So you're ready to buy your first home. This in itself is a milestone, you've now taken the first step in the journey to homeownership. Your personal journey will be unique, complete with surprising struggles and unexpected successes. But take comfort in the fact that you’re not the first person in to purchase a home in Utah. Millions of people across the country have gone through the same process that you’re starting now. It’s possible, it’s been done before. And like you, every other homeowner began with the same thought: “I am ready to buy a house.”
We won’t sugarcoat it, buying a home can be scary. Your home will likely be the biggest purchase of your life. But with the right tools at your disposal and a Utah mortgage broker working with you, you can continue down this path to achieve stability, financial security, and the joy that comes with owning your first home.
Is buying a home right for you? Renting and buying both offer benefits, but there are many things to consider in determining which one is right for you.
Begin with a rent vs buy calculator. You’ll be able to compare the costs of buying with the long-term costs of renting. While your rent could be less than a monthly mortgage payment, buying a home could have big savings in the future. You may be paying just as much for that two-bedroom rental as you could for a well-finished home in any Utah city.
As a renter you don’t have to do or pay for maintenance. You can contact the building manager or owner when something breaks and needs repaired, and your request will be taken care of. If you need to relocate for any reason, you don’t have to worry about selling your home.
In the majority of cases, renting a home is also easier than buying one. When renting, it may only take you a couple of weeks to find a place and be able to pay the required deposit.
Your rent will rise over time, and it is out of your control. Your rent may be reasonable now, but the price will increase over time due to inflation, demand, and other factors. If you have pets, it may be difficult to find a home that will accept pets, your landlord could also charge a monthly fee and/or security deposit.
Renting also won’t help you work toward your financial goals. Your entire rent payment belongs to your landlord. Landlords are earning equity and growing wealth and you are paying for it.
As a homeowner, you may be able to take advantage of certain tax deductions that renters can’t:
• Mortgage interest
• Real estate taxes
While the annual amount saved will differ from person to person, these tax breaks are sure to help take the strain off your wallet.
Owning a home also allows you to build long-term wealth. When you make a monthly mortgage payment, it’s not all going to a mortgage lender’s pockets. Instead, a portion of the payment will go toward paying the principal (the amount you owe on the house), while the interest you owe will go to the lender.
In other words, you’re paying for your house a little bit at a time. The payments applied to your principal balance each month allow you to gain what is called equity. While the amount of equity you have in your house will ebb and flow with the housing market, even modest gains will add up over time.
Another perk of buying a home is that there’s an end date on house payments. Whether you’ve got a 30-year or a 15-year mortgage, you’ll own your house outright when that term is up.
You’ll need to save money before you buy a home to cover your down payment and possibly your closing costs. You’ll also be required to pay property taxes, which can increase from year to year.
If you want to sell your home, you might be stuck if no one makes an offer, or you might not get what you paid for it. If you need to relocate for any reason, there’s definitely stress and pressure if you can’t finalize the home sale in time.
As a renter, purchasing renter’s insurance is optional. Homeowners insurance is mandatory if you have a mortgage, and will add to your monthly payment expense.
Being able to afford a monthly payment whether it be a rent payment or a mortgage payment is something you must consider before buying a home. Your monthly rent is (usually) a fixed amount that you can plan for on a monthly basis. Your mortgage payment can be a fixed amount too, but you also have to account for surprise expenses like plumbing issues, a new roof or a new furnace. After all, you are your own landlord when you own your home.
Before you start looking for your new home, make sure your expectations aren’t bigger than your pocketbook. Buying a home should be a comfortable investment, not a financial burden.
When deciding how much you can afford, a good place to start is with this calculator, which allows you to plug in your monthly income and monthly debts to see how much you can spend on a house. However, no one says you have to spend the maximum amount. In fact, depending on your financial situation, it may make sense to spend less.
The lower your DTI, the better chance you have of receiving an approval and having a greater variety of loan options available to you. For this reason, the Consumer Financial Protection Bureau recommends that you keep your DTI at 43% or below, however, exceptions are often made.
You should also consider all of your other expenses, such as utilities, transportation, groceries, and other living costs. You will be in over your head if you’re living beyond your means. You should always have a budget in place before moving forward with any kind of loan. Whether you’re comfortable budgeting with pencil and paper or budgeting software like Mint.com, make sure you have a well-thought-out plan.
Let’s begin with the basics. A mortgage is a legal agreement in which a person borrows money to buy property, like a house or other real estate. A mortgage allows you to buy a home even if you don’t have all the money in your bank account or another source. Let's discuss some of the most common Utah mortgages.
If your mortgage broker refers to your loan as “conventional,” it simply means that it follows guidelines set by Fannie Mae or Freddie Mac, two government-sponsored entities that invest in loans to allow mortgage lenders to lend money. Because of this, the qualifications for conventional loans are stricter than they are for many other loans. The basic requirements for conventional loans are a minimum credit score of 620, a debt-to-income ratio not exceeding 45%, and a loan amount not exceeding the loan limits set by FHFA.
FHA mortgages are insured by the Federal Housing Association. FHA loans require a lower down payment than other types of mortgage programs, and you don’t have to have perfect credit to qualify. A FHA loan is an excellent option for first-time home buyers.
VA mortgages are guaranteed by the Department of Veterans Affairs and are only available to veterans, National Guard members, active-duty personnel and eligible surviving spouses. There are many benefits to a Utah VA loan, but the most notable is that a down payment is not required.
When you get a mortgage, you pay interest to your lender each month. You can’t choose your rate, but you can choose what type of rate you get.
“Fixed” refers to the fact that your interest rate won’t change over time. If you lock-in a 4.5% interest rate on a 30-year loan, you will keep that same interest rate for the life of the loan – no matter how the market changes.
The biggest perk of a fixed-rate mortgage is the consistency. You don’t have to worry about your rate increasing. Your monthly principal and interest payment will always be the same.
An adjustable rate mortgage (ARM) includes an initial fixed interest rate period that lasts five, seven or ten years depending on the loan you choose. After the fixed interest rate period, your rate will adjust up or down once per year depending on market conditions.
ARMs are a popular choice for homebuyers because they typically offer lower interest rates than other loan options. The advantage of the ARM is that you’ll enjoy a lower monthly payment during the fixed period. For this reason, an ARM can be a great option if you plan on moving or refinancing within a few years.
The term is the period of time over which you pay off your mortgage. Here are the most common terms for a mortgage.
A 30-year term stretches out your monthly payment, so it gives you a lower payment than you’d get from a mortgage with a shorter term.
The biggest perk of a 15-year term is that you’ll pay off the loan faster – and you’ll save thousands in interest over the life of your loan. However, the shorter term also means you’ll be paying higher monthly payments.
Many lenders offer terms in five-year increments, but if you’re looking to customize your term to fit your budget, an Advanced Funding Home Mortgage Loans' has a better choice for you. With a Pick Your Term Mortgage, you can pay off your mortgage in any time frame you choose, from eight to 30 years.
Before agreeing to lend you money, your mortgage company has to weigh the risks. They’ll dive into your credit history, your debts, your income sources, the property you’re purchasing, and more.
When shopping for a home, it’s easy to put applying for a mortgage on the back burner. Your mind tends to go from “I need a house” to “I should look for a house” to “I think I want that house.” There’s a problem with this mindset: You’re looking for a home before you’ve been pre-approved for a loan, and that could make you miss out on the house you want.
Instead, when you begin to entertain the idea of buying a home, go to your mortgage broker to get pre-approved. A pre-approval determines how much money you’re eligible to borrow before you actually get a Utah mortgage loan.
To get you pre-approved, your lender will verify your income and assets, which include your bank accounts, investments, retirement funds and any real estate you might own. You’ll be asked for copies of pay stubs, W-2s and bank statements. Your lender will also consider your credit and debt-to-income ratios (DTI). If you have all your information in order, the pre-approval process is quick and can be done in just a phone call.
Pre-approval is also a great opportunity for you and your mortgage lender to chat about your home loan options. Discussing your goals with your lender will help you find the best possible mortgage option for you. Once you’re pre-approved, you’ll receive an official letter showing the amount you’ve been pre-approved for. You can use your pre-approval letter to show the seller that you’re serious about your offer.
During the application process, your Utah mortgage broker will request some basic financial information, such as your name, income, estimated property value, etc. From this information, they will prepare a document called a Loan Estimate, which they’re legally required to provide to you within three business days of your application. Your Loan Estimate will include preliminary numbers for the loan you’re requesting, including the interest rate, monthly payment, closing costs, and taxes and insurance. A Loan Estimate helps you better understand the terms of the mortgage you’re applying for.
An interest rate tells you how much your lender charges for letting you borrow their money. Interest is paid by you, the client, to your lender. A lower interest rate means you’ll have a lower monthly payment.
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The next step to think about is your down payment. You pay the down payment at closing to show your mortgage lender that you have a vested interest in paying back the loan.
Does every buyer need money for a down payment?
There are a few types of mortgages you can get that don’t require a down payment, such as USDA and VA loans.
For those that don't meet the qualifications for a no down payment program having 3% down would be the minimum for a conventional loan. FHA loans require a minimum down payment of 3.5%. You can qualify for a conventional loan with a minimum credit score of 620 and an FHA loan with a credit score as low as 580.
Your loan-to-value ratio (LTV) describes how much money you owe on the home compared to how much your home is worth. You can find your LTV by dividing the amount of your mortgage by the appraised value of the home (we’ll talk more about the appraised value in a moment).
For example, let’s say you’re purchasing a home worth $200,000. If your down payment is 10% ($20,000), the mortgage company will have to pay the remaining $92,000. Therefore, your LTV is 90%.
The first advantage of a higher down payment is that it allows you to get a lower interest rate because you’re less risky to your lender. They won’t need to loan you as much money, and you’ll be less likely to walk away from the home because your money is in it.
The second advantage to putting more down is that you could avoid paying private mortgage insurance (PMI). Down payments of 20% or higher get you out of paying PMI, a monthly fee that could add hundreds of dollars to your mortgage payment. Putting 20% down may be beyond your means, but even if you can’t fork over 20%, there are still benefits to putting down more than the minimum. Mortgage insurance rates are based on your LTV, so the higher your LTV, the more expensive your mortgage insurance payment will be.
In many cases, PMI will fall off once you reach 80% LTV, so you’re not stuck with PMI forever if you can’t afford a 20% down payment on a conventional loan.
Mortgage insurance premiums (MIP) on FHA loans stick around for the life of the mortgage. That being said, assuming you meet the stricter credit standards, you can always ditch the mortgage insurance payment by refinancing into a conventional loan once you reach 20% equity.
If you don’t want to pay PMI at all, you could opt for lender-paid mortgage insurance (LPMI) on a conventional loan to avoid the monthly insurance payment. In this case, you would get a slightly higher rate than you would if you chose to pay PMI on a monthly basis.
Although you may not have the money for a 20% down payment, the good news is the money doesn’t have to come only from you. If you have a family who wants to help get you, they can use one of two types of gift transactions to help with your down payment: a straightforward cash gift or gift equity.
Cash Gift: A cash gift occurs when a person cuts you a check to help pay for your down payment or closing costs. To use a cash gift for your mortgage, you’ll need the giver to provide you with a gift letter stating that the funds don’t have to be paid back.
Gift Equity: A gift of equity occurs when a close relative gives you a discount on the sale of their house. The difference between your sale price and the actual market value gets contributed to your down payment.
You can use this search engine to find nonprofits that provide FHA assistance in your area.
Now that you’re pre-approved, it’s time to find a real estate agent. This is the person who sets up appointments on your behalf and gives you information on the houses that may be of interest to you. Choosing the right agent can really affect the house hunting experience. You want someone who knows the area that you’re looking at – schools, crime rates, transportation, and knows what a fair market price looks like for the area. Also, you’ll need a real estate agent to help you negotiate the price and create a purchase agreement.
Typically, there are two agents involved when you’re purchasing a home. The seller’s agent represents the seller of the house, and the buyer’s agent represents you, the buyer.
It’s important to vet an agent before committing to work with them. Here are eight questions to ask a real estate agent when interviewing them:
1. Is this your full-time job?
2. How long have you been an agent?
3. How many sales have you closed in my preferred location?
4. What do your services cover? Are there any fees I have to pay?
5. How often will you contact me or show me properties?
6. How do you handle short-notice showings? How fast can you show a property?
7. What makes you different/better than another agent?
8. Do you have references (past clients) that I can contact?
Real estate agents earn a commission on the selling price of the house after it’s sold. If you’re the buyer in the transaction, this is great news. The seller pays the commission of your agent and their agent. Much like the mortgage broker, the real estate agent doesn’t get paid until the job is done, so they’re going to be working alongside you to seal the deal.
House hunting gives you the opportunity to dive into the fascinating world of real estate.
When looking for houses, here are some things you should consider:
1. Neighborhood: Make sure the home you’re looking for is in a community that suits you. If you’re trying to get away from the hustle and bustle, search for a house in a quiet neighborhood. If you’re passionate about discovering new things, research homes that are in up-and-coming parts of town. Don’t just focus on the house. Make sure the location is right for you.
2. School district: If you have kids or plan to have kids, think about the local schools. You want to make sure you’re providing your children with the best possible education, and your location may have a lot to do with that. And even if you don’t have kids, buying a home in a good school district can make it easier to sell when you’re ready to.
3. Commute: Carefully consider the time it would take you to get from your potential house to your job. Your dream house will quickly become a headache if you’re driving an extra two hours a day.
4. Age of the house: Who doesn’t love an old house? It’s easy to get carried away by old wooden doors and custom-made windows. But older houses often come with surprise expenses that don’t necessarily exist in newer homes. If you’re looking for “a project,” make sure you have the funds and the right expectations.
5. Space: The layout matters, but so does the amount of space available. How much room does your family need? Do you frequently have guests? Considering your lifestyle can help you figure out how much space you really need.
Above all else, take time to really look at the house you’re interested in. Consider necessary improvements or problem areas, as well as whether the overall value of the neighborhood is projected to go up or down. And don’t forget to take advantage of your agent during this process. A good agent will not let you settle for a bad home. They’ll give you helpful hints on the area and advice about the pricing of houses. If they’re not doing their job, shake them off and find a new one.
When you search for homes, you need to consider the monthly cost of taxes and homeowners insurance. The cost will differ from city to city and neighborhood to neighborhood, so talk to your real estate agent about these expenses. It’s always a letdown when you find out an affordable house has not-so-affordable taxes.
You’ve been searching – maybe for months – and finally, after much consideration, you and your real state agent have found the perfect place. Now is the time to make an offer on the house.
Making an offer entails looking at the value of recently sold houses in the area to make sure your offer is in line with what other people are paying. You should also review your budget to make sure that the offer is on target with your finances.
Here are some of the factors that go into the offer:
• How much house can you afford?
• How badly does the current owner want to sell the house?
• How does this house compare to other houses in the area?
• Is anyone else interested in buying the house?
• How much work needs to be done on the house?
Your written offer will include the following:
• The address of the property
• The names of the potential buyers
• The amount you’re offering
• Any contingencies (conditions that must be met before the deal can close, such as a successful home inspection)
• Items that will be included in the sale, such as appliances, window coverings, etc.
• The amount of your earnest money deposit, which shows that you’re committed to closing the deal
• The deadline to respond to your offer
You may also be able to take advantage of seller concessions, which are expenses paid by the seller on behalf of the buyer. You may be able to negotiate with the sellers to pay for certain fees associated with closing the loan. The seller can’t do things like help with your down payment, however.
The demands that you can make will be affected by how much competition you have.
Once again, this is where having a good agent comes in handy. They’ll be able to give you some pointers to make the most of your offer. They’ll also talk to the seller’s agent to get a feel for the seller’s expectations.
If the seller accepts your offer, you can move on to the next step. If the seller comes back with a counteroffer, it may be time for negotiation.
At this point, you can accept their counteroffer or make a new offer. And it may go on like this until you finally find the middle ground.
The key to this dance is knowing where you stand. If you don’t want to spend more than $200,000, don’t slip into a deal with a $250,000 home. If you become emotionally attached to the home, you may want to throw caution to the wind. But this is not the time to be romantic. If the seller isn’t willing to budge, you may need to shrug your shoulders and keep looking. There will be other homes. Remember that a home is a major investment – not an impulse buy.
Once your offer has been accepted, the lender will do a deep dive on various items to make sure you’re in good shape to pay back the loan. You provided some initial documentation to get your pre-approval. Now your lender just has to make sure everything checks out.
Underwriting is the process of evaluating the risk of lending money. The underwriter will verify the documentation you’ve provided to see that you have the ability to repay the loan. There are four basic areas that underwriters attempt to verify when they review your documentation.
1. Income: Your employment and income history
2. Property: The type of property and its value
3. Assets: Your bank balances and the sources of any deposits
4. Credit: Your credit score as reported by the three major credit reporting agencies and credit history
There are many important documents needed for a mortgage. In order to make the process go smoothly, we recommend you have each of the following items ready:
• Two recent pay stubs
• Two years of W-2s
• Two recent bank statements
Additional information may be required depending on how you earn your income and the type of loan you’re applying for.
While we’re verifying your information, you can start shopping for your homeowners insurance.
The underwriter has to make the final decision on whether a loan can go forward. Once they’ve approved it, you’re ready to go to the closing table.
A quality home inspection during the homebuying process can save you from big problems down the line.
Even if you have a new home, no construction is entirely without fault. Whether the issues are big or small, having an inspection done will open your eyes to potential problems.
According to the Department of Housing and Urban Development, a typical home inspection can cost anywhere from $300 – $500. With the amount you’re spending on the house, this can be a small price to pay for peace of mind.
To ensure that your inspector has the proper training and experience, check to see what organizations recognize him or her. Organizations like the American Society of Home Inspectors (ASHI) provide education for their certified inspectors. ASHI also gives trainings and tests for certification to make sure that inspectors are keeping their skills sharp. Using a certified home inspector will give you confidence that their reports are right.
If you’re getting a general inspection, some of the things that should be covered are electrical, plumbing, insulation and roofing. When checking the plumbing, the inspector might look to make sure the pipes are fitted properly and that everything is flowing correctly, while an electrical inspection might flag exposed wire or something that can be a safety hazard if it shorts.
It’s important to get a write-up from the inspector about what will be included in the inspection. If there are specific areas you want looked at, make sure to bring them up beforehand. This will set appropriate expectations for the report provided.
Other types of inspections that can be done include chimney, foundation, insect, and meth. If the house is hooked up to well water, an inspection of that system can be important as well. These inspections are typically paid for separately from the initial inspection and often require a different inspector with specialized training.
About the same time you have the inspection done, you’ll also need to get an appraisal to find out what your property’s worth.
After the offer’s been accepted, your mortgage broker will require an appraisal of the property you’re trying to purchase.
Basically, a real estate appraisal helps establish a property’s market value – the likely sales price it would bring if offered in an open and competitive real estate market. The appraisal protects you from overpaying for a home. The appraisal also protects your lender by making sure that the house is worth at least as much money as they’re lending you in case you default on the loan.
While brokers and lenders order the appraisal for you, it’s important to note that the appraiser is completely independent from your mortgage company. This way, you can rest assured that the numbers won’t be biased.
If your appraisal comes back lower than expected, there may still be some hope. Here are a few things you can do if you received a low appraisal but you still want the house.
If you think the appraiser made a mistake, you could appeal the appraisal to see if you can get the home re-evaluated. Your mortgage broker and real estate agent will help with this process.
To make an appeal, you need to provide your mortgage broker with a reason you think the appraisal report is wrong. Perhaps there are factual errors in the appraiser’s report. Did he or she note the square footage or the number of bedrooms wrong? Another mistake could be that the comparable properties used in the report weren’t similar enough. For example, did the appraiser compare your single-family home to a nearby duplex?
If you don’t think you have a shot at changing the appraisal value, you can try to negotiate with the sellers. If the gap between the offer price and the appraised value is not too large, you may be able to meet somewhere in the middle.
If a deal falls through because of appraisal issues, the homeowners might have a hard time getting another buyer – so they might be willing to negotiate. Keep looking for other homes, but keep in mind that the deal could still work out if the sellers don’t get any more offers.
Sometimes, deals just fall through. You might not be willing to pay more out of pocket to buy a home that’s overpriced. There will always be another home.
That covers some of the intricacies around appraisals. You’re almost to the finish line! Now it’s time to close the deal.
The appraisal and inspection have come back, all your paperwork is in, and you’re ready to close your loan. The finish line is fast approaching.
Closing is about more than signing the paperwork though. You often have to bring money to the table so the deal can be finalized.
What kinds of costs are involved at closing? How can you make sure those costs match what you initially agreed upon? How do you keep costs down? Don’t worry – we’ll walk you through it!
When you close your loan, you have certain costs associated with getting a mortgage loan. These costs include things such as, the appraisal, credit report fee, title insurance, etc.
The down payment is probably the biggest cost you’ll have to pay at closing. This is your assurance to your lender that you’re serious about this transaction.
Here are some other costs you’ll have to cover at the time of closing:
• Escrow: You may be required to prepay a certain amount of taxes and insurance costs so your lender can pay these bills when they’re due.
• Homeowners association dues: Many homeowners associations require a year’s worth of dues when you move in.
• Prepaid interest: If you purchased any prepaid interest (discount points) to buy your way to a lower interest rate, you’ll pay for this at closing.
• Third-party fees: These are fees that cover costs incurred by third-party services that your lender uses to complete the transaction. For instance, you’ll have to pay for the appraisal and title insurance at closing. You might also pay a closing fee, a courier fee, and a credit report fee. The charges may vary depending on the lender and the transaction.
There may be other things to pay for at closing as well, but that covers the basics.
Just before you close, you’ll get a document called a Closing Disclosure. The Closing Disclosure gives you a summary of the final costs associated with your loan.
It’s important that you read your Closing Disclosure to make sure the amounts closely correlate with the Loan Estimate your lender gave you at the time of application. Lenders are tightly regulated in terms of how much the cost can change between the Loan Estimate and the final Closing Disclosure. However, third-party fees can go up between the estimate and closing.
It’s easy to think that buying your home is the last step. Unfortunately, the craziness has just moved into its next phase, but it’ll all be over soon, and we’re here to help.
So let’s dive in together and deal with that big hairy monster that is the move. There’s a lot to think about. Take a deep breath and remember to take one step at a time.
Packing can seem overwhelming. So. Much. Stuff.
But there’s one thing you can do to make the packing (and unpacking) process a bit easier: Get rid of whatever you don’t really need or want anymore. By the time you get around to putting things in boxes, there will be a lot less work to do. And getting a jump on the sorting process will give you time to label your items and make unpacking less hectic.
Additional information regarding packing can be found at RealSimple.com.
The next thing to worry about before you move is updating your address. You should make sure that your ID is correct and that you can vote in your new location. Once that’s taken care of, here’s a short list of people and entities that need to know about your move:
• Electricity and gas providers
• Water and sewage treatment providers
• Cable, internet and phone providers
• Medical and dental providers
• Insurance providers (auto, home, health, life)
• Banks and credit card companies
• Lawn care, landscaping and snow removal providers
• Your alarm company
• Your children’s school
• Your place of employment
• Magazines, newspapers and other subscription providers
If the house is brand new or has been vacant for a while, you’ll have to call and make sure your basic utilities, including power, water, and gas, are turned on when you get there.
Moving with your pets can be stressful for them. If you’re transporting your pets in a crate, make sure they spend some time in it to get acclimated before moving day. Also, make it a priority to set up a place where their bed, food, and water will be kept soon after you move in.
No house is ever perfect for you when you first move in. Your first priority should be to make sure everything is safe and functional. You should make sure the lights and appliances work, the furnace filters are changed, the deck doesn’t have holes in it, etc.
After that, it’s time to do everything that makes a house a home. This could be something as simple as repainting and moving in your furniture, or something a little more complex like remodeling the bathroom to suit your needs. The sooner you start making your list, the sooner you can turn your house into a place of your own.
For additional information please contact us at (801) 272-0600. We are happy to assist with any questions you may have.