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Author: Ryan Hillard

Founder & Managing Broker

What are Closing Costs?

Written by Ryan Hillard on . Posted in Article. No Comments on What are Closing Costs?

Buyer’s Closing Costs

When you buy a home there are closing costs. These are costs that go above what you are paying for your down payment. Closing costs are your out-of-pocket fees used for items like getting your home loan, having the house appraised, getting the title transferred into your name and so on. Your closing costs can range between one and three percent of your loan amount, depending on different factors.

This means if you’re taking out a $300,000 mortgage loan, closing costs could range from $3,000 to $9,000. The amount a home buyer has to pay in closing costs can vary a lot depending on the home price, location, and other factors.

Typical closing costs paid by the buyer include:

  • Origination Fee — This is the fee from your mortgage lender used to set up and process your application, verify your documents, underwrite, and close your loan. 
  • Appraisal Fee — This is the fee to have your home appraised. 
  • Title Search and Title Insurance — A title search insures that your new home’s title is clear, and no one else can claim rights to the home or property. Title insurance provides protection against undiscovered claims.
  • Upfront Mortgage Insurance or Funding Fee — Some home loans require an upfront fee to insure or ‘guarantee’ the mortgage. Government-backed home loans like FHA, VA, and USDA mortgages, all have an upfront fee, though you can roll this fee into your loan amount instead of paying it at closing.
  • Discount Points — Discount points let you ‘buy’ a lower interest rate by paying an extra fee at closing. 
  • Escrow — Escrow is set up so that you pre-pay money that will be placed in an escrow account and disbursed as necessary to pay for your property taxes and homeowner’s insurance. You will also have your down payment due at closing, but this typically is not thought of as a ‘closing cost.’Any earnest money you paid when you made an offer on the house will be credited toward your down payment at closing.The type of mortgage you choose can also have a big effect on your closing costs. And the biggest of these is mortgage insurance.Mortgage insurance or MI is only paid when putting less than 20% down to buy the home with a conventional loan.  The Mortgage Insurance helps protect the lender.  Most mortgage insurance is paid with your monthly payment and considered an annual payment, however there are some loan programs that also have an initial mortgage insurance premium that is called an Upfront Mortgage Insurance Premium and may be due at closing as well.  Let’s look at some of these types of programs with Upfront Mortgage Insurance.
  • FHA Upfront Mortgage Insurance Premium (UFMIP)The first program is FHA home loans which require annual mortgage insurance an upfront insurance fee. The upfront mortgage insurance premium, or UFMIP — is equal to 1.75% of the loan amount, or $1,750 for every $100K borrowed. Despite its name, FHA upfront mortgage insurance doesn’t have to be paid at closing. Most borrowers roll this cost into their loan amount rather than pay it with cash. Rolling UFMIP into your loan will greatly reduce your closing costs. But it does mean you’ll pay interest on the fee over the life of your home loan.
  • VA Loan Funding FeeVA loans do not require annual mortgage insurance. But they do require a one-time ‘funding fee’ due at closing unless the veteran has exempt status. For first-time home buyers, the VA funding fee is usually equal to 2.3% of the loan amount. Buyers who have used a VA loan before will pay 3.6% of their loan amount. If you make a down payment of 5% or more, the VA funding fee is reduced. VA home buyers also have the option to roll this fee into their loan amount instead of paying it along with their closing costs.
  • USDA Guarantee Fee Like the FHA loan, the USDA home loan program requires both an upfront mortgage insurance fee and an annual one. USDA’s upfront fee is equal to 1% of the loan amount and can be added to the mortgage balance to reduce closing costs. It’s important to be aware of all the costs associated with buying a home so that you have enough money to pay your closing costs. If you’re not sure, check with your lender, they will cover your closing costs and your options. There are several costs to be aware of when buying a home, but the great news is that our team is here to help you throughout the process.

Five Things You Should Do Before You Buy a Home

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Buying a home can be a stressful and confusing time for many homebuyers. But it does not have it be. One of the first things you should do when you are considering buying a home is to know your credit score.

Tip Number One:

Get Your Credit Report and Scores for Free

To get a home loan there are several factors that come into play, but your FICO or credit score is one of the most important. You can check your credit report and get your scores online for free. The Fair Credit Reporting Act requires each of the nationwide credit reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months. Once you have your credit report be sure to review it and check for any errors.

Tip Number Two:

Look for Errors on Your Credit Report

Mistakes on credit reports are bigger issues than you may realize. If you do find inaccuracies, you can dispute them with the three major credit bureaus. They have 30 days to investigate your dispute. If they find that the item in question is inaccurate, they will correct it.
The higher the credit score the more likely you are to get approved for a home loan, so check what you can do to improve your score.

Tip Number Three:

Improve Your Score Before Applying

A few points difference in your credit score can be the difference in whether you qualify for a home loan or not. There are a few things you can do to increase your scores. First, pay down the balances on your credit cards. Your credit utilization ratio is your credit limit divided by your card balance. This ratio accounts for 30% of your overall credit score, only payment history has a bigger impact. For example, if your credit limit is $10,000 and your balance is $6,000 your utilization ratio is 60% which is high. The lower your credit card balances are the higher your credit rating will be. Some credit experts advise keeping your balances below 20% of your credit card limit.

The next thing you can do is to make all your payments on time. 35% of your credit score is based on your payment history so it’s important to pay all your bills on time. If you’re a forgetful person you can set up auto pay with your creditors, so you never miss a payment.

If you are wanting to buy a home, do not apply for, or open any new credit. This means to hold off on buying a new car or opening a credit card until after you close on your mortgage.

Tip Number Four:

Check Your Savings

You will need a certain amount of cash in the bank to buy a home. If you are living paycheck to paycheck then it probably is not the ideal time for you to apply for a loan. There are more upfront costs associated with getting a mortgage loan besides the down payment. There are closing costs and fees that you will need to pay to the appraiser, lender and title company, so you need to make sure you have enough cash on hand when you get ready to close. And one of the most important things you should do before you go out looking for a home is to get pre-approved.

Tip Number Five:

Get Pre-Approved

A pre-approval means you have completed a mortgage application and a mortgage lender has checked credit and verified income and assets. You will need to submit documentation verifying your income, assets and savings and your lender will be able to help you through this process. Most sellers today will not even consider an offer from a buyer who has not already been pre-approved, so plan on meeting with your mortgage lender before you go shopping for your home.

Buying a new home is exciting and there are a few simple things you can do before you start looking that will help you through the process.

Contact us to find out more about buying your home! We are happy to help!

First Time Home Buyer Guide

Written by Ryan Hillard on . Posted in Guide. No Comments on First Time Home Buyer Guide

Benefits of Home Ownership

Although the experience of owning your first home can be fulfilling and exciting, the actual financing and buying process can be quite overwhelming. From choosing the right neighborhood for your lifestyle to reviewing your financing options, there are a lot of important decisions that you need to make to buy a home. By understanding the home buying process and the financing options available, it should bring you some peace of mind, while helping you make informed financial decisions.

Tax Benefits

There are many advantages to home ownership, such as tax benefits, building wealth and securing financial stability. As a homeowner, you can deduct your monthly mortgage interest and your property taxes on your income tax. Certain costs incurred during the purchase of a home are also tax deductible. Be sure to save all of your closing documents, as you will need them throughout the process and in the future. It is best to contact a tax professional to receive more detailed information on what deductions you may be eligible to receive.

Although the experience of owning your first home can be fulfilling and exciting, the actual financing and buying process can be quite overwhelming. From choosing the right neighborhood for your lifestyle to reviewing your financing options, there are a lot of important decisions that you need to make to buy a home. By understanding the home buying process and the financing options available, it should bring you some peace of mind, while helping you make informed financial decisions.

Building Wealth through Home Ownership

Owning a home can help you build wealth in two ways – growth in equity and appreciation. Growth in equity happens as you pay down your mortgage. A certain percentage of each mortgage payment goes towards a reduction in the total amount owed. Typically, payments in the first few years of the mortgage are primarily applied to interest on the loans. As time passes, however, more and more of each payment is applied to the outstanding loan amount and your equity in your home increases. Appreciation is when the value of a property builds over time. Historically, real estate market values tend to grow over time. Also, when you update existing features or remodel a home, the value of your home may increase.

Financial Stability through Home Ownership

As a homeowner, you gain more financial stability over the years of owning a home. Fixed-interest home loan payments remain stable year-after-year, as opposed to rent payments, which may increase year after year. Since salaries generally rise over time, the fact that mortgage payments remain steady over time can help you manage, plan and grow your wealth.

The Home Buying Process

Once you have made the decision to buy a home, you may ask yourself “What should I do first??”

The home buying process begins by finding out how much you qualify for. This means that you will need to first meet with a lender and review your financial documentation to find out how much you qualify for. Once you find out how much you qualify for, you can begin looking for a house. Once you find a house you like, you will make an offer and then you will be able to close on your house.

The home buying process is simple and typically happens in this order:

Step One

Collect Financial Records

Your lender will ask you for your financial records to determine your financial stability, creditworthiness and ability to repay the loan. These items will cover your job history, credit score, income and assets.

PITI

When evaluating your future housing expenses, it’s important to take into consideration the entire housing expense, not just the mortgage payment. Mortgage lenders use PITI calculation (Principal, Interest, Taxes, Insurance) to determine the total monthly housing expense. HOA (Homeowner Association) fees will also be added to the calculation when applicable. The PITI calculation will be used as one of the components of the Debt-to-Income ratio.

Total Debt-to-Income Ratio

When evaluating your ability to repay the loan, your lender will calculate your debt-to-income ratio or DTI. The DTI is your total minimum monthly debt (proposed PITI, credit cards, student loans, car payments, etc.) divided by your gross monthly income. The lower your debt-to-income ratio, the higher the likelihood of getting the home loan terms you want.

Credit Score

A credit score is generated by a credit reporting agency and is calculated from several pieces of data in your credit report. Both positive and negative information is considered in the calculation, including payment history, amounts owed, length of credit history and types of credit used. The higher the score, the better your loan rates are likely to be.

Step Two

Evaluate Your Home Loan Options

When you are shopping for a mortgage loan it is especially important to work with a licensed mortgage professional who you feel comfortable with and who you feel you can trust.  

Your mortgage professional can help you:

  • Identify any credit issues that may hinder a loan approval.
  • Guide you through the loan application and closing process.
  • Help you determine a purchase price and monthly payment that fits in your budget.
  • Help you compare different loan programs so you choose the best one for your financial needs.
  • Manage and address any issues that may come up along the way.

When choosing a mortgage, there are many factors to consider which would affect your monthly payments, closing costs, amount of cash needed at closing and total amount paid for your loan.

These factors include:

  • Whether the loan is Fixed or Adjustable Interest Rate
  • Number of years (or term) that you will be making payments
  • Down payment amount
  • Mortgage insurance options
  • Fees

Do not be afraid to ask questions so that you fully understand the impact of these factors on your home loan. The more knowledgeable you are, the more comfortable you feel and if your lender cannot answer your questions you may not be working with the right lender. 

Do not be afraid to ask questions so that you fully understand the impact of these factors on your home loan. The more knowledgeable you are, the more comfortable you feel and if your lender cannot answer your questions you may not be working with the right lender.  

Here are a few questions that you may want to ask:

  • “What’s the difference in monthly payments between a 15-year term and a 30-year term?”

While a 15-year term will result in a higher monthly payment, you may qualify for a lower interest rate. Plus, you would be finished paying for your home in half the time, saving a significant amount on interest payments.

  • “What interest rate would I qualify for if I chose an Adjustable Rate mortgage?”

Usually, adjustable rate mortgages have a lower starting interest rate, resulting in a lower initial monthly payment. Adjustable rates tend to increase over time. However, if you plan on staying in the home for only a few years, this may be a viable option. And if you are bringing in less than 20 percent for a down payment, you will want to know about mortgage insurance. 

  • “How would mortgage insurance affect my monthly payment and how long would I have to pay it?”

Mortgage insurance reduces the down payment requirements for the borrower, but it will increase your monthly payments. Depending on the type of loan and the specific insurer, you may be able to eliminate the mortgage insurance payments once your balance drops below a certain level. There are many other questions you may have. Be sure to write them down, so that you do not forget to get information on all the details.

Step Three

Finding Your New Home

Once you have been approved for a loan, the next step is to find your dream home! The house hunting stage can be fun and exciting, but it is important to keep your priorities in mind when evaluating potential homes.

For example, perhaps you have found a beautiful, large home, but the school district is rated poorly. Is a smaller house in a better school district a better fit? This depends on your family’s unique needs.

You may have to look at dozens of homes before you find one that suits your lifestyle, budget and includes all the features that you and your family desire. However, you should be prepared to readjust your priorities during your home search in order to find a home that is in budget and fits all your needs. 

As you search for homes and find one that you are set on, you will want to make an offer. But when you get ready to make an offer, you will want to be sure to work with a reputable real estate agent, who can help you through the entire process.

A real estate agent can also be a great asset in helping you find your dream home. Real estate agents generally have access to home sale listings that you may not be able to access on your own.

A good real estate agent can help you by:

  • Reviewing your wish list and researching potential homes.
  • Making arrangements to show the homes that fit your requirements.
  • Researching neighborhoods, schools and tax rates.
  • Negotiating a purchase price and making the offer. 
  • Assisting in the purchase and closing process.

Wherever you are in the home buying process, the first step is to find out how much you qualify for and that begins by meeting with a lender. If you’re ready to take the first step in the home buying process, contact Forward Mortgage Group today for a free consultation with one of our experienced lenders.