Everything you need to know about pulling money out of your property, refinancing your home, and financing new real estate.
Understanding the Home Buying Process
Owning a home is the cornerstone of the American Dream for many, and is one of the largest purchases you will make in a lifetime. There is a lot of mystery surrounding the home buying process, and many first time buyers find themselves scrambling to figure it all out. Understanding the real estate process will help you to navigate the often confusing waters and get one step closer to owning your first home. One of Coldwell Banker Hawaii’s top real estate agents, Tracy Allen often advises her clients throughout their home loan process. Her advice: to seek out an expert and don’t skip the research phase. Any great realtor should know how to seek out the best source for your home loan. Tracy typically works closely with her partner Anne Perry on ensuring a smooth process and accurate, personalized advise for each client. Home loans are widely known as mortgage loans, or short: a mortgage. In a nutshell it means that a (future) home owner is giving up some equity in his or her house in return for money. This can be used to refinance a house, to finance the purchase of real estate, or to get money from ownership of a property to be used on other expenses. The process of receiving a home loan includes providing ones real estate as collateral for the money one receives from the bank. In case the borrower defaults on the loan for whatever reason, the bank can seize the house to make up for the lack of debt payback and the missing interest on the loan. Mortgage loans are used by both, commercial and private property buyers to finance the purchase of real estate.
How to Buy a Home
Find out more about how to buy a home, how to invest in real estate, and how to own lucrative property without actually being able to pay full price for it.
The Home Loan Process
The loan process involves several steps that buyers must go through before being approved for a mortgage. First, the lender will conduct a mortgage pre-approval. This pre-approval means that the lender has examined your finances and determined that you are approved for a house loan in a certain amount. The pre-approval will also help you in the home “shopping” process, as it shows the real estate agent that you are a serious buyer and are ready to make a purchase decision. If you are buying a luxury property, your real estate agent will likely ask for a pre-approval letter to ensure that you are viewing properties in your price range. Once you have found a realtor, you can start searching for a lender.
You will be required to provide your lender with documents that show that you have the means to pay back the loan. These documents include:
-Pay stubs, W2s and bank statements that show the last two years of income
-A profit and loss statement if you own a small business
-Tax returns and 1099s if you are self employed
-Documentation of any debts owed
-Investment statements for the past 3-6 months
-Any documentation of additional income
Once you have provided this information, the lender will determine how much of a loan that you qualify for. There are several formulas that the lender will use to make this determination. First, he will consider your debt to income ratio. The debt to income ratio is a measure of how much debt you have versus how much income you are bringing in.
Figuring out how much you can afford
The front-end ratio factors how much of your gross income can be used to make your mortgage payment each month. Your mortgage payment, including taxes and insurance, should not exceed 28 percent of your gross monthly income. If you earn, for example, a combined monthly income of $10,000, your monthly mortgage payment cannot exceed $2,800. Another way to find the front end ratio is to multiply your yearly salary by 28% and divide by 12. This number represents an affordable monthly mortgage payment.
The debt-to-income ratio factors how much of your income goes to monthly expenses including credit card debt, medical bills, student loan debt and child support or alimony payments. Most lenders require a debt load of no more than 36 percent of your monthly income before taxes.
To find out the maximum amount of money you can pay toward debts each month, multiply your yearly salary by 36 percent. Divide that number by 12 months, and this number represents the total amount that you can pay toward non-mortgage debt every month.
Once you have completed this process, your lender will approve you for the mortgage. you can now shop for your dream home. Buying a home is a part of the American Dream. Make your dream a reality by understanding the home buying process.
Buying a home starts with understanding your home loan.
Please always consult an expert before making any financial decisions. This guide is not intended to provide specific financial advice but rather an informational overview of home loans.