the buyer can afford the mortgage.
- Tax returns: Lenders will require recent tax returns.
- Debts: Lenders need to know how much debt the mortgage applicant has in student loans, car payments, credit cards, and other debts. They will use this to calculate a debt-to-income ratio (DTI). Some lenders weigh this ratio even more heavily than a credit score.
- Assets: Investments, savings accounts, bonds, or other assets enhance the buyer’s financial profile.
- Residence history: Past addresses, including landlord references, may be required.
- Documentation of any down payment assistance: If the buyer is utilizing down payment assistance, it could take longer to process the mortgage due to third parties.
Prequalified vs. Preapproved
Think of a prequalification as a quick snapshot of qualifications to take out a mortgage loan. The prequalification takes into account the buyer’s credit score and self-reported income, and it gives him or her (and you) a ballpark idea of how much house is affordable. Remember, it’s an approximation, not a promise, cautions the Consumer Financial Protection Bureau.
A preapproval is more complex. Most banks will want a loan application and documentation of income, assets, and debts, along with a full credit report—not just a credit score. With a preapproval, a conditional commitment in writing from the bank confirms approval for a specific loan amount. In competitive housing markets, a preapproval provides an edge over other buyers, and it could be required to make an offer.
An escrow account is a holding account. Lenders hold money in escrow to pay property taxes and homeowner’s insurance, which ensures that they are paid on time and helps reduce the financial strain on the buyer. Each month, a portion of these estimated annual costs is factored into the mortgage payment along with principal and interest. The bank holds this extra money in escrow and then pays insurance and tax bills when they are due.
An appraisal report provides an approximate dollar value of the home. Appraisals are conducted by experts who are licensed or certified by the state. Appraisers look at several factors, such as the size and condition of the home, comparable sales in the neighborhood, and other features that add to or detract from the value of the property. Lenders require an appraisal to determine the property’s value and the maximum possible loan amount.
Many banks request a home inspection report prior to purchasing a property. Investing in a detailed home inspection up front will save the buyer money in the long run. The last thing your buyer wants to do is purchase a home only to discover down the road that it needs costly repairs. With the report in hand, the buyer can go back to the seller and request repairs or a reduction in sales price to cover the cost of the fixes. If they skip the home inspection, the appraiser could note problems and reduce the value of the home, which will impact how much they can borrow against the home.
Private Mortgage Insurance
Private mortgage insurance (PMI) is a type of loan insurance that some lenders require buyers to have. This insurance protects the lender if the buyer defaults on the loan. PMI is typically required if the mortgage is a conventional loan and the down payment is less than 20% of the home’s purchase price. PMI can help buyers qualify with a lower down payment. It’s a safety net that enables buyers to enter the market when they otherwise may not have been able to purchase a home.
These are fees that are paid at the closing of a real estate transaction. Closing costs may be paid by either the buyer or the seller (or a combination of both) and include appraisal, administrative, and application fees. Typical closing costs for an average-priced home range from 1% to 5% of the home’s price, depending on the state, according to a 2019 report by ClosingCorp.
For more information, visit synovus.com/homebuyer-basics.
This content is general in nature and does not constitute legal, tax, accounting, financial, or investment advice. Buyers are encouraged to consult with competent professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information; do not endorse any third-party companies, products, or services described here; and take no liability for use of this information.