What You Need To Know About The Home Inspection Process

Congratulations on finding a house!

You now have only a few days from when you signed the purchase and sales agreement to have a home inspection.

Chances are your real estate agent made the offer contingent upon a satisfactorily home inspection and obtaining mortgage financing.

What Is A Home Inspection?

According to Wikipedia, a home inspection “is a limited, non-invasive examination of the condition of a home, often in connection with the sale of that home. This is usually conducted by a home inspector who has the training and certifications to perform such inspections.

The inspector prepares a written report, often using home inspection software, and delivers it to a client, typically the home buyer.

The buyer uses the knowledge gained from the home inspection to make informed decisions about their pending real estate purchase.

The home inspector describes the condition of the home at the time of inspection but does not guarantee future condition, efficiency, or life expectancy of systems or components”.

It is not the job of the home inspector to estimate market value or to let you know you got a good deal on the price of the home. This is done typically through an appraiser.

Why Have A Home Inspection?

Buying a home is the single most expensive investment many of us will ever make.

A home inspection is designed to provide the home buyer with the information they need to make a more informed decision about the property.

The home inspection report should clearly identify any potential significant defects, and give the home buyer a realistic estimate of the costs of repairs so that they can be negotiated in an updated purchase contract.   An inspection should also highlight any areas or features that need to be addressed in the near future which may be reaching the end of their useful life span.

What Do Home Inspections Cost?

The home buyer generally has to pay for the inspection up front, but there may be an agreement in the purchase contract for the seller to reimburse those fees at the time of closing.

Home inspection fees vary from state to state. An estimated cost of a home inspection is around $250-$400, depending on what services have been selected, as well as where the house is located.

In addition to the general home inspection, there are many common services that home buyers also choose to have preformed when having a home inspection. These additional services are not typically included in the general home inspection fee.

Optional Home Inspection Services:

  • Wood destroying pests
  • Radon gas
  • Lead base paint (homes built before 1978)
  • Asbestos
  • Carbon monoxide
  • Pools, spas, barns, or other external structures
  • Docks and sea walls
  • Underground sprinkler systems
  • Septic

Once the inspection is completed, the buyer generally has seven days to put in writing the “request for repairs” required by the seller to make prior to taking possession of the home.

The sellers may not be obligated to make every repair, so make sure you read the purchase and sales contract carefully to make sure the agreement does not state that the home may be sold in “as is” condition.

The Home Inspection Process:

A home inspection should include examination of all major systems, including the plumbing, heating, air conditioning, electrical, and appliance systems.

The home inspector will also look at the structural components, such as the roof, foundation, basement, exterior and interior walls, chimney, doors, and windows.

It is recommended that the home buyer and/or representing buyer’s agent be present at the time of the home inspection.

A typical home inspection can take between 1 ½ hours to 3 hours, depending on the size and condition of the home.

Remember you are paying for the home inspection. Follow the home inspector around and ask questions about the condition of your home and how to maintain it.

The attached link will help give you a better idea of what happens during a home inspection provided by the American Society of Home Inspector’s visual home inspection demonstration video. CLICK HERE FOR VIDEO

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Shopping For A Hazard Insurance Policy

When shopping for a hazard insurance policy, something called “bundling” can actually save you quite a bit of money that most people aren’t aware of.

Many of the big insurance companies price their insurance rates to attract a particular segment of the market. They usually price their hazard insurance policies to attract homeowners who need to insure not only their homes with hazard insurance, but also their cars with car insurance and lives with life insurance.

The big insurance companies want customers who will stay with them for years vs shopping around for a better deal every six months.  So, to give customers an incentive to stick with them, they offer discounts if you use the company for all three (hazard, auto, life) lines of insurance.

Companies offer “multiline discounts” to attract customers who will need more than one type of insurance. These companies offer a cheaper rate to insure both your house and car than if you insured each one separately at different companies.

The same goes if you add a second car or a life insurance policy – the discounts keep adding up.

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Frequently Asked Questions:

Q. How much can you actually save when you combine insurance policies with one company?

It varies by company, but with some of the large insurance companies, it will save you up to 40%.

Q. Why are the large companies sometime so far off when it comes to price on my hazard insurance?

Large companies often give significant discounts if you have your hazard, auto and life insurance with them – and they actually *want* to be higher in price if you only have one line. People with only one line of insurance switch more often according to the statistics.

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Ten Things You Can Do To Protect Your Identity

Facts About Identity Theft:

It’s estimated that there were 10 million victims of identity theft in 2008, and 1 in every 10 U.S. consumers have reported having their identity stolen.

The U.S. Department of Justice reported in 2005 that 1.6 million households experienced fraud not related to credit cards (i.e. their bank accounts or debit cards were compromised).

And, the U.S. DOJ also reported that those households with incomes higher than $70,000 were twice as likely to experience identity theft than those with salaries under $50,000.

What Is Identity Theft?

According to the United States Department of Justice, identity theft and identity fraud “are terms used to refer to all types of crime in which someone wrongfully obtains and uses another person’s personal data in some way that involves fraud or deception, typically for economic gain.”

Such personal information may include your name, address, driver’s license number, Social Security number, date of birth, credit card number or banking information.

Victims of identity theft can spend months trying to restore their good name. And most victims do not realize it has happened until they get denied for a mortgage or a credit card.

Ten Ways to Protect Your Identity:

1.  Dumpster Diving –

Avoid “dumpster diving” by shredding all papers that contain any personal information.

Criminals sift through trash looking for the following:

-Bank Statements
-ATM Receipts
-Canceled Checks
-Credit Card Statements
-Credit Card Purchase Receipts
-Credit Card Solicitations (unopened “pre-approval” solicitations)
-Pay Stubs
-Tax Documents
-Utility Bills
-Expired Identification Cards (Drivers License, Passports…)
-Expired Credit Cards
-Medical Statements
-Insurance Documents

2. Personal Info / Phone Calls -

Never provide personal information, including your Social Security number, passwords or account numbers over the phone or internet if you did not initiate the call.

If you are asked for any type of personal information, before giving any information, ask the caller for their name, telephone number and the organization that they are representing.

You should then call the company using the customer service number the company provides with your account statement. Do NOT call the number you were given by the caller.

To reduce the number of solicitations you receive, you can sign up at the do not call registry:

web: http://www.donotcall.gov
call: (888) 382-1222

3. Look Over Your Shoulder –

Avoid “Skimming and shoulder surfing” (Never let your credit card out of your sight).

Pay with cash. Try never to let your credit card out of your sight to avoid a fraud scheme known as “skimming”.

According to Wikipedia:

“Skimming is the theft of credit card information used in an otherwise legitimate transaction. It is typically an “inside job” by a dishonest employee of a legitimate merchant. The thief can procure a victim’s credit card number using basic methods such as photocopying receipts or more advanced methods such as using a small electronic device (skimmer) to swipe and store hundreds of victims’ credit card numbers.”

Be aware of people “shoulder surfing”. This is when they are looking over your shoulder or standing too close trying to obtain your PIN number when making purchases with your debit card. They may also be listening for your credit card number.

4. Secure Your Mail –

Always mail your outgoing bill payments and checks from the post office or a neighborhood blue postal box and never from home.

Pick up your incoming mail as soon as it is delivered. The longer it sits the better chance a criminal has of stealing it.

-Get a P.O. Box.
-Lock Your Mail Box

Contact your creditors if a bill doesn’t arrive when expected or includes charges you don’t recognize. It may indicate that it was stolen.

5. Read Credit Card Statements -

Review account statements to make sure you recognize the purchases listed before paying the bill.

If your credit card holder offers electronic account access, take advantage and periodically review the activity that is posted to your account.

The quicker you spot any unauthorized activity, the sooner you can notify the creditor.

6. Monitor Credit Report -

Review your credit report at least once a year to look for suspicious activity. If you do spot something, alert your card company or the creditor immediately.

7. Email Links –

Never click on a link provided in an email if you believe it to be fraudulent.

Keep in mind, no financial institution will ask you to verify your information via email.

Criminals may link you to phony “official-looking” web site to confirm your personal information. This is known as “phishing”.

According to Wikipedia:

“Phishing” is the criminally fraudulent process of attempting to acquire sensitive information such as usernames, passwords and credit card details by masquerading as a trustworthy entity in an electronic communication.

8. Opt Out –

Opt out of credit card solicitations. (Take your name off marketers’ hit lists)

You can opt out of credit card solicitations by calling 1-888-567-8688 to have your name removed from direct marketing lists.

You can do this online at OptOutPrescreen.com, which is the official consumer credit reporting industry opt-out website for the three credit companies:

Experian
Equifax
Trans Union

9. Safeguard Your Social Security Number -

Protect your Social Security number.

Never carry your Social Security card or anything else with your social security number on it in your wallet or purse, along with your driver’s license.

Do not put your Social Security number or driver’s license number on any checks you may write.

Only give out your Social Security number when absolutely necessary.

10. Read Privacy Policies –

Find out what company privacy policies are (know who you are dealing with).

When being asked for your Social Security number or driver’s license number, find out what the company’s privacy policy is.

Inquire as to why it is being asked for.

Ask who has access to your number.

Ask if you can arrange for them not to share your information with anyone else.

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Is There A Rule-of-Thumb Regarding The Number Of Credit Lines To Have Open?

While the actual credit score has a big impact on a loan approval, it’s not the only component of the credit scenario that underwriters consider for a mortgage approval.

Since loan programs, individual lenders and mortgage insurance companies all have their own credit report restrictions, it’s difficult to define a standard Rule-of-Thumb to follow.

However, the number of “Open and Active Trade Lines” seems to be the common denominator in most approvals.

A trade line is basically a credit card, installment loan or other credit liability that is reported to the credit bureaus and displayed on a credit report.

Credit Trade Line / Approval Bullets:

  • Banks usually won’t count a trade line that is less than 12 months old.
  • The minimum number of trade lines most lenders find acceptable is 4 open and active trade lines.
  • Lenders like to see at least one credit line of $5,000, or all credit lines to total $1,000 or more.

Exceptions to Trade Line Rules:

Interestingly enough, a recent list of Mortgage Insurance requirements included a favorable trade line requirement, which read:

Min 3 trade lines @ 12 mo reporting. Cannot be ‘authorized user’

Basically, this means as long as the lender, and the loan program allow for less than 4 trade lines, this mortgage insurance company will accept only 3 trade lines that are in the borrower’s name.

Another exception to this rule is if you have no FICO score, and no negative trade lines.

In this case you may qualify for an “alternative credit” loan. The most common loan of this type is insured by FHA, but there are select programs that are usually targeted to assist people whose culture does not trust or use banks.

Borrowers applying for a non-traditional credit loan will still need to prove they have successfully paid their bills on time for 12 months by clearly documenting at least four creditors.  A verification of rent from a property management company, power, utilities, cell phone… are alternative sources of credit that can be used.

*A letter from a landlord or creditor stating that the bills were paid on time is not acceptable forms of proof.  Lenders will need canceled checks and / or copies of bank statements to start out with.

Since not all companies report to credit bureaus, it’s possible to get a complimentary credit report at AnnualCreditReport.com to verify your total reported trade lines.

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Alternate Sources For Establishing Credit

While the basic Rule-of-Thumb for acceptable credit history is a minimum of four trade lines documented on a credit report, there are alternative methods of building a credit picture that an underwriter can use to make a decision for a loan approval.

For potential home buyers with little or no credit history, keeping records for 12 months of paying bills on time is essential for mortgage loan approval. In fact, loan officers will appreciate receiving proof that you have paid a variety of accounts regularly and on time. Even if you do not have a credit history, or your credit report isn’t as good as it could be, this may enable you to get a mortgage.

The industry term for this is “thin credit.”

Some loan types, namely FHA and USDA, will accept alternative credit sources in order to establish proof of financial responsibility.

Alternative credit is unreported to the bureaus, but will still be verified and can be instrumental in a home loan approval.

Those with thin credit don’t usually have bad credit, but have just not had an opportunity to build enough traditional credit, such as bank/store credit cards, auto loans, etc.

Alternative Sources for Building Credit:

  • Rental History – Canceled checks and letter from property management company
  • Medical Bills – 12 months of statements from medical billing company showing paid as agreed
  • Utilities – power, gas, water, cable, cell phone
  • Auto Insurance
  • Health / Life Insurance – as long as it’s not auto-deducted from pay check

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What’s My Debt-to-Income (DTI) Ratio?

Debt-to-Income (DTI) is one of the many new mortgage related terms many First-Time Home Buyers will get used to hearing.

DTI is a component of the mortgage approval process that measures a borrower’s Gross Monthly Income compared to their credit payments and other monthly liabilities.

Debt-to-Income Ratios are designed to give guidance on acceptable levels of debt allowed by particular lenders or programs.

There are actually two different Debt-to-Income Ratios that underwriters will review in order to determine if a borrower’s monthly income is sufficient to cover the responsibility of a mortgage according to the particular lender / mortgage program guidelines.

Most loan programs allow for a Total DTI of 43% and a Housing DTI of 31%.

Two Types of DTI Ratios:

a) Front End or Housing Ratio:

  • Should be 28-31% of your gross income
  • Divide the estimated monthly mortgage payment by the gross monthly income

b)  Back End or Total Debt Ratio:

  • Should be less than 43% of your gross monthly income
  • Divide the estimated house payment plus all consumer debt by the gross monthly income

Remember, the DTI Ratios are based on gross income before taxes.  Lenders also prefer to use W2’s or tax returns to verify income and employment.

However, the adjusted gross income is used to calculate DTI for self-employed borrowers on most loan programs.  Since there is room for interpretation on these guidelines, it’s important to review your personal income / employment scenario in detail with your trusted mortgage professional to make sure everything fits within the guidelines.

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Calculating Loan-to-Value (LTV)

Understanding the definition of Loan-to-Value (LTV), and how it impacts a mortgage approval, will help you determine what type of loan amount and program you may qualify for.

Since the LTV Ratio is a major component of getting approved for a new mortgage, it’s a good idea to learn the simple math of calculating the amount of equity you may need, or down payment to budget for in order to qualify for a particular loan program.

The LTV Ratio is calculated as follows:

Mortgage Amount divided by Appraised Value of Property = Loan-to-Value Ratio

*On a purchase transaction for a residential property, the LTV is calculated using the lesser of either the purchase price or appraised value.

For Example:

Sally qualifies for a 96.5% Loan-to-Value FHA program, which means she’ll have to bring in 3.5% as a down payment.

If the purchase price is $100,000, then a 96.5% LTV would = $96,500 loan amount. And, the 3.5% down payment would be $3,500.

$96,500 (Mortgage Amount) / $100,000 (Purchase Price) = .965 or 96.5%

In addition to determining what mortgage programs are available, LTV also is a key factor in the amount of mortgage insurance required to protect the lender from default.

On a conventional loan, mortgage insurance is usually required if you have an LTV over 80% (one loan is more than 80% of the home’s appraised value). On that point, if you are currently paying mortgage insurance and think that your LTV is less than 80%, then it may be time to refinance, or call your lender to restructure the payment.

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Frequently Asked LTV Questions:

Q:  Why do the lenders care about Loan to Value?

Lenders care about the LTV because it helps determine the exposure and risk they have in lending on a certain property. Statistics show that borrowers with a lower LTV are less likely to default on their mortgage.  Also, with a lower LTV the lender will lose less money in case of a foreclosure.

Q:  Can I drop my mortgage insurance on an FHA loan?

The mortgage insurance on an FHA loan is structured differently than a conventional loan. On a 30 year fixed FHA loan, the monthly mortgage insurance can be removed after five years, as well as when the borrower’s loan is 78% LTV.

Q:  What does CLTV stand for?

CLTV stands for Combined Loan To Value. The CLTV calculation is as follows:
(1st Mortgage Amount + 2nd mortgage amount) / Appraised Value of Property = CLTV

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Common Documents Required For A Mortgage Pre-Approval

Even though many lenders are still quoting quick 10 minute pre-qualifications over the phone or online, a true mortgage approval that holds any weight is one that has been issued by an underwriter who has had an opportunity to review all of the necessary documents.

With a constant stream of new lending guidelines, volatile mortgage rates and tightening regulation from Washington, very few real estate agents will show new homes to a First-Time Home Buyer without at least a pre-qualification letter.

A Pre-Approval Letter will help you in three ways:

It’s obviously a good idea to get your paperwork prepared ahead of time so that the pre-approval process is as thorough as possible.

In order to get a pre-approval letter, you’ll start by filling out a loan application and submitting a few documents for the loan officer and / or underwriter to review.

Common Loan Pre-Approval Documents:

Income / Assets for Wage Earner:

  • Last 2 year W2s and Tax Returns
  • 2 most recent Pay Stubs
  • 2 most recent Bank Statements, 401(K), Liquid Assets, Investment Accounts

Income / Assets for Self-Employed:

  • Last 2 year Tax Returns – Business and Personal
  • Last Quarter P&L Statement

Letter of Explanation For:

  • Employment Gap or New Line of Work
  • Late Payments / Judgments / Bankruptcy on Credit Report

Other:

  • Bankruptcy Discharge
  • Child Support Documentation
  • Lease Agreements (If own other Rental Properties)
  • Mortgage Payment Coupons (If own other Real Estate)

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Most borrowers also want an opportunity to learn more about the loan officer before digging up all of these personal documents. Spend 15 minutes on the phone asking the loan officer to explain how mortgage rates work, quizzing them on some basic industry vocab or just to see if they know what to prepare your agent for ahead of time. The Q&A session can be more than just a lender qualifying you, as long as you’re prepared to ask the right questions.

Either way, you’ll definitely want to have the above list of approval documents ready once you’ve decided on the right loan officer that you trust will meet your expectations.

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Top 8 Things To Ask Your Lender During The Application Process

Knowing what questions to ask your lender during or before the loan application process is essential for making your mortgage approval process as smooth as possible.

Many borrowers fail to ask the right questions during the mortgage pre-qualification process and end up getting frustrated or hurt because their expectations were not met.

Here are the top eight questions and explanations to make sure you are fully prepared when taking your next mortgage loan application:

1. What documents will I need to have on hand in order to receive a full mortgage approval?

An experienced mortgage professional will be able to uncover any potential underwriting challenges up-front by simply asking the right questions during the initial application and interview process.

Residence history, marital status, credit obligations, down payment seasoning, income and employment verifications are a few examples of topics that can lead to stacks of documentation required by an underwriter for a full approval.

There is nothing worse than getting close to funding on a new home just to find out that your lender needs to verify something you weren’t prepared for.

2. How long will the whole process take?

Between processing, underwriting, title search, appraisal and other verification processes, there are obviously many factors to consider in the overall time line, which is why communication is essential.

As long as all of the documents and questions are addressed ahead of time, your loan officer should be able to give you a fair estimate of the total amount of time it will take to close on your mortgage.

The main reason this question is important to ask up-front is because it will help you determine whether or not the loan officer is more interested in telling you what you want to hear vs setting realistic expectations.

You should also inquire about anything specific that the loan officer thinks may hold up your file from closing on time.

3. Are my taxes and insurance included in the payment?

This answer to this question affects how much your total monthly payment will be and the total amount you’ll have to bring to closing.

If you include your taxes and insurance in your payment, you will have a higher monthly payment to the lender but then you also won’t have to worry about coming up with large sums of cash to pay the taxes when they are due.

4. Will my payment increase at any point after closing?

Most borrowers today choose fixed interest rate loans, which basically means the loan payment will never increase over the life of the loan.

However, if your taxes and insurance are included in your payment, you should anticipate that your total payment will change over time due to changes in your homeowner’s insurance premiums and property taxes.

5. How do I lock in my interest rate?

It’s good to know what the terms are and what the process is of locking in your interest rate.

Establishing whether or not you have the final word on locking in a specific interest rate at any given moment of time will alleviate the chance of someone else making the wrong decision on your behalf.

Most loan officers pay close attention to market conditions for their clients, but this should be clearly understood and agreed upon at the beginning of the relationship, especially since rates tend to move several times a day.

6. How long will my rate be locked?

Mortgage rates are typically priced with a 30 day lock, but you may choose to hold off temporarily if you’re purchasing a foreclosure or short sale.

The way the lock term affects your pricing is as follows: The shorter the lock period, the lower the interest rate, and the longer the lock period the higher the interest rate.

7. How does credit score affect my interest rate?

This is an important question to get specific answers on, especially if there have been any recent changes to your credit scenario.

There are a few key factors that can influence a slight fluctuation in your credit score, so be sure to fill your loan officer in on anything you can think of that may have been tied to your credit.

8. How much will I need for closing?

*The 2010 Good Faith Estimate will essentially only reflect what the maximum fees are, but will not tell you how much you need to bring to closing.

Ask your Loan Officer to estimate how much money you should budget for so that you are prepared at the time of closing.

Your earnest money deposit, appraisal fees and seller contributions may factor into this final number as well, so it helps to have a clear picture to avoid any last-minute panic attacks.

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Now that you have the background to these eight important questions, you should feel more confident about finding a mortgage company that can serve your personal needs and unique scenario.

Remember, the more you understand about the entire loan process, the better your experience will be.

Most frustration that is experienced during the home buying and approval process is largely due to unclear expectations.

You can never ask too many questions…

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How Much Can I Afford?

How much mortgage money can I qualify to borrow?

This is typically the number one question mortgage professionals are asked by new clients.

Of critical importance when considering mortgage financing: There is sometimes a difference between what a client ***can*** borrow and what they ***should*** borrow.

In other words, what makes for a comfortable long-term mortgage payment?

The Quick Answer:

If we’re simply considering the financial math, lenders will calculate your Debt-to-Income Ratio and generally allow for 28-31% of your gross income to be used for the new house payment with up to 43% of your gross income to be used for all consumer related debts combined.

Sample Mortgage Scenario:

Let’s use a gross monthly income of $3000 and a qualifying factor of 30% Debt-to-Income Ratio:

$3000 multiplied by .3 (30%) = $900 max monthly mortgage payment

This means that your mortgage payment (Principal, Interest, Taxes, Hazard Insurance) cannot exceed $900 a month.

“Ballparking” a Qualifying Loan Amount:

Simple step:  We use a safe average of $7 per month in payment for every $1000 in purchase price so…

Step 1)  $900 a month divided by $7 = $128.50

Step 2) $128.50 multiplied by 1000 = $128,500 loan amount.

Remember, these are average ratios and guidelines set by most lenders for common mortgage programs.

Keep in mind, while most consumer debts are listed on a credit report, there are some additional monthly liabilities that may contribute to the overall qualifying percentages as well.

Regardless of how your personal income and credit scenarios factor in, it is important to consider your overall budget when trying to determine how much of a mortgage you should qualify for.

Other items to consider in your monthly budget:

1. Confirm all debts are taken into account
2. Any private notes or family loans
3. Short-term expenses – medical, auto repairs, travel, emergencies
4. Plan on additional expenses for the home such as water, electric, maintenance, etc…
5. Keep a cushion for savings and financial planning

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