HOMEBUYING
101
EVERYTHING LOCAL. EVERYTHING EASIER.
Contents
4
First Time Homebuying: The Begining Stages
6
Advantages/Disadvantages of Conventional and ARM Loans
8
7 Easy Steps to Your New Home
Real People. Real Results.
3
First-Time Homebuying: The Beginning Stages The early stages of first-time homebuying can be
can be expensive, and renting may be the most vi-
intimidating. To alleviate stress, Frandsen Bank &
able option.
Trust has identified the following elements prospective homebuyers should consider before proceeding
Personal objectives: (Commitment) How long do you
with the process.
plan on living in the house? Consider factors such as relocating for business purposes and life-changing
Should I rent or own?
events.
The process of deciding whether to rent or own can be challenging. Examine the advantages and addi-
What is Debt-to-Income Ratio:
tional factors to determine which option best suits
Debt-to-income ratio (DTI) compares the consumer’s
your situation.
monthly debt payments to their total monthly income.
Renting advantages: Renting can cost less, provides
DTI should be calculated with the consumer’s gross
shorter-term commitments, is more flexible for situ-
monthly income. What is gross monthly income? The
ations that require relocation (Job/education), and
amount earned before taxes and other deductions.
maintenance repairs are often the property owner’s
Outline financial responsibilities such as rent, auto,
responsibility.
credit card payments (minimum), monthly alimony,
Owning advantages: Owning a home can provide
child support, and other notable fixed or revolving
stability, help build equity, the property value may
debt. Lenders will assist with the debt-to-income ratio
appreciate, possible tax incentives, mortgage pay-
calculations to help determine your creditworthiness.
ments could be cheaper than rent, and renovations
The lower the DTI ratio, the lender will be more in-
can be done on your own accord.
clined to approve credit inquiries. Borrowers need a DTI of 50% or lower to qualify for most loan products.
How much can I afford? Depending on the location, renting or owning can be
How Do I Pre-Plan:
the cheapest option. For example, transitioning from
The pre-plan process involves outlining your finan-
$800 rent to a $1,400 mortgage payment may strain
cial picture to help determine your credit worthiness.
finances.
What is the status of your savings account? Lenders recommend that borrowers have enough money to
Supplemental variables:
cover unplanned expenses for up to three months
Career: (Job security) Becoming a homeowner re-
after supplying the initial down payment on a house.
quires financial responsibility. Determine whether or
Creating a budget can help build financial stability so
not job security will be an issue before proceeding
prospective home buyers can meet this expectation.
with the home-buying process. Easy budget guide:
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Education: Education status does not restrict pro-
• Calculate all sources of income to understand
spective home-buyers entirely. Secondary education
how much money will be available before financial
Frandsen Quarterly | Quarter 2 2023 | FrandsenBank.com
obligations are paid.
buyers should provide definitive answers. In addi-
• Evaluate expenses by listing monthly respon-
tion to the advantages of renting or owning, sup-
sibilities such as rent, phone bills, utilities, car
plemental variables such as career, education,
payments, car insurance, medical expenses, en-
and personal objectives should be considered in
tertainment, eating out, and other notable expen-
the decision-making process. Understanding the
ditures.
debt-to-income ratio and pre-plan process can
• Subtract the two variables – For example, net
help buyers comprehend their complete financial
pay equals $3,275 and expenses $2,175. The
picture before deciding to enter the housing market.
consumer’s available income after financial
Contact a Frandsen Bank & Trust mortgage lending
obligations
expert today for more information!
each
month
equals
$1,100.
• The execution of the budget plan includes allocating a percentage of the $1,100 to a savings account. With $1,100 remaining, it would be recommended to set aside at least 50%. Overview: The beginning stages of first-time homebuying will prompt questions to which prospective home-
YOUR LOCAL MORTGAGE Find a lender near you at frandsenbank.com/locations NMLS 718070
Advantages/Disadvantages of Conventional and ARM Loans Whether you are a first-time homebuyer or searching
conventional loans are an option for homebuyers
for a second home, the mortgage experts at Frand-
searching for primary residences, investment prop-
sen Bank & Trust can walk you through the advan-
erties, and vacation homes. Furthermore, borrow-
tages and possible drawbacks of conventional and
ers do not have to retain Private Mortgage Insur-
adjustable-rate mortgages. As well as some other
ance (PMI) for the loan period, which PMI increases
considerations to help you through the process.
monthly mortgage payments. Borrowers can cancel PMI when 20 percent equity is invested in the home.
What is a Conventional Loan?
The general affordability and flexibility of conven-
A conventional loan is a type of mortgage loan that is
tional loans offer prospective homebuyers various
not government-backed. What does this mean? Gov-
financing options.
ernment-backed loans are subsidized and protect
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lenders against defaults on payments. Convention-
Conventional Loan Drawbacks:
al loans are originated and serviced through private
Conventional loans tend to have strict requirements.
lenders, such as banks and other financial institutions.
For example, mortgage lenders typically look for a
Conventional Loan Advantages: Combined with
debt-to-income ratio under 42 percent; anything over
flexible repayment timelines of 15, 20, and 30 years,
will decrease the buyer’s probability of approval.
Frandsen Quarterly | Quarter 2 2023 | FrandsenBank.com
Those with past hardships will also be
The credit score requirement for a conventional and
faced with difficult challenges. For in-
adjustable-rate mortgage loan is generally 620 or
stance, homebuyers with foreclosures on
higher. Homebuyers will notice that credit score re-
their credit report will have issues quali-
quirements vary by bank. For reference, credit scores
fying for a conventional loan for approxi-
are generated based on the disclosed information in
mately 7 years.
the credit report. Lenders will measure a borrower’s creditworthiness after analyzing the report.
What
is
an
Adjustable-Rate
Mortgage?
Debt-to-Income Ratio factors in each debt the bor-
An adjustable-rate mortgage (ARM) is an-
rower is responsible for paying each month, such
other type of home loan with an interest
as credit cards, student loans, and auto loans. The
rate that changes periodically. How does
process indicates how much an individual’s month-
this work? Interest rates on ARMs are
ly income goes toward debt repayment. Depending
fixed for specified periods, then change at
on the financial institution, mortgage lenders may re-
yearly or monthly intervals. Dependent on
quire DTIs to fall within predetermined ranges. This
the market status, a borrower’s monthly
requirement will be discussed in the beginning stag-
mortgage payment and interest rate can
es of the home-buying process.
either increase or decrease after the fixed period ends.
In addition, mortgage lenders may require borrowers to provide a down payment of at least 3 percent.
ARM Advantages: The probability of lock-
Some homebuyers may be eligible for down payment
ing in a lower interest rate for the initial fixed
assistance to help meet or exceed this requirement.
period means the borrower(s) can apply more to-
Qualifications are dependent on income, location,
ward the principal each month. ARMs also offer
and time of application.
flexibility for individuals who intend on reselling their homes before the loan reprices. This option allows
Understanding your complete financial picture will
homeowners to exploit the market when rates be-
help determine whether a conventional or adjustable
come more favorable.
rate mortgage best suits your situation. The Frandsen Bank & Trust mortgage experts will find a solu-
ARM Drawbacks:
tion that best fits your needs.
Homeowners with fixed budgets could experience temporary financial strain with the fluctuation of interest rates. Refinancing to a fixed-rate mortgage (FRM) can be an option, but the homeowner must pay closing costs, ranging between 2 and 5 percent of the loan amount. So, a home loan of $325,000 will cost between $6,500 and $16,250. The cost can be paid upfront or charged to the homeowner’s new loan. A few things to consider: Prospective homebuyers with favorable credit scores and reports are likelier to receive lower interest rates. Real People. Real Results.
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7
Easy Steps Your New H
To Home
NMLS 718070
1
The First Step
Average Time - 1 Hour
Pre-qualification stage can be completed with your local mortgage lender, and this should be done before you begin searching for houses. Frandsen lenders will help prospective homebuyers determine how much they can afford. This process can develop a reasonable housing budget and highlight potential credit issues that might be problematic.
Prequalification : is an informal process where the prospective homebuyer and mortgage lender review financial information. The primary purpose is to generate an idea of how much you can afford. This process can generally be done on the spot. Make sure to provide enough details to depict your financial condition accurately. Pre-qualification is not binding on the bank because the information is not verified; thus, the prospective home-buyer will not benefit from inaccurately disclosing personal information.
Credit report As part of your loan underwriting, the bank will purchase a credit report, which is a detailed account of your credit history (amounts of past and present loans and revolving accounts, payment history, and any delinquencies, bankruptcies, or foreclosures). You will be charged for this as part of your closing costs.
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USEFUL INFORMATION TO HAVE AVAILABLE • Full name (including former names), address, Social Security number, and driver’s license or other government- issued ID for each borrower • Pay stubs for the last 30 days and W-2 statements and/or 1099s for the last two years for each borrower • If self-employed or receiving rental or sales income, copies of complete personal and corporate federal tax returns for the last two years • Current statements with account numbers for all other income (government benefits, investment income, pensions, etc.) • Copies of court orders and current statements regarding receipt or payment of alimony, child support, or other legal obligation • Statements with account numbers for the past two months for all bank and investment accounts and all other financial resources • Current values of all your major assets—real estate, bank and investment accounts, stocks/ bonds, vehicles, business assets, valuable collectibles, etc. • If you are receiving a gift to help with purchasing a home, a letter, provided by the bank, to be signed by you and your benefactor(s) stating the amount of the gift and certifying that it is a gift and not a loan • If selling your current home, written documentation regarding your net proceeds from the sale • Current statements with accounts for all mortgages, personal and student loans, credit cards, auto loans, business loans, contracts for deed, etc. • Property tax statements, county valuation statements, and insurance declaration pages for all real estate owned • Adequate documentation regarding the value of any additional assets (stocks/bonds, business assets, personal property, etc.) • If renting, name and address of landlord(s) for the past year • A copy of school diploma or transcript (if you have been employed less than two years and were in school before that)
2
Loan Application
Average Time - 2 to 5 Days
It is recommended to complete your loan application once the purchase agreement is signed. You can do this in person at your local Frandsen Bank & Trust office, through the mail by contacting your Frandsen banker, or online at frandsen.mymortgage-online.com.
Locking or floating your interest rate Depending on the purchase agreement, this may be discussed at the time of sale. Homebuyers can choose to lock their interest rate on a specific date or float until a specified date later in the process. Furthermore, if rates are expected to rise, the buyer will want to lock in the interest rate as soon as possible. When rates are supposed to decrease, float the rate as long as the market allows.
What you’ll need • Talk to your Frandsen banker about when to lock your rate • To avoid delays in your closing date, it is a good idea to lock your rate at least 10 days before closing
Which mortgage to apply for? Your loan officer will work with you to choose a loan program that is best for you from a wide range of options: • FIXED-RATE CONVENTIONAL : Down payments as low as 3% (income limits apply for lower down payments) • ARM : Adjustable-rate mortgage • VA : Low or no down payment (veterans eligibility requirements apply) • USDA RURAL DEVELOPMENT : No down payment (income limits apply) • MINNESOTA HOUSING : Down payment and closing cost assistance (income limits apply)
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Real People. Real Results.
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3
Purchase Agreement
Average Time - 3 to 10 Days
At this point in the process, you should have selected a home within your price range. This begins with a written offer via a legal document called a purchase agreement. The process can be executed through real estate agents and real estate attorneys, who will draft the document and present it to the seller on your behalf. What does the purchase agreement include? The purchase agreement outlines the price and notable details of the sale, including whether or not the buyer plans to retain their own inspector to analyze the property. Purchase agreements should also specify a targeted closing date (generally several weeks later) and when you will pay and take ownership of the house. Buyers must accompany the purchase agreement with an earnest money payment (Approximately one percent of the purchase price). Your real estate agent or attorney is responsible for depositing the earnest money payment into a trust account, which will be held and applied to the buyer’s closing costs. Once the buyers and sellers sign the purchase agreement, the contract is now legally binding. If the contract is not fulfilled on the buyer’s end, the earnest money payment could be forfeited.
What you’ll need • Names and addresses of all buyers and sellers and spouses • Address, legal description, and tax parcel ID number for the property (provided by the seller) • List of personal property items (appliances, etc.) to be included in the sale • Dollar amounts of the purchase price, earnest money, down payment, and new mortgage • Check for earnest money (ask your agent or attorney to whom this should be made payable)
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Average Time - 1 to 5 Days
About Home Inspection Home inspections are completed to identify potential issues with the interior and exterior of the property. This process allows homebuyers to make calculated decisions based on the disclosed information. If the buyer opts for a private inspection, the purchase agreement will include a timeline for when it must occur.
What you’ll need • If you opted for a private inspection, it is your responsibility to select and retain your own inspector, who can be a professional or a competent person you know • You must coordinate a time with the seller when the inspector can visit the property • You will pay for the inspection from your own funds • When completed, you will need to sign a document stating either that you are satisfied with the results of the inspection, or listing items that you want the seller to fix
Homeowners Insurance (HOI) Homeowners insurance protects the consumer in situations where the home is damaged, or personal property is lost.
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4
Loan Processing / Underwriting
Average Time - 1 to 4 weeks
This particular process is comprised of several components: Appraisal, title search, disclosures, and additional requirements that vary based on the type of property and mortgage the buyer applied for. Important reminder, loan processing involves the services of third-party vendors, and unexpected delays can occur. Banks do not have control over that particular factor.
What you’ll need • You may be asked to provide additional financial information—the quicker you supply it, the smoother your process will be • The seller will need to provide access to the home for an appraiser and possibly other inspectors • The seller may be asked to provide an abstract of title to the property
Appraisal The bank will also purchase an appraisal of the property. An appraisal is a written estimate examining the true market value of the house you plan on purchasing. The appraisal will be prepared by a licensed appraiser that will review the property’s interior and exterior while also analyzing recent sales prices for similar properties in the area. This will help generate an estimate for the fair market value. Home-buyers will be charged for this process which will be applied to the closing costs. Buyers will receive a copy of the appraisal for personal records.
Title search Depending on the situation, the title search will be in conjunction with the title insurance policy. The title search will disclose all recorded documents at the county courthouse that pertain to the property. This will either be reviewed by the title insurance company or attorney. Copies of the title search/title opinion can be provided to the homebuyers. Buyers will be charged for this procedure. See the next page for more information about title insurance.
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5
Preparing for the Closing
Average Time - 1 to 2 weeks
The closing process will typically occur at the office of a title company of the homebuyer’s choice. If the homebuyer does not prefer a title company, the bank can help suggest one. Once the bank provides documentation to the title company to initiate the process, the title company will contact the buyer or real estate agent to arrange a date/time for the closing. Approximately three days before the closing date, the lender will send you a closing disclosure detailing the final costs.
What you’ll need • Copy of your new homeowners insurance policy showing Frandsen Bank & Trust as mortgagee, along with a receipt showing payment for one year (have your agent fax or mail these directly to your Frandsen lender) • Copy of your flood insurance policy and paid receipt if the property is located in a flood zone • Copies of the private septic inspection, water test, survey, or Certificate of Occupancy if required by local government authorities or the terms of your mortgage or purchase agreement • Contact all utility companies (electric, gas, phone, Internet, cable TV, trash service, etc.) to apply for service and make required deposits • Notify the Post Office of your new address • Arrange a time with your real estate agent or the seller for a final walk-through of the home • The closing will likely occur during business hours so plan work schedules accordingly
About title insurance FB&T requires homebuyers to purchase title insurance for the bank. Furthermore, the buyer will also have an opportunity to purchase owner’s insurance. Frandsen recommends owners’ insurance to protect the buyer from unexpected events. What is a title insurance policy? The policy ensures that the title to the home will go into your name on the closing date, free and clear of liens and claims. This required policy protects the bank’s interest in the property, not the buyers. What is owner’s title insurance? Owner’s title insurance will personally cover the buyer from claims against the title. Owners’ title insurance can be more affordable when the policy is purchased at closing. When the buyer declines to purchase the policy at closing, it can be more expensive to purchase later.
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6
Closing Day
Average Time - 1 to 2 Hours
This process involves paying for the house with the loan proceeds. The home-buyers real estate agent or lender may choose to attend. Home-buyers also have the option of including their attorney. Attorney fees can not be applied toward the final closing cost. When the loan agreement includes escrows for taxes and/or insurance, an escrow account will be created at closing. The seller will then provide the keys, and the title company will hand over copies of the deed, mortgage, and other essential documents.
What you’ll need • Final walk-though of the home just before closing • Cashier’s check or money order for the exact amount shown on the Closing Disclosure, made payable to yourself (you will endorse it over to the title company at closing) • Driver’s license or other government-issued ID for each borrower • Addresses where each borrower has lived for the last 10 years • Remember to get a written bill of sale from the seller transferring ownership to you of any personal property items (appliances, etc.) included in the sale, for insurance and warranty purposes • Be sure to ask the seller for copies of any warranties on the home, appliances, and mechanical fixtures
Important Documents At the closing, two important documents will be signed and subsequently filed with the county where the home is located: • WARRANTY DEED : A legal document that the seller signs at closing conveying title to the real estate into your name • MORTGAGE : A legal document that you sign at closing granting a security interest in the real estate to Frandsen Bank & Trust as collateral for your loan
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7
After the Closing
The title company will file the deed and mortgage with the county. Homebuyers will receive a payment letter with instructions on making monthly payments. The buyer may receive bills for the item if the loan agreement includes escrows for taxes and/or insurance. These will not be paid directly; duplicated bills will be delivered to the buyer’s mortgage servicer to pay out of the homeowner’s escrow account.
Important final step Don’t forget to apply for your state homestead tax credit as soon as possible.
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