THE HOMEBUYING PROCESS: HEAR IT FROM AN EXPERT
Are you ready to become a homeowner? Wondering how the homebuying process even begins? In this Money Smarts episode, a Summit mortgage lending officer sits down with us to answer the most commonly asked homebuying questions – covering everything from how to get a mortgage preapproval to receiving an accepted offer.
Transcript
AMY CROWE: Welcome to Money Smarts, a podcast of Summit Credit Union, where we connect people and inspire action to create member and community wealth. As a not-for-profit financial cooperative, Summit Credit Union exists to improve our members' lives and help them reach their dreams. Our Money Smarts podcast is just one way we engage members in the community in conversations about money that inspire you to spend smart, save more, and take action to build a richer life.
Welcome to our home buying show. My name is Amy Crowe, and I'll be your host today. I'm the financial education specialist here at Summit Credit Union. The home buying process can be a little confusing and sometimes a little overwhelming, but Summit Credit Union wanted to bring in one of our expert mortgage lending officers with over 20 years of experience to sit down with us today to share a little bit about the home buying process, to get some of your most commonly asked home buying questions answered, and to help you make all the right mortgage money moves.
Well, I'm super excited that you had a chance to spend some time with us today to help our members learn a little bit more about the home buying process. So welcome to our podcast.
MORTGAGE LOAN OFFICER: Thanks for having me.
AMY: Awesome. Well, let's just dig right in. So someone wants to buy a house, and they have done very little research except to know that they want to buy a house, and they've been renting, and they know that it's, you know, better for them if they buy a house. What's one of the first things you would tell somebody about the home buying process?
MORTGAGE LOAN OFFICER: Well, first of all, I think, just the idea of them wanting to find out they want to do it, it's scary, and they don't know if they're ready, or what they have to do, or how long they have got to wait. And it's just kind of fun to see what their picture is, what they're thinking. And probably half the people don't realize that they are readier than they thought they were when they come to see us, which is fantastic, because we have some really great, different programs that work for a lot of people.
AMY: So it's kind of a scary process right off the bat. Do you find a realtor first, or do you talk to somebody who is a mortgage lender first? It's kind of like the chicken before the egg, right?
MORTGAGE LOAN OFFICER: Right, Well, in the perfect world, I think you would talk to the lender first. And if people do go and jump ahead, realtors end up taking them back to their lender.
AMY: Oh, before they even show them a house?
MORTGAGE LOAN OFFICER: Yep, they want to know that the people are for real and that they know what they're doing. I don't want to say they're wasting the realtor's time, but they don't want to do something if it's not their time to do it, if they have to wait three to six to 12 months.
AMY: Or maybe they need to improve their credit.
MORTGAGE LOAN OFFICER: Right, they just don't know until they see where they're at.
AMY: So if somebody comes into your office, what does that conversation look like?
MORTGAGE LOAN OFFICER: We get a lot of those where people come in and just said, I really want to get a house. I saw one I liked, and I want to make an offer on it. And I'm like, okay, when did you, start thinking about a house? Well, I've been thinking about it a little bit, but when I saw this house, I just wanted it now.
So those are the people you kind of got to step back a little bit and say, let's take a look at where you're at, and let's see if you are in a good situation to be able to afford a home.
AMY: Well, because the home is something that you're going to pay for for the next 30 years of your life.
MORTGAGE LOAN OFFICER: It's the biggest purchase of their life. You can't think about it one day and want to do it the next and, you know, just expect you're going to do it that fast.
AMY: It's interesting because I think what I've learned about the home buying process, and I've bought a couple of houses now, you know, our first starter house, and then now kind of our dream house, which we've remodeled and things like that in various ways. It's really about comparison shopping and doing your research...
MORTGAGE LOAN OFFICER: Yep.
AMY: ...and meeting with an expert, because this purchase is something that you are going to have for a very, very long time. Even if it's that starter house, and I think they say on average, you're in your starter five to eight years, something like that.
MORTGAGE LOAN OFFICER: Yep, that's the likelihood. We have some seven-year programs, seven-year ARM programs, which are really the perfect fit for a lot of our first-time homebuyers, because people do their stepping stones.
AMY: So when someone comes to you for the first time, and maybe they've thinking, you know, have maybe seen a realtor, and the realtor has brought them back. Or they're, before they even see a realtor, they want to come talk to you. What is that initial conversation look like? How long does that take?
MORTGAGE LOAN OFFICER: Probably, it could take like a half an hour to an hour depending on how much information and how many questions they have. But it's really important, you know, to go over and see. Nowadays, there are a lot of people that jump ahead to a bigger home than the normal starter home, a lot of couples. And it's a, it is a different thing, because we have so many different programs you got to kind of fit it with the member.
AMY: So when you're sitting down and talking with somebody, what are some of the first things that you ask them?
MORTGAGE LOAN OFFICER: What I ask them is, and this again is usually somebody saying, I'm thinking about buying a house, which is a perfect person coming in starting this process. And I ask them what are they thinking? What kind of price range, if you were to buy a house today, what would be the range? So you can kind of get a feel of where they're at.
AMY: And when you think about that range, and is that usually, you know, maybe $100,000 to $300,000?
MORTGAGE LOAN OFFICER: Yeah, it can be. It can...
AMY: That's a pretty big range.
MORTGAGE LOAN OFFICER: It really can be. I work with a lot of first-time homebuyers that are under $200,000, and I said, there is a lot out there for that.
AMY: There is, surprisingly.
MORTGAGE LOAN OFFICER: And it's a fun number, and a lot of the people can afford it.
AMY: So when you're first having that conversation with them, is there a checklist of things that people should bring in when they first talk to you?
MORTGAGE LOAN OFFICER: Yes, and actually on our Summit website, we do have awesome, awesome tips. And it kind of goes over if you're going to, you can, obviously, find a mortgage lender to talk to. And you can also, there's a list that you would look at, and it would say this is what we'd recommend you bring in with you, if we don't have a chance to tell them before the appointment.
AMY: So that's summitcreditunion.com.
MORTGAGE LOAN OFFICER: Yep.
AMY: And what's really cool is I think that you can actually go to, ‘meet’, up at the top, and actually make an appointment yourself...
MORTGAGE LOAN OFFICER: Yep, and...
AMY: ...that fits in your schedule with a mortgage lender that's at a branch that you desire.
MORTGAGE LOAN OFFICER: Absolutely. It's that easy, and it's a, just a great, easy way to do it. And a lot of people have started using that, because it's so, it doesn’t take time to have to talk to somebody and set something up. It's instant.
AMY: Well, I know too that some of the things that you ask them to bring in is everything from their income to employment history. Is that just a pay stub and a business card?
MORTGAGE LOAN OFFICER: No, usually it's, a perfect picture would be two years of W-2s for the person.
AMY: Oh, wow.
MORTGAGE LOAN OFFICER: Yeah, just to be safe, and then two paystubs if possible, and then usually asset statements. And what I tell people, things that you're going to use, the down payment monies, what accounts are you going to use. And, of course, if they have Summit, we don't need them to bring anything, because we have it all here.
AMY: That's true. Do they need to bring like credit card statements or anything like that?
MORTGAGE LOAN OFFICER: No, if we get the far enough to do the pre-approval, we pull their credit, and it will show things that we need to do that we can go over with them and look at what their balances and payments and stuff like that are.
AMY: Okay. So here's the, you know, kind of elephant in the room question. What if you're looking at the bank statements or the credit union statements, and they don't really have a ton of money in their savings accounts, because I think some people think that they need no down payment.
MORTGAGE LOAN OFFICER: Yep, there's a few. There's a few out there. And depending on again the scenario, which I work with a group of people called the Home Buyer Round Table, and that is a wonderful group where we work with a lot of first-time home buyers, and usually those are the people that we're talking on the low end of the, looking at buying a house for $100,00 to $150,000.
We have down payment programs that would work, but we still got to look. The main thing I tell my members, is that you have to be able to qualify for a loan before you can get some of these products and services that will make you eligible for a house.
So it's important about their credit, it's important about their debt to income, and that's what I try to do when I sit down with somebody. Before we pull credit or anything, we kind of go through and say, okay, what price range are you thinking? Where do you think your income is? It's a lot of them telling me without actually getting even documentation, which I think you said we were going to talk about the difference between a pre-qual and pre-approval.
AMY: We will in a little bit.
MORTGAGE LOAN OFFICER: Yeah, yeah.
AMY: But you threw out an industry term. You said DTI.
MORTGAGE LOAN OFFICER: Debt to income, and debt to income is so important that we want to make sure, and the credit union hugely, Summit Credit Union does not believe in house poor people, and we are big on making sure somebody can qualify and afford, be able to comfortably live in their house, not worrying about the payment. It's just . . .
AMY: So house poor means that you want to live comfortably. You don't want to buy too much of a house, because if something happens, you want to be able to take money out of your savings account for that.
MORTGAGE LOAN OFFICER: Yep.
AMY: And so it's almost like you have to take a step back and say, maybe you want to meet with somebody at Summit, just in general, to see, do you have money in a savings account for a rainy day?
MORTGAGE LOAN OFFICER: Yep.
AMY: Do you, can you afford to put car tires on your car? Even to the idea of do you need a lawn mower and how much lawn mowers cost, right?
MORTGAGE LOAN OFFICER: Correct.
AMY: Or new furniture for the house. And then you start thinking, my gosh, there might be some more things that I need to do with my finances before I buy a house so that I'm not stuck later.
MORTGAGE LOAN OFFICER: That's absolutely right. And another issue that I see with people wanting to buy a house is they believe they can and want fixer-uppers. And for a first-time house, you got to look at what you just explained. You got to have some ability to say, where's that money going to come from to fix these things that you think you want to change, you know, if it's not good enough. So a lot of times people can't look at a house like that for their first house. It's going to be a little different. It has to be move-in ready.
AMY: So it's almost like when someone is sitting down with you, they want to buy a house. They've made an appointment with you online. You've looked at their credit. You've looked at their credit union statements. You see that they could do a little bit better job at saving some money ahead of time just to put them in a little bit more comfortable position. Do you refer them back to somebody at Summit to talk with them about how they can get their financial house in order before they buy a real house?
MORTGAGE LOAN OFFICER: Absolutely. And probably realistically, there is the two out of five people that I'm looking at that come in, and they don’t have a lot in their account, and they're not really sure what they're doing, and they need a lot of questions answered.
And I always bring up our Project Money. Our Project Money is something that we work with people that are trying to save something, be able to purchase something. It's so important that I usually send them to a universal banker. And a lot of times, we'll even see their credit, and we'll see they have an auto or a credit card or something that maybe we can better, which is like 99% of the time.
AMY: Oh, so you look at their financial position and say, you know what? Knowing what I know about credit and refinances and things like that, and knowing that you want to get into a house in the next six months, go talk to somebody at Summit, see if we can refinance this, consolidate this.
Because what we've seen and what I've seen from some of our universal lenders and our financial service specialists is they're really able to find ways to free-up hundreds of dollars a month and save hundreds of dollars and thousands of dollars in interest by refinancing debt.
MORTGAGE LOAN OFFICER: Yep.
AMY: And they tell me that it can even take as little as six months when you re-categorize, strategize, refinance some of your debt, compartmentalize it, right?
MORTGAGE LOAN OFFICER: Yep.
AMY: Six months later you could have thousands of dollars sitting in a savings account to put down for a down payment.
MORTGAGE LOAN OFFICER: That's absolutely correct, because that's how much they're saving. They're spending way more now than they need to, and they don't realize it.
AMY: Our Project Money program is a reality based challenge where it's a community financial education program where we're showing the community that a lot of times we're very mindless with our spending. And if we're mindful with our spending, and really make every single spending decision align with what our true financial goals are, and maybe that's buying a house. Maybe you don't go to the retail store and just buy whatever you want to. Maybe it's you sticking to the list, keeping the savings, moving it to a savings account.
So it really becomes a strategic plan almost in I'm going to buy a house, and here's what I need to do in the first couple of months to be able to do that. The checklist is I need to talk to Debbie. I need to talk with somebody at Summit to figure out if there's anything I can do to refinance my debt, to lower my interest rates, to increase the availability of money to save for a down payment.
MORTGAGE LOAN OFFICER: Yep.
AMY: So let's talk about the down payment for a second. I think a lot of people think they need 20% down.
MORTGAGE LOAN OFFICER: Oh, yeah.
AMY: And that's not true.
MORTGAGE LOAN OFFICER: That's, no, that's a myth. And there are again products out there with, and I want to make it very clear, 0% down, but with those, you've got to be very, very secure with you income, debt, credit. You have to fit inside and making sure you can afford and qualify for the program, because they're not just going to give somebody with high debt to income and not perfect credit this option that they can get into a house without zero down. They're going to have to work a little to build that.
AMY: Well, I think we talked about debt to income just a couple minutes ago. It's really adding up all of your debt, and subtracting it from your income. And then there's a calculation that we use somehow to determine whether or not they would be comfortable or not comfortable with a loan.
MORTGAGE LOAN OFFICER: Right. And the biggest thing too with income, we use the before taxes. So if somebody is making the, I get a lot of, well, I take home $1,400 a month, or I take home $800 a week. And that's their net where we have to kind of, that's where the pay stubs come in handy, because some people have investment that they put into 401(k), and some people have insurance and all that kind of stuff. So we got to make sure, we want to keep their debt to income in the 40% to 43% range max with all their current obligations, because we don't them to be too tight. And it's pretty conservative, but it's a very good number.
AMY: Well, and I think too that you don't factor in all of the extras and all the fun, right, the budget stuff, the clothing, the entertainment, the eating out, all of that type of stuff?
MORTGAGE LOAN OFFICER: Absolutely. We don't put in cable. We don't put in phone. We don't put in a lot of things that people, they wouldn't have to have, but they do want, and they have. And that's again the Project Money thing, or when you have them sit down with someone, you might write a list of, what are you paying monthly, and what do you need, and what do you want, and, you know, what could you get rid of if you had to?
AMY: Oh, so let's add to this checklist, one, they need to make an appointment with somebody so that they can do some research and figure out where they're at, right?
MORTGAGE LOAN OFFICER: Right.
AMY: Not only with a mortgage lender, but with somebody from Summit to just figure out what we might be able to do to help save them some money. But then the other thing is that they need to actually look at a budget.
MORTGAGE LOAN OFFICER: Right, right.
AMY: And they need to say, I know that you live comfortably. I know that you feel like you have extra money, but are you accumulating wealth?
MORTGAGE LOAN OFFICER: Yep.
AMY: Are you putting money into a retirement savings account? Because you don't want to be house poor and then not have money for retirement.
MORTGAGE LOAN OFFICER: Yep, your future.
AMY: In the future are you going to have a baby? And are you factoring daycare costs into that?
MORTGAGE LOAN OFFICER: Exactly.
AMY: Are you going to add another child to your family? Are you, or are you going to have the big house, because that's a priority for you and then not have other things in your life.
MORTGAGE LOAN OFFICER: Yep.
AMY: So it really becomes this thought process of where might I be five years from now?
MORTGAGE LOAN OFFICER: Yep, and it's absolutely correct, because there's so many questions and so many thinking on what's important right now, and what's your goal in life? What's your, you know, steps and stages?
AMY: Well, and I think some people think, you know, I'm wasting money renting.
MORTGAGE LOAN OFFICER: Yeah.
AMY: Is that true or not true?
MORTGAGE LOAN OFFICER: Well, it depends on what kind of person you are. And again, I tell my members, and I have members that pay pretty large rent. And I, you know, if they're trying to buy a house, that's a hard one, because if you don't have a down payment, I know they can afford the monthly payment, but you got to see, are they long term? Are they going to be staying in the area? Do they know, when I talk to somebody about a house, do you feel like you're going to live in it for at least, four to five years, because that's where you're going to reinvest and make some money on your money that you put into this house.
AMY: Because home values are going to go up or going to go down depending on the market, right?
MORTGAGE LOAN OFFICER: And you pay for the realtor when you sell but not when you buy, so there's a percentage. You always got to think of that too that's going to possibly go out to somebody helping you when you are ready to choose a different house.
AMY: That's actually a really good point of the conversation. So you are hiring a realtor to help you facilitate a real estate transaction.
MORTGAGE LOAN OFFICER: Yep.
AMY: It's very serious.
MORTGAGE LOAN OFFICER: Yep.
AMY: Like this is going to filed with the, who's it filed with?
MORTGAGE LOAN OFFICER: It's filed with the register of deeds.
AMY: With the register of deeds...
MORTGAGE LOAN OFFICER: Yeah, it's a legal binding.
AMY: ...at the county that you live in, right?
MORTGAGE LOAN OFFICER: Yep.
AMY: This is your house. You have a deed to the house, and so you're hiring someone to help you with all the legalese.
MORTGAGE LOAN OFFICER: Yep, and making sure your house is okay. And there's inspections, appraisals, there's all sorts of things that the lender will help you with, and the realtor, to make sure that the house you are buying is the right one for you.
AMY: Oh, yeah. You're totally skipping ahead on what, on our conversation today. We're going to get to all the home appraisals and all of that in just a sec. But it is one of those things where you don't have to hire mortgage lender.
MORTGAGE LOAN OFFICER: No.
AMY: I mean, we have some fees like closing costs, talk a little bit about that.
MORTGAGE LOAN OFFICER: Well, we do, and actually we have pretty good closing costs. We're very competitive. And that's the other thing in my business is we get a lot of new members, because they walk in because they have been recommended from a friend or a coworker. And then they're telling me, our signs on the…everywhere in Madison and Milwaukee.
AMY: Well, we're the number one mortgage lender in Dane County.
MORTGAGE LOAN OFFICER: Dang, right. And that's well known, because I hear it every day, and that really, really, really, helps. And I do recommend that they do a little comparison shopping, but 99% of the time, they're coming back to us with our very minimal great programs and rates, or closing costs rather.
AMY: So one of the things that when they make an appointment with you, and you sit down, and you start looking at credit, and you look at their credit union statements, and you figure out how much a down payment they have. You start talking to them about, what's going to be happening in your life in the next five or ten years? And then you have to start and say, well, here's our sheet of paper with all of the fees associated with buying a house. Like you said, here are our closing costs, which can be a couple of thousand dollars.
MORTGAGE LOAN OFFICER: Yep.
AMY: So not only do you have to think about how much money you have for the down payment, which is going to be, obviously, a good faith amount of money that you put forward to reduce your loan amount on your mortgage.
MORTGAGE LOAN OFFICER: Right.
AMY: But with that down payment then, you also have to think about those closing costs, which could be another couple of thousand dollars. And then you need the new furniture for the house, and the lawn mower, and the snow blower, and you don't want to ever have someone get in a position where they start adding debt on their credit cards after they buy the house.
MORTGAGE LOAN OFFICER: Well, that can cause a lot of trouble for a lot of people, because you know what they say with the credit cards, you can buy now and pay later. And it really can, the whole goal is to keep them so that they're comfortably being able to live where if they were paying off their credit card monthly, they still can do that. And they don't let some kind of debt continue to grow higher than it should, because that's going to affect their savings and their retirement and their investment. It's going to change everything.
AMY: So we talked about the myth of you don't need 20% down. There's a lot of different down payment programs that you could potentially go into. But it's not just the down payment. It's also the closing costs. But there's something called private mortgage insurance.
MORTGAGE LOAN OFFICER: Yep.
AMY: And so if you do have a 20% down payment, you don't have to pay private mortgage insurance. That's really the onus of the 20%, right?
MORTGAGE LOAN OFFICER: Correct. And that's the myth part again where in a perfect world, no one wants to pay for private mortgage insurance. But if you waited to build up a 20% down payment let's say, you could be waiting quite a while to get a house and wind up where the houses continue to rise, and down payment would be more, and it would take you a little bit longer.
So private mortgage insurance is very important to people that, to let them know that you don't have to have 20% down. You can have 3% down, you can have 5% down, you can have 10% down, 15% down, and this private mortgage insurance will go down, and it's tied to your credit score too. But it will be, it's very minimal if you think about you getting into a home without having to wait for the 20% down. It's crazy, wonderful.
AMY: What is the benefit of private mortgage insurance? Why is that in place?
MORTGAGE LOAN OFFICER: Well, it's in place because, and this is another one that's kind of a myth of it doesn't really help the lender, or it doesn't help the buyer. What happens is it's just they're giving the A-Okay saying that it's okay for this member to get this loan, because they're qualified for their credit, their debt to income. They're a good risk. They're a good borrower.
And with that, which you have to have this without the 20% down, and again, some people can get it if they're not perfect with their credit score, but it's going to cost them quite a bit more. And my game plan is not to get them into something when it's very expensive. I'd rather see them work with a universal banker, come back to me in a few months, and then look at saying, okay, let's see what we did to make your picture better, debt, your debt to income, or even your credit score.
AMY: So let's think about this checklist again. We have a down payment. We have closing costs. We have private mortgage insurance. We have the actual loan payment.
MORTGAGE LOAN OFFICER: Yep.
AMY: What else is there that they need to think about in terms of their mortgage payment and what all goes into it?
MORTGAGE LOAN OFFICER: Right. Well, and then you have the property taxes.
AMY: Oh, I forgot about those.
MORTGAGE LOAN OFFICER: That's the big one.
AMY: Which can change, right?
MORTGAGE LOAN OFFICER: Yep, it can change. And in a lot of counties, especially in Dane County, where, you, we have great services, so I can't complain. Our taxes are pretty high compared to some areas, but it's wonderful, and we have great services, and it's wonderful to live in Madison or Dane County area.
AMY: Now I think you can kind of figure out what your property taxes might be, right?
MORTGAGE LOAN OFFICER: Yes.
AMY: What's the resource to be able to do that?
MORTGAGE LOAN OFFICER: There is an online system. You can go online with the treasurer to see. They'll usually give you like a mill rate they call it, or you can even look up the homes you're kind of looking and interested in. You can go online to Access Dane or to City of Madison and actually see what the current estimated market value is and what the taxes are.
AMY: And we have calculators out on summitcredituinon.com...
MORTGAGE LOAN OFFICER: Absolutely.
AMY: ...to be able to figure that stuff out too.
MORTGAGE LOAN OFFICER: And our calculators are so good, because they have very good estimates with the area in the counties that we're asking our members to say what, where do you think you're going to buy at? They're wonderful.
AMY: Awesome. So we have the down payment. We have the closing costs. We have the property taxes. We have the private mortgage insurance. Anything else I'm, oh, the loan payment.
MORTGAGE LOAN OFFICER: Yep, loan payment. And then the last but not least, homeowner's insurance, which is going to be to protect their beautiful home. And that's the one thing you have to have before you close. You pay for a year out. And it's very important, because you look at it as you're paying for insurance if something ever happened to your beautiful investment, it could be rebuilt, it could fixed, repaired, whatever. And it's pretty reasonable actually, because I've seen insurance anywhere from $500 to $800 a year, which for home is really not too much. You know, it's pretty reasonable.
AMY: So you are kind of paying a little bit ahead in a, you know, in a lump sum versus just knowing that it's just going to be part of your loan payment. So you should probably factor that into any lump sum of money you're accumulating for buying a house.
MORTGAGE LOAN OFFICER: Right, right.
AMY: Got it. And then is that something that you just call your insurance agent and be like, I'm thinking about buying a house. Here's the size of house I'm thinking about getting. Can you give me an estimate?
MORTGAGE LOAN OFFICER: You could do that. A lot of times these people have car insurance or renter's insurance and stuff like that. If they're really close to serious saying, I really need to know my budget, they could contact their current agent and just get good estimates.
But a lot of times, you're waiting until you have, you know, decide on what kind of house you have too. And it will depend on where it's located, and how close you are to a fire department, and what, how old the house is. There's so many different things they look at. But it's nice to know it could be rebuilt or fixed up if something happened to it.
AMY: Right. And so there's quite a lot of things that you need to think about, more than just I can find a house that's the exact same cost as my rent payment, and I can afford it.
MORTGAGE LOAN OFFICER: Yep.
AMY: Because you need to think about a lot of different things that go into the lump sum of money that you have to be able to invest in this home in the first place . . .
MORTGAGE LOAN OFFICER: Right.
AMY: ...and do all of the things that you want to do, everything from the hiring of the realtor, which can a couple of thousand of dollars after the real estate transaction. You're also hiring an appraiser and a home inspector. You want to talk a little bit about those two folks that you hire to help you as you purchase this house?
MORTGAGE LOAN OFFICER: Right, right. And it's very important, and we recommend inspections on a house, especially a first-time buyer or somebody that has not done this before. It's, we recommend you get an inspection. We don't require it, but we highly recommend. And what that means is if there is something that needs to be fixed, you can make sure that they are going to fix it for you before you buy it, or you may walk away for that matter.
Appraiser, appraisal, we end up doing that for you, and we would do that, usually I do that right after the inspection if time allows. Otherwise, we get the appraisal ordered at the same time, and the lender has to be the one who orders that, because we will need to make sure it's somebody that's not tied to any of the realtor or the lender or whatever. It's a third party.
AMY: So when you are hiring that appraiser, what are they really appraising, and how does that factor into getting your mortgage loan?
MORTGAGE LOAN OFFICER: They are looking at what the current market is on that house that you are going to buy. And the biggest thing here, and that's another one, how do they compare it? They do know what you're paying for it, because they get a copy of the offer, but they have to look at square footage, similarities of other houses that have sold in that area where the house is located, and show that the value, and sometimes one has a one-car garage, somebody has two-car garage, you kind of give and take for what you can.
But you do the best you can, the appraisers do, to tie it to a house that is similar to your house, so they can make a reasonable guess of why it would be priced at whatever, you know, they're buying it for. And it can, it usually comes in right around the purchase price. Yes, they know about it. But what happens is if it can't, it will come back a little lower, and then the realtor and the buyer have to negotiate with the seller and see if they want to adjust this. This is, does not happen very often.
AMY: So it's based on when the county is assessing your property for your property taxes. But we'll see a difference in a gap between what the county is saying your house is assessed at and what you're paying taxes on versus what the house is being sold for or what their asking price is.
MORTGAGE LOAN OFFICER:: Correct.
AMY: And so you'll see maybe even a $10,000 difference, which is why you want to hire an appraiser...
MORTGAGE LOAN OFFICER: Right.
AMY: ...so that you can double check and be a good consumer to make sure that, yes, this house is truly worth or appraised at this price. And so I'm not, quote, unquote, overpaying for it or different things like that, because the seller can set the price however they want to.
MORTGAGE LOAN OFFICER: A lot of people will be paying more than the assessed value. A lot of people have done stuff to their homes inside that the city might not know about, and things have been updated. And by doing that, it's going to be where realistically, when you do an appraisal, it is going to come in higher. And the fact of the matter is, it's for our purpose. It's not for the City of Madison's purpose. But they will know how much you paid for the house, because you are reporting to them a sale that you purchased a home for this price, so your assessment can go up a little bit.
AMY: Tell me a little bit about fixed-rate mortgages versus adjustable-rate mortgages.
MORTGAGE LOAN OFFICER: Perfect. Yes. I've been in the business for over 20 years, and my theory was if you asked me 10 or 15 years ago, fixed rate was the only way to go, because it was conservative. But in the world I've seen in the last 20 years, a lot of people, and you just mentioned too, especially first-time homebuyers, they do not stay in that same property ever for the full 30 years. They end up refinancing it to remodel, to go to a different type program, maybe a shorter term, and/or selling it and moving to the next house.
So a lot of times, you do have to look at and listen to the member and see is this a forever home. And if it's a home they really think, if this is big enough, I could see myself in it forever, and there's not a lot they have to do with, fixed rate is a wonderful way to go for qualifying them.
But if there's even a chance, a 50/50 chance that this is, and I believe this is happening more and more. And Summit's seven-year ARM is just amazingly popular, because it's a really good window of time for people to know you're locked in for seven years. It's calculated like a 30-year, and you never have to do anything unless you feel you want, or you know you're going to change it, and you want to live in the house longer, you would convert it before the rates would ever go too high into a fixed rate.
AMY: And that's one of those things where people sit down with you kind of that first time, and you look at their budget and their credit report and their credit union statements, and you talked about down payment or all the other fees and things you need to think about, right? And then you start talking about loan programs. But maybe you might even need to meet with them a second time...
MORTGAGE LOAN OFFICER: Oh, yes.
AMY: ...to really dig into, do you need a fixed rate? Do you need an adjustable rate mortgage? And really, there's more than one or two loan programs.
MORTGAGE LOAN OFFICER: There's a lot of loan programs. And when you get preapproved, that's the other thing I tell people, it's not what you're going to guarantee, have to take. When you get the house, you're going to know, like you just said, what kind of house is it. What do I need to do to the house? Is it a forever home? You know, they're just trying to invest in something that's going to earn something for them instead of paying rent to somebody and it going nowhere. This is their investment.
AMY: So that the first meeting is really like a prequalification.
MORTGAGE LOAN OFFICER: Yes.
AMY: You're really starting to think about the process and all the things that you need to think about, it's kind of your research into home buying.
MORTGAGE LOAN OFFICER: Yep.
AMY: That second appointment is really that preapproval where you are really looking at their credit. You're really running the numbers. You're looking at their income. And they're going to walk away with a piece of paper that says that I can buy a house for this amount of money, and this credit union is going to give me a loan. Tell me a little bit about the power of that preapproval letter.
MORTGAGE LOAN OFFICER: The power of the preapproval letter is pretty amazing, and we have two letters we give them. One with a purchase price amount on it, and one without, because we don’t want them to share how high they could go.
AMY: Oh, right.
MORTGAGE LOAN OFFICER: But it's, again, it's very important that they know they don’t go over that or, you know, most of the time, we're always talking about the max they would ever spend. And they know, because people have a budget, which I love, and they want to stay within a reason of what they can afford monthly. So our, the letter is a strong letter saying we've pulled their credit, we've verified things. It says assets are verified, we saw that they have down payment and resources.
It's just now at the time when they do the offer, they just have to have everything that they came in with, and not change anything. And some of the letters are strong letters, which I've learned through many of my realtor friends, when they say they saw Summit as the lender, we're a bump ahead. And we do make it so that our offer could take another lender's letter off the table, which is fantastic.
AMY: That's awesome.
MORTGAGE LOAN OFFICER: It is.
AMY: And so you have the realtor, and they're making an offer on the house, and maybe you're negotiating a little bit, and then you get an accepted offer.
MORTGAGE LOAN OFFICER: Yes.
AMY: Do they come running to your office and say, I have an accepted offer, like what happens next?
MORTGAGE LOAN OFFICER: Well, they run or they call or then email really fast and quick, and it's the most exciting thing in the whole wide world, because it's what they've been looking and waiting for, and sometimes it takes quite a few times before they find the right one. But it's, I usually ask them dates. Dates are so important, like when are you going to close, because we can lock in rates up to 60 days, which is pretty good too.
And kind of with the volatile market right now, you want to make sure, you know, you let the member know where it's been, what's it doing, and see if they want to lock it in. That's my first main thing and then setting up an appointment as soon as we can, so we can get together and talk about real numbers. And real numbers are fun, because then that's the one where you do the verification of the program that you want to go with and see that it's comfortable for them. And it's just, that's the best part of the deal is when it becomes reality.
AMY: And then they get a real statement with all of the numbers that are pertaining to them.
MORTGAGE LOAN OFFICER: Correct.
AMY: It's not a squishy estimate anymore.
MORTGAGE LOAN OFFICER: Nope. Taxes are real. Insurance is always going to be that good estimate, but it, I think we estimate high if anything. And everything else, I do believe it's real numbers. And until you have an accepted offer, you can play with numbers, but the real numbers are super exciting because it's scary, but exciting. You know you got a place, and you know it's going to be the big purchase that you wanted to make.
AMY: So how long does it really take from when you have the accepted offer, and they tell you, and you start verifying everything, until they can actually sign the paperwork at the title company...
MORTGAGE LOAN OFFICER: To close.
AMY: ...to close and do the real estate transaction. What is that timeframe and estimate? I want to make sure that people really understand that it's not the next day.
MORTGAGE LOAN OFFICER: No, no, no, no, no. In a perfect world, 30 days is like probably the perfect window, a month. But I'll be honest, we have done it in less time. If push comes to needing it done because the member will get the deal, because the seller wants to close sooner than later, we will do our best. I've seen us do it in 21 to 24 days, which is tight but doable, especially in Dane County. And then we usually go as long as 45 days.
AMY: And why does it happen? Why does it take so long?
MORTGAGE LOAN OFFICER: Well, a lot of times it's you had the inspection, you had the appraisal, and you want to make sure, sometimes you have a house that you know you're going to have issues that you want them to fix or give you credit for. And the thing is, you want to give everybody enough time to do something, and you want to know what you're doing. You don't want to push anybody any faster, because you want to make sure you a get full appraisal and a full inspection.
AMY: Because you're hiring these people, and so you need to, by their schedules and their appointments.
MORTGAGE LOAN OFFICER: Correct.
AMY: Then they go to the house, they look at these things, they do the inspection, different things like that. So there's a lot of scheduling of things with people.
MORTGAGE LOAN OFFICER: Correct.
AMY: It's not just verifying income and getting, you know, a lot of the paperwork together in terms of the lending loan paperwork for your mortgage. It's hiring people to do things for you to make sure that this is solid real estate investment.
MORTGAGE LOAN OFFICER: That's exactly correct. And it's, we can . . . do our part, which we're very good at, and we're very quick at, but it is very important we have outside people that we are working with to make this process perfect and easy and making sure everything is, the numbers work.
AMY: So when they go to the title company, sometimes the mortgage lender might be there, sometimes the realtor might be there, but they're really signing the paperwork with the person who's selling the house and learning a little bit about like, okay, what are the quirks of the house? What should I know? Which, I mean, that stuff is going to come out with the inspection, because you're going to know if you need a new roof in five years or how old the water heater is and different things like that. But you can be like, okay, so where's this, you know?
MORTGAGE LOAN OFFICER: Yep. It's scary. It's scary, because a lot of times it's like you go to the house. If you think about it, you're in there making the offer and looking at it. You go back for a second time if possible. You go in for the inspection. But I said, it is really scary from the time you sign the papers that you want it that you don't get to go in and see it more often than you do.
AMY: Right.
MORTGAGE LOAN OFFICER: But you realize you usually do a walk-through the day of or the day before just to make sure the house is usually empty from the sellers and that there's nothing out there that you missed, you know, when you were looking the first time. And that's when you go to the table and say, I saw this, and I didn't know what that was. Or how do you do the switch, or? There's so many little quirks like you said.
AMY: Yeah. What does this switch do?
MORTGAGE LOAN OFFICER: Keys. Yep, yep, yep. It's exciting and adventurous because you're going into a new house and learning a lot about it.
AMY: And then you get your keys, and you get your mortgage, you know, statement in the mail, and you can setup an automatic payment or whatever that might be.
MORTGAGE LOAN OFFICER: And you open up a home savings, which is one of our other benefits that we have for our members that have loans with us, and that's a really, really, really good, it's like a certificate rate, better than a money market really, for home mortgage people, 1% is the rate right now. You can put money in it every month, and it builds for you. You can take it out as you need it, but it's a really, really good thing especially when you're talking to the member about saving for things you have to do for the house in the future, because you will be the owner, and you have to pay for anything you want to do to the house or any repairs that it needs.
AMY: Well, I love that about Summit. It's not only do we educate you about the entire home-buying process, but we set you up for success after the fact with this home savings account.
MORTGAGE LOAN OFFICER: Yes.
AMY: It really is the idea of setting money aside, putting in an automatic payment, whatever that might be, to buy the snow blower later in the year.
MORTGAGE LOAN OFFICER: Yeah.
AMY: Or to start saving for the roof that you know you need to replace in five years because that showed up on the inspection.
MORTGAGE LOAN OFFICER: Right. And that's what you bargained for. You can project. It's the coolest thing ever, and I joke with my members it's like free money, because if you invest in that, it's going to make a lot more than regular savings type account.
AMY: And it's set aside in a bucket specifically for home use, right?
MORTGAGE LOAN OFFICER: Yes, yes.
AMY: And you can use it whenever you want to.
MORTGAGE LOAN OFFICER: Yes. It's literally, if people are concerned about putting money into it, and then they feel like something came up personally, you can get at it. That's the benefit. But a lot of times people watch it grow, and it's ready when they need to use it for something for the house.
AMY: Well, Debbie, we are almost at the end of our time today. So tell me the one or two things that you tell your members as an absolute must regarding the homebuyer process.
MORTGAGE LOAN OFFICER: I tell my members, come see us. Come see us before you get too much into the looking and picking and wanting to make an offer. Let us sit down with you. I sit down with somebody as a pre-qual, and I end up realizing that they're going to end up with a universal banker that same day because they aren't ready for me yet.
But they're on their way, and they need to do a couple of things. Just come in and see where you're at, because until you know where you're at, you really can't do anything. I think you want a timeline, and a lot of people are more ready, than they think to buy a beautiful house.
AMY: How does it feel to be able to help somebody get into the house that they have been researching and spending so much time trying to find?
MORTGAGE LOAN OFFICER: It's the best. I've done it a long time. That's the mother in me. It's very important for me to make sure that person has everything, and they're comfortable, and they're guided well. And my theory is you got the credit union, you've got your realtor, you got everybody helping you, use them. Ask a lot of questions and make sure that we help with anything you need, we do it every day. They don't. So we have the answers. They've got to ask questions, and I kind of scold them if they don't ask me more questions, because it worries me.
AMY: Well, and sometimes they don't know what questions to ask.
MORTGAGE LOAN OFFICER: Right.
AMY: Which is why we have a ton of resources at summitcreditunion.com that kind of gives you some of the questions to ask about the home buying process.
MORTGAGE LOAN OFFICER: And I really do, and the realtor does usually too, the minute they have the offer, you give them the timeline. And you give us, you give them our timeline of what we're saying about the inspection, knowing when it's done, because they're going to order it if they want it, the appraisal when it's done. The homeowner's insurance, we give them kind of the tips of here's what you got to do to stay on track, to make your purchase happen on the timeframe that we're using.
AMY: Well, it has been a pleasure talking with you today about the entire home buying process from start to finish.
MORTGAGE LOAN OFFICER: Pretty fun.
AMY: It is. It's really...
MORTGAGE LOAN OFFICER: And exciting.
AMY: ...helping people realize some of their dreams in an amazing place that really represents who they are and how they want to live their lives, right?
MORTGAGE LOAN OFFICER: Yes, and it's just a, it's, I'll say it again, biggest purchase of their life. It's something you don’t do every day, and it's very exciting. It's fun.
AMY: And find the resources and help that can guide you to make the, one of the wisest financial real estate investments of your life.
MORTGAGE LOAN OFFICER: We'll help educate and make sure that we'll never let them get into a bad situation.
AMY: Thank you so much. I so appreciate your time. This has been great.
MORTGAGE LOAN OFFICER: Thank you for having me, and I love it. I love Summit Credit Union.
AMY: Join us next time for our Money Smarts podcast to get more tips, tools, and advice on how you can own your money. Discover more money smarts at summitcreditunion.com. Like us on our Facebook page. That's all for today. Thanks for listening and remember, it's your money, own it.
