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Wednesday, August 11, 2021

Managing Your Mortgage Dreams

Jane Frances and Erin Mauch with Rudler, PSC (provided)


By Erin Mauch, Staff Accountant & Jane Frances, CPA for Rudler, PSC


Ask anyone who’s tried to buy one lately and they will likely tell you the same thing: The housing market is hotter than it’s been in more than a decade. 

Many people looked to escape major metropolitan cities during the pandemic where overcrowding, restrictions and/or cost of living concerns are high. In addition, demand outpacing supply and historically low mortgage rates have led to many homes closing over the seller’s original asking price.

As a result, the competition for homes has become quite intense. While some experts expect the market to cool down soon, many prospective buyers may not be willing to wait and miss out on their dream home.

Maximize your buying potential and investment by reviewing the following considerations and checklist of documents to have handy before signing off on your next mortgage.

BE WELL DOCUMENTED


Following the market crash of the early 2000s, the industry repositioned itself to try and prevent people from buying more home than they can afford. As a result, thorough documentation is needed for banks to ensure they aren’t taking on unnecessary risk.

Generally, there are four critical categories of documents needed when applying for a mortgage: Mortgage application information, income verification, and assets and debts credit verification.


1. Mortgage application information:

Depending on the lender, a bank or credit union may ask you to submit documents for mortgage pre-approval. This is where a lender checks your credit and income via things like pay stubs, bank statements and tax returns. This in turn will allow the lender to determine your loan amount. This can also be a good move if you plan to shop around for a mortgage lender and helps determine the interest rates for which you qualify. This will then be followed by a Uniform Residential Loan Application, the standard form given to prospective homebuyers necessary for the lender to establish the level of risk you present as a borrower.




 

2. Income verification:

Income verification is exactly as it sounds – evidence you currently and should continue to have necessary funding to pay your monthly mortgage for the duration of your loan. Some lenders may ask for up to two years’ worth of W-2s. Generally, you’ll want to have 1-3 months of your most recent paystubs at your current employer handy and should be prepared to explain any gaps in employment during that time.

If you’re self-employed, you may be asked to submit income tax returns, your current year to date and prior year financial statements. Be aware that quarterly financials may not be sufficient. These documents will help if a lender wishes to see if their business is bouncing back in the wake of COVID-19.

3. Assets and debts: 

Additionally, be sure to pull bank statements that include retirement and investment account statements. You’ll also want to ensure that if you’re paying off any large purchases, such as a car, that you pull those statements as well.

4. Credit verification:

Lastly, verification of your credit rating is going to be a big part of your mortgage application. If you have any concerns about your credit rating, be sure to investigate, research and fix it prior to applying for a home loan. Since your credit score generally decreases after buying a home, be sure to plan for other major purchases (a new car, credit cards, etc.) accordingly.

It is possible other documentation may be requested outside of these forms of documentation and information but is likely rare.


MAKE YOUR PAPERWORK WORK


First time buyers may be shocked to see that the purchase price of their new home is higher than originally expected due to various line items and add-ons to final contracts.

Closing costs – the fees you pay when obtaining your mortgage that are typically 3-5% of your loan amount – and home warranties can be paid for by the buyer or seller. Common among closing costs are the fees to originate and underwrite the mortgage itself, agent commissions, the property’s appraisal, property taxes and filing fees. Some first-time homebuyers may be shocked to discover that a $200,000 home has jumped up $12,500 in price due to these additional costs.

Also, some sellers will ask buyers to submit 1-5% of the home’s value in earnest so they feel comfortable taking the home off the market. That fee is typically applied to closing costs but if the sale fails to go through, that money may not be refunded.

Private mortgage insurance, or PMI, is usually required with most conventional home loans where the buyer makes a down payment that is less than 20% of the final purchase price. PMI protects the lender, not the borrower, in the event you fail to make payments on your loan, which is why it is added to your mortgage payment’s monthly premium. It is also possible to pay PMI in a one-time lump sum at your closing or in an upfront/monthly premium combo.

Additionally, you may be offered the option to purchase a home warranty. This is a contract that typically (depending on the company) helps to cover the cost of service, repair and/or replacement of major appliances and systems, such as an HVAC unit, contained within. Like closing costs, home warranties can be paid for by the buyer or seller.

Because the housing market is so competitive, some buyers are currently foregoing home inspections so that they can close a deal before losing a property to someone else. Buying a home “as is” so to speak is a calculated risk. On one hand, it could land you the property of your dreams (possibly at a better price than anticipated). On the other hand, that dream could turn into a nightmare if you decide to skip doing your due diligence and your “fixer upper” requires major renovation (or worse).

In fact, here’s a scary stat for potential home buyers to be aware of: right now, the average home for sale needs $26,900 worth of work, according to a recent report from Zillow and home repair marketplace Thumbtack. That’s a lot, considering that many homes are selling for far more than their asking price. Buyers may not even understand the extent of the repairs or updates needed on the property, especially if they feel compelled to forgo the home inspection in today’s competitive market.


THE BOTTOM LINE


No matter when you buy a home doing your homework upfront can help prevent significant hidden costs (not to mention time and energy spent) on your home once purchased. If you have questions about what sort of documentation you may need, reach out to your accountant, bank or current preferred financial lender to learn more.

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