Is it tacky to talk about money? I suppose it’s all in how you do it.
Today I’m going to attempt to talk about finances in what I hope is a balanced way. While this is probably 80% a running blog, it’s also then 20% a lifestyle blog, and since August I’ve talked pretty openly about my home buying journey. I’ve received a handful of questions from future first-time homebuyers about the process and why I found it so stressful. Not surprisingly the majority of home buying stress comes down to finances.
Today I want to share what the process was like for me, what challenges I faced and what prospective first time home buyers might encounter. Of course everyone’s circumstances are different; if you’ve got 100 million dollars in the bank this post probably isn’t for you :).
The #1 Reason I Felt Stressed
Adam and I were initially planning to buy our home together. Based on our combined income we pre-qualified for a 30-year mortgage that was more than double what we intended to spend. Since our little family consists of just Adam, myself and a perfect little cat we in no way needed a big house and would never have even looked at homes in the higher end of that value range.
Instead we wanted a nice condo or townhouse where we could afford to put at least a 20% down payment on and obtain a Conventional 15-year mortgage. (You can learn about the various types of mortgages here.)
When we eventually found our townhouse and wanted to put in an offer, our mortgage company needed to run a credit check on both of us. During that process they determined that Adam has an “unusual credit history.”
Basically he has no credit score. He doesn’t have a bad credit score or a good credit score, he literally has no credit score because he has no credit history. He’s never had a credit card or been issued a student loan. He’s always paid cash for everything.
Despite having significant liquid assets (aka a good chunk of easily accessible cash in the bank) without a credit score the mortgage company couldn’t approve Adam for a conventional mortgage.
FHA mortgages, which are backed by the government, allow for people with no credit history to qualify, but because someone without a history of good credit is riskier to lend to, the interest rates of those mortgages tend to be higher (and sometimes even require you to pay insurance on your mortgage).
Because we really wanted this townhouse, and we didn’t want to pay higher interest rates or mortgage insurance, I decided to proceed with the conventional mortgage application on my own.
Now one of the biggest considerations a mortgage company takes into account on whether to approve you for a mortgage or not is your debt-to-income ratio. With both Adam and my income combined we more than qualified for this townhouse; however, with just myself on the mortgage we were cutting it fairly close.
Even though our loan processor assured me that I would be approved, I couldn’t help but feel like it was all going to fall through. I lost a lot of sleep waiting for approval.
In the end I obtained a 30-year conventional mortgage on my own, and Adam applied for his first credit card :). Our plan is for him to build up a credit score so that we can refinance the mortgage next year into a 15-year mortgage and of course add him onto the mortgage documents and deed.
What Documents I Had to Submit
It’s been a couple of months now since I submitted my completed mortgage application but from memory this is what I had to submit:
- Three years of W2s to prove income
- Authorization for credit check
- Mortgage application
- 60 days of bank statements from all checking and savings accounts
- 60 days of statements from my retirement account
- 60 days of credit card statements showing balances and minimum payments due (you need to supply this even if you don’t carry a monthly balance)
- Student loan statement showing what I still owe and what my minimum monthly payment is
- Copy of my Good Faith payment to title company (more on this later)
Because financial statements are generally not things I ever share with anyone, it felt really invasive to share them with a stranger. My finances are pretty well in order but it’s hard not to feel judged! Like, do they really need to see how many times I place an order via Amazon every week? Because it’s like daily :).
What I Had to Do
The process of buying a house goes something like this:
1. Contact a mortgage company and get pre-qualified for a certain mortgage amount. This lets you know what price range of homes you should be looking at based on your income and how much of a down payment you plan to make.
2. Find a home you really love within your price range and make an offer. An offer includes how much you’re willing to pay for the house along with how much of a Good Faith payment you’re willing to make. A Good Faith payment is money you have to put into escrow within 2 days (at least here in FL) after your offer is accepted.
This Good Faith payment shows you’re serious about buying. If you decide to back out of the transaction for any reason other than that you can’t obtain financing you forfeit this money and the seller gets to keep it. If no bank will finance your mortgage you get the money back (at least here in FL).
If you obtain financing and move forward with the house purchase the Good Faith amount is applied to your down payment.
Your Good Faith payment can be any amount that you want to put down; however, if someone else also puts in an offer for the same amount as you but their Good Faith payment is higher there is a chance the seller will choose that buyer over you and you’ll lose out on the house.
In most cases I think 1 to 3% of the total house price is standard. We put close to 10% down as Good Faith because we knew other people were seriously looking at the townhouse.
3. Once your offer is accepted you have to put the Good Faith money into escrow with your title company within 2 days. You can choose your own title company or use one that your mortgage company recommends. We went with the title company that our real estate agent recommended. It’s good to shop around if you’re not sure about which title company to use because they all charge a service fee that you’ll more than likely be responsible for covering at closing.
4. Now that your offer has been accepted and the final amount is agreed upon, your mortgage company can begin estimating how much money you’ll need to bring to closing. You already know what you offered as a down payment, but there will be additional costs on top of that. My mortgage company didn’t charge me any “points” which are loan origination service fees a mortgage company can charge for.
If you have good credit and are getting a conventional mortgage, you should be able to find a bank that won’t charge you any points. However, you will still end up paying several administrative fees to the county you’re buying in, your lawyer, as well as to your title company.
You should budget to bring 2 to 5% more than your down payment to closing. I ended up needing to bring 2.5% more than my down payment to closing. I also needed to pre-pay one year of property taxes on top of my down payment and the admin fees. In total I had to bring my down payment plus an additional $5,000 in property taxes and $9,000 in fees.
5. While your mortgage company is working on your paperwork, they’ll need you to have a property appraisal completed. This is to determine if you’re paying a fair value for your home. During this time period I also recommend getting a home inspection done to see if there is structurally anything wrong with the house.
Inspections aren’t always required, but for a cost of less than $500 it’s worth it to know that you’re making a good investment.
During this time period you’ll also need to submit an application to your Home Owners Association (HOA) if you have one. You’ll need written approval from your HOA to close. The HOA is going to run a background and a credit check on you just to make sure you are an upstanding citizen that they should welcome into their community.
6. Once your closing costs are estimated and agreed upon, it’s time to start submitting all of the documentation I listed above as well (bank statements, etc.) to your assigned Loan Processor. This is the admin person who puts your application together for approval by the bank underwriter. The underwriter is the person who gives the final approval on the mortgage. Without the underwriter’s approval you will not get a mortgage.
7. Once your Loan Processor collects all of your documents they send it to the Underwriter for review. At this point the Underwriter can do three things: ask for additional information, deny or approve your mortgage application. In my case I was given conditional approval but had to supply a few more documents as proof of my own liquid assets.
8. If your application was denied, you can probably search for another bank or try again when your finances are in order. If your application is approved you just wait to sign your final documents on the Closing Day. If your application requires more information you submit that to your Loan Processor who sends it back to the Underwriter for final approval. Once you receive final approval then you are ready to sign the Closing Day documents.
9. Once you’re approved, you’ll need to get your money ready to complete your down payment. I made this final payment via wire to the title company the morning of my closing. You’ll want to send the money as early in the day as possible as it can take a couple of hours for the wire to go through, and you can’t get the keys to your house until the money clears.
10. Once you’re at the closing table you’ll sign all of the final mortgage and home buying paperwork. The seller may or may not be present. My seller was not there as he lives out of state. He simply FedEx’d his paperwork into my title company. At closing you’ll receive the keys for your home and you’ll be all set!
I can’t lie and say the process was a cake walk. I think it would have gone smoothly if Adam and I were both able to be on the mortgage, but since I was applying for a mortgage on my own there was a lot of stress involved. I couldn’t pass things off to Adam; I really had to be the one to be on top of everything since legally I’m the only one who owns the house (until he generates a credit score and we refinance into a 15 year mortgage to add him on).
All of that being said, it wasn’t a total nightmare. Once I received approval from the underwriter everything was really smooth from there.
Now that I’m sitting and writing this in my house, I have to admit that all the stress was worth it. My mortgage payment is less than my rent payment used to be, and I have a lot more space!
If you have any specific questions about the home buying process leave me a comment below or send me an email and I’ll try my best to answer!
Homeowners, did you find the mortgage application process stressful or easy?
Is anyone out there currently house shopping? That’s the fun part 🙂