How to Avoid Buying Mistakes
1. Not doing your homework. Enter the market well-prepared by researching location, school district, deed restrictions and taxes.
2. Trying to make a shrewd investment. Focus on finding the best place for you and your family to live rather than trying to predict the real estate market.
3. Choosing a poor location. Consider what part of town you would like to live in and avoid homes located on busy streets.
4. Overlooking an inferior floor plan for an attractive exterior. Choose a great floor plan over a great exterior because you’ll spend far more time inside the house than outside.
5. Overlooking how the home will function for your family. Consider features that are most important to your family and choose a home that will meet those needs.
6. Not having the home properly inspected when buying a resale. Hire a state-licensed, professional inspector to evaluate the home’s true condition, which could save you thousands of dollars in repairs and maintenance.
7. Not having the home properly inspected when buying a new home. Research the number of homes sold, homeowner satisfaction, years in business, industry recognition and warranties offered.
8. Not getting what you want because you’re impatient. If it’s a used home, allow time to negotiate and get the best deal possible. Refusing to rush the process could save you $5,000 on the purchase price.
9. Waiting for a better time to buy based on the market and interest rates. History shows that those who purchased homes and kept them for three to five years or more did better than those who didn’t. Waiting is one of the biggest mistakes a home buyer can make.
10. The biggest home buying mistake is not buying at all. Buying a home will give you a place to call your own and allow you to take advantage of tax breaks and build equity.
Avoiding common mistakes can make the home buying process simpler and less stressful.
Mistakes to Avoid When Buying a Home
A great way to make the home-buying process flow smoothly is to educate yourself and learn from mistakes others have made – this can make the difference between buying the home of your dreams and buying a “lemon.”
Not getting pre-qualified or pre-approved. If you receive pre-qualification or pre-approval from a reputable lender, your negotiating position is strengthened. It shows agents and sellers you are serious about buying a home.
Not seeking guidance from real estate professionals and inspectors. These people are trained in buying, selling and inspecting. Find someone you respect and trust and allow them to help – it will benefit you in the end.
Choosing an agent haphazardly. Don’t jump from agent to agent just because you saw their name on a sign outside of a house you like. Interview at least three agents and choose the one you feel most comfortable with and who will focus on your needs.
Not getting enough information about the properties. Obtain market statistics and sales records for the area you are considering buying a home in so you know how things (prices, conditions, list-to-selling price ratios) stack up in your neighborhood.
Not looking at enough houses for sale. The more you see, the more you’ll learn about what you want and what each house is worth.
Not making the correct price comparison. Don’t assess the value of a house only on the asking price. Your real estate agent should compile reports that reflect and compare the selling price of similar houses recently sold.
Forgetting to calculate all the costs. When calculating the maximum price you can afford, don’t forget to include hidden costs, i.e. courier costs. Calculate a reasonable price range and look for a house that is priced closer to the lower end of your range.
Not asking enough questions. Don’t be afraid to ask questions! You’re not supposed to know everything about buying a home. Remember, this is potentially the biggest purchase you will make in your life – don’t get caught in a “lemon” because you didn’t ask enough questions!
Fear of losing a specific house. Don’t fall in love with the first home you see. New listings come onto the market all the time. The best deal may still be around the corner.
Not looking past the interior decorating or cosmetic improvements. Don’t choose a house because you like the interior decorating – that is not what you are buying and it will probably go with the seller when he moves. Check out the actual structure of the house!
Not checking out every nook and cranny before purchasing. Go through the house with a fine-tooth comb. You don’t want to find out after you’ve bought the house that the roof is leaking. Open cabinets, turn on every switch, notice details, move stuff away from the walls, look in the attic, turn on faucets.
Not making a low offer. Pay only what you can afford. The seller can always make a counter-offer, and you can counter-offer again until you settle on a suitable price, or you can simply walk away.
Being pushed into buying a certain home. Don’t make a decision until you feel you’ve seen enough to pick the best one.
Mistakes to Avoid Prior to Home Ownership
1. Spending more than you make. This can lead to real danger in not being able to afford to purchase. Create a budget you can live with and cancel credit cards you do not use before applying for a loan.
2. Not Saving Enough for Down Payment and Closing Costs. Be sure to include these items when working on your home buying budget. It will be difficult to come up with thousands of dollars if you have not planned ahead.
3. Failure to Understand Cost to Own and Maintain a Home. You must understand the expenses involved in ownership and plan your budget to include these items. All homes are different and the costs vary depending on the type of home and construction.
4. No Knowledge of Mortgage Products. Investigate the types of mortgages available and find one that fits your needs. No two are alike and the costs can vary greatly. Shop lenders for the best rates and terms.
5. Failing to Seek Professional Help. If you find you are in financial trouble and getting deeper in debt, seek professional counseling to improve your credit history and ability to purchase a home.
6. Failing to Control Your Home Purchase. This is your home and be sure you are in charge of the location, style, and price you can pay. Never let family, friends, or a Real Estate Agent sell you on something you do not want.
7. Indecision. Know what you want in regards to your future. If you are unsure, now may not be the right time for you to buy a home.
8. Purchasing a Home Before You Are Ready. Buying a home is a major commitment. If you are not prepared for the responsibility of ownership and the financial obligation it creates by all means rent.
There is no way to guarantee a “smooth” path from an approved contract to the settlement table, but doing your part is at least half the job. Expect minor problems and delays along the way. On the seller’s side, title problems are a common cause of postponed settlements. On your side, bureaucratic snags such as extensive credit checks and slow appraisals can bog things down. In many cases, there isn’t much you or the seller can do but wait.
While you’re waiting for completion of all the processes now in motion, you should:
- Apply for homeowners insurance on your new home.
- Get an exact accounting settlement cost, and make sure the money and necessary documents will be there at closing.
- Select a date for the final walk-through of the house.
- Contact utility companies about starting service in your name.
Insurance on your new home: Your lender will require you to take out a homeowners insurance policy, something you would want to do anyway. The lender wants to cover the amount of its mortgage loan so it can recover the money in the event of a loss. However, it’s up to you to see that your insurance coverage remains adequate by getting property protection, liability insurance and/or any additional coverage you think is necessary.
The final inspection: The house you’re buying must be handed over to you in the condition specified in the contract. To verify this, schedule a walk-through of the house shortly before settlement, several days in advance is best, to allow time for the seller to correct any last-minute problems.
Take along a simple device, such as a plug-in nightlight, to test all electrical outlets. Turn on the furnace and air conditioning, flush toilets and turn on faucets, put the washing machine and dryer through a cycle. In short, put the house through its paces.
If anything needs fixing or further cleaning, tell the seller immediately. Neither you nor the seller wants to postpone the settlement, but make it clear you won’t go to closing until a second walk-through is satisfactory.
What happens at closing: The closing is where ownership of the home is officially transferred from the seller to you. Your closing officer works for the title company and coordinates the document signing and the collection and disbursement of funds. Your main role at the closing is to review and sign the documents related to the mortgage loan and to pay the closing costs.
Most parties involved with the purchase of your new home will attend your closing. The closing is a formal meeting typically attended by the buyer(s) and the seller(s) (and their attorneys if they have one), both real estate sales professionals, and, of course, the closing officer. The meeting is typically held at the title company’s office.
What to bring to closing: For things to go smoothly, each party should bring certain documents and be prepared to pay the necessary fees. Many closing costs can be paid by personal check, but ask the closing attorney or closing officer. A certified or cashier’s check may be required. Find out to whom checks should be made payable.
The seller and his attorney are responsible for preparing and bringing the deed and the most recent property-tax bill. They also will bring other documents required by the contract. This can include the property insurance policy, termite inspection, documents showing the removal of liens and a bill of sale for personal property.
Make sure you have adequate funds for the down payment and other settlement costs, arrange for your attorney to represent your interests at the meeting, bring the loan commitment, inform the lender of the meeting time and place and have your driver’s license ready as proof of identity. Finally, it’s a good idea to bring a copy of the purchase contract to refresh your memory.
Choosing a Lender
Despite an excess of loans and lenders, comparison shopping has been eased by the development of computer-loan origination systems and mortgage-reporting services – firms that survey major lenders in metropolitan areas every week or so and publish information sheets on who is offering what loans on what terms.
Shop for lenders offering the best deals. Check with several mortgage companies and use one or more reporting services. Rely on your own efforts, lots of telephone calls and possibly some old-fashioned legwork. If there isn’t a reporting service covering your area, begin the search at your own bank or savings and loan.
Sources of Mortgage Money:
Independent Mortgage Companies: make just over half of all home mortgages, including most VA-guaranteed and FHA-insured loans.
Savings Institutions: Savings and loan associations and savings banks originate close to a quarter of home mortgages. Most are conventional loans – those not guaranteed by the VA or FmHA, or insured by the FHA.
Commercial Banks: are active in residential lending. Banks also are a major supplier of loans for mobile-home buyers.
Mortgage Brokers: act as intermediaries. A broker keeps tabs on the mortgage market through ties to local, regional and national lenders, and can refer a prospective borrower to a mortgage banker, savings institution or a commercial bank. Brokers don’t lend money and can’t approve loans.
Credit Unions: make close to one-third of all first-mortgage loans, but you must be a member.
Public Agencies: State and local finance agencies make below-market-rate financing available to eligible low- and moderate-income first-time buyers through the sale of tax-exempt bonds.
Employers and Unions: Don’t overlook your employer as a source of assistance. An employer may subsidize the interest or even act as a lender. Unions are another possibility. The AFL-CIO offers what it calls “Union Privilege.” Unions that sign on can make first-time home loans available to eligible members for as little as three percent down.
Closing the Transaction
The sale is formally ended at the closing table. In most transaction, the closing lasts less than an hour and often occurs at the title company office. Your Real Estate Professional and the buyer’s agent may be present, and a title company officer or escrow agent will preside.
Basic documents The sale actually consists of two transactions: 1) transferring the property to the buyer and 2) paying off the existing mortgage on your home (or allowing the buyer to assume your mortgage). To transfer the property, the title company will present documents proving that you have the title. Proceeds of the sale may be disbursed at closing or shortly thereafter, once all paperwork and verification has been processed. When you give your house key to the new owners, the sale is completed.
Closing the Contract
A valid real estate contract must be in writing and be freely offered by the buyer and accepted by the seller. All parties to the contract must be legally competent to do business. Money or other valuable consideration needs to be exchanged for title to the property.
Keep in mind that if things go wrong, the buyer could require you to sell your home to him/her or pay damages. Be familiar with the terms of any contract you give to a would-be purchaser.
Consider the contract as a whole. Is it slanted in favor of the buyer? If so, consult an attorney about making changes. Analyze the document as a series of paragraphs or clauses, each written to benefit one party or the other.
Key Elements of the Contract
Price and terms: If a low offer comes your way, remain cool until you’ve examined the terms. Nothing evokes a more emotional response than a low bid. Be realistic and objective because many properties don’t bring full price. Don’t use price alone as a reason not to counter or negotiate. A first offer may reveal what’s most important – price or terms – to this particular buyer, giving you the key to begin bargaining.
Condition of home and inspection: The purchaser should have your home inspected for soundness of construction and state of repair. Include all mandatory and voluntary disclosure statements concerning the property’s condition, such as known defects in the contract.
Be careful what you guarantee. You cannot be sure the roof won’t leak, the heating system won’t go out or any other number of such assurances. Once the property is sold, you are no longer responsible for it.
Response deadline: You’ll be asked to respond to an offer within a specified timeframe. Try to get as long a response time as possible. Other offers may come up and you’ll want to buy time to review them and perhaps use one offer to increase another.
Settlement date and occupancy: If you have another home under contract, seek a settlement date that will enable you to take your sales profits to the next closing. Be realistic; the buyer of your home will probably need at least 30 to 50 days to arrange financing and close.
Finalizing: Everything in the offering contract is negotiable. When everyone has agreed to the terms, initialed the changes and signed the contracts, you’ve got an agreement binding on all parties. All that remains is removing contingency clauses, arranging financing and clearing title.
What is Escrow?
An escrow is a deposit of funds, a deed or other instrument by one party for the delivery to another party upon completion of a specific condition or event. It is an independent neutral account by which the interests of all parties to the transaction are protected.
When opening an escrow, the buyer and seller of a piece of property establish terms and conditions for the transfer of ownership of that property. These terms and conditions are given to a third, impartial party known as the escrow holder. The escrow holder has the responsibility of seeing that the terms are carried out.
The escrow is a “storehouse” for all monies, instructions and documents necessary for the sale of your home. This includes the buyer providing funds for a down payment, and the seller depositing the deed and any other necessary papers.
Why Do I Need an Escrow? An escrow will provide you with a guarantee that no funds or property will change hands until ALL of the terms and conditions have been followed. The escrow holder has the responsibility to watch over the funds and/or documents and then pay out the funds and/or transfer the title only when all requirements of the escrow have been completed.
How Does the Escrow Process Work? The buyer, seller, lender and/or borrower cause escrow instructions to be created, signed and delivered to the escrow officer. The escrow officer will then process the escrow, in accordance with the escrow instructions. When all conditions required in the escrow are met, the escrow is “closed.”
Prior to close of escrow, the buyer deposits the funds required with the escrow holder. The buyer instructs the escrow holder to release the money to the seller when:
- The deed records
- A policy of title insurance is prepared and delivered to the buyer.
The escrow holder acts for both parties and protects the interests of each within the power of the escrow instructions. Escrow cannot be completed until the instructions have been fully satisfied and all parties have signed escrow documents. The escrow holder takes instructions based on the terms of the purchase agreement and the lender’s requirements.
The duties of the escrow holder include:
- Managing the funds and/or documents in accordance with instructions
- Paying all bills as authorized
- Responding to requests from the principals
- Closing the escrow only when all terms and conditions have been met
- Distributing the funds accordingly
How Do I Open an Escrow? Generally, the seller’s real estate agent will open the escrow. As soon as you complete the purchase agreement, the selling agent will place the buyer’s initial deposit, if any, into the escrow account at a title company or into the real estate broker’s account.
What Do I Need to Do Before My Appointment to Sign Escrow Papers? All parties signing the documents must bring proper identification. Bring either a valid driver’s license, state identification card or current passport with you to the title company. This item is needed to verify your identity by a notary public. This is a routine, but necessary step for your protection.
What’s the Next Step After I’ve Signed the Closing Escrow Papers? After both parties have signed all the necessary instructions and documents, the escrow officer will return the buyer’s loan documents to the lender for final review. After the review is completed, the lender is ready to fund the buyer’s loan and informs the escrow officer.
How Long is an Escrow? The length of an escrow is determined by the terms of the purchase agreement and can range from a few days to several months.
What is an “Escrow Closing”? An escrow closing is the climax of the transaction. It signifies legal transfer of title from the seller to the buyer. Generally, the Grant Deed of Trust is recorded within one working day of the escrow holder’s receipt of loan funds. This completes the transaction and signifies the “close of escrow.” Once all the conditions of the escrow have been satisfied, the escrow officer informs you or your agent of the date escrow will close and takes care of the technical and financial details. The final closing papers are disbursed upon close of escrow, when the escrow officer verifies with the County Records Office that the documents have recorded and legal transfer has occurred.
Once a contract becomes binding, you probably will have to arrange for financing. Depending on the terms of the contract, the purchase of the home may be contingent on your being able to get financing at certain terms by a certain date.
Lenders: The Real Estate Professional might provide you a list of lenders. Most home buyers get loans through savings institutions and mortgage bankers and, to a lessor extent, from commercial banks, credit unions, or other private sources. In some cases, the seller may be willing to offer financing. Sellers often can offer a loan to a buyer at a competitive interest rate and attractive terms. Check on specifics.
Types of loans: In general, three broad categories of loans are available.
- Private versus government loans – Most mortgage loans are made by savings institutions, banks and mortgage companies. On government (FHA and VA) loans, the government does not actually loan the money but rather guarantees (or insures) to repay the lender if you default for some reason. Generally, a lender will require you to buy mortgage insurance, particularly if you make a low down payment. This insurance may be paid at closing or added to the loan amount. VA loans require no mortgage insurance, but only qualified veterans may apply for them. Mortgage insurance protects the lender, to a degree, in the event of default. Government loans have important advantages – they generally require a lower down payment than conventional loans and often have a lower interest rate or points. One the down side, government loans limit the amount you can borrow, often take longer to process, and sometimes have higher closing costs.
- Fixed rate versus adjustable rate – On a fixed rate mortgage, the interest rate stays the same over the life of the loan, usually 15 or 30 years. That means your payment will not change except for adjustments for taxes and insurance. Adjustable rate mortgages go by a variety of names, but basically these loans have interest rates or monthly payments that can go up or down over time. These mortgages typically start out with a lower interest rate, lower monthly payments, and lower fees and points than fixed rate mortgages. They often appeal to first-time home buyers, younger couples who expect their incomes to grow in the coming years, and people who might not have much cash for down payment and closing costs. If you consider an adjustable rate mortgage, ask the lender to explain the terms fully. Ask about the interest rate cap; the maximum rate you will be charged no matter how high rates go in the market. Don’t confuse rate cap with payment cap. When the payment is not enough to cover interest, the excess interest is added to your principal balance, so your debt increases instead of decreases. Also ask about the index that will be used to calculate future interest rates and how index charges will affect your mortgage.
- Assumable versus new loan – Some loans, particularly FHA and VA loans as well as some adjustable rate mortgages, are assumable. That means a buyer can assume an existing loan usually on the same terms as the previous owner. Assuming a loan may save some costs and time. As the buyer, you may pay the lender a fee at closing for processing the assumption.
The true price of financing: When shopping for a loan, don’t judge the loan by the interest rate alone. Compare several items in the entire loan package, including:
- Points on a low-interest-rate loan can be double those for a loan with a higher interest rate, causing you to pay more up front and in cash.
- Total fees charged by the lender. Some lenders will absorb the cost of many services, while other do not, so ask in advance.
- Term. In general, the longer the life of the loan and the more fixed the payment, the more you can expect to pay over the life of the loan. For example, a 30-year, fixed-rate loan will cost more in interest than a 15-year, fixed-rate loan.
- Penalties. Ask what penalties will be charged if you pay off the note early. A prepayment clause could require you to pay a penalty if you pay off the loan early, such as refinancing the loan at a later time.
Loan approval process: When you apply for a loan, the lender will ask about your finances. You will already have most of the facts and figures in the financial information you compiled earlier. The process can take several weeks.
From the lender’s viewpoint, approving the loan is only part of the risk; the other part is the property itself. The lender may require an appraisal to verify that the home is worth the loan as well as a physical survey to discover any encroachments on the property. Repairs may be required. Insurance must be purchased. Verification of employment, deposits, and other matters must be obtained. Loan documentation and conveyances instruments must be drawn and approved. In addition, the title company must research the title and arrange for paying off any liens, taxes, and other costs. All these conditions and other conditions must be satisfied before a transaction can close.
Hazard insurance: As another protection, the lender may require insurance protecting the home against hazards such as fire and storms. (Flood insurance will most likely be required if the house is in the flood plain and would be a separate policy.) Hazard insurance may be included in a homeowner’s policy that covers other risks such as theft and liability. Even if not required by a lender, it is probably a good idea for you to seriously consider all types of insurance. Discuss these issues with your insurance agent.
Find the Right Mortgage
Time spent shopping for a mortgage is time well spent. Before you rule out one loan or another, give some thought to your particular needs and wishes. Pre-qualifying before house hunting puts you ahead of the game. You already know the standard of mortgages for which you qualify. The message is simple: Shop for a loan, not a lender. Hunt for the best loan – interest rate, points, processing costs, etc. Don’t pay much attention to who’s originating the loan or where it is.
First, you should review the major kinds of mortgages you may encounter. This list doesn’t explain them all, but it does contain those you will most likely see.
Fixed-Rate Mortgage (FRM): This is the standard mortgage model. It is the oldest and most easily understood type of mortgage. Its primary attraction is that the interest rate and the amount of payment remain fixed for the life of the loan, typically either 15 or 30 years. However, if rates fall, the holder cannot benefit from the new, lower rate except by refinancing.
Adjustable-Rate Mortgage (ARM): With this kind of mortgage, the interest rate you pay rises and falls along with other rates charged throughout the economy. Therefore, you, the borrower, assume the risk of rising rates, and you stand to benefit should rates fall.
An essential question to ask about an ARM is whether there are limits on how much your rate can be raised, both at each review and over the whole term of the loan. Without limits, known as “caps,” you’ll have no way to predict how much your rate (and thus your monthly payments) might change.
Convertible Option: FRM and ARM represent the primary options available to home buyers today. The convertible mortgage represents something of a compromise between the two. It is designed for those who want the advantages of the ARM, but also want to limit the risk of rising rates. Under this arrangement, the buyer starts out with an ARM, but has the option of converting to a FRM at specified points during the loan term. You may want to ask the lender these questions: When can you convert? How often can you consider the option? Are there any up-front fees involved? Will you have to pay more for an ARM with the conversion feature than for an ARM without it? Are there additional fees due if and when you decide to convert? Find out the lender’s conversion rate.
Graduated Payment Mortgage (GPM): A fixed-rate GPM starts out with low payments, usually below that of a fixed-rate and possibly that of an ARM, but rise gradually (usually over five to ten years), then level off for the remaining years of the loan.
Growing-Equity Mortgage (GEM): This option is designed for borrowers who want to pay off their mortgage as soon as possible. Therefore, the interest rate remains fixed, but the amount of the monthly payment increases according to a prearranged schedule, with the higher payments going to reduce the principal balance. This mortgage can be appealing to someone who is expecting regular income growth and wants to build equity quickly.
Fifteen-Year Mortgage: Like the GEM, the fifteen-year mortgage enables borrowers to repay their loan more quickly, which means they build equity faster and pay less interest over the life of the mortgage.
Biweekly Mortgage: Another option for people who want to repay their loans sooner is the biweekly mortgage. Instead of making a single mortgage payment each month, borrowers who choose this option make two equal payments monthly.
Federal Housing Administration Insured Loans (FHA): Should one fail to pay, FHA insures mortgage loans made by approved lending institutions. The FHA insures a variety of mortgages, including FRMs, ARMs, GEMs and GPMs. Down payments are low – 5 percent or less. The FHA doesn’t set the interest rate on loans it insures, so you’ll need to shop around for the best rate.
The FHA limits the amount it will insure to whichever is less: 95 percent of the local average home price or 75 percent of the loan limit set by the Federal Home Loan Mortgage Corporation, a large buyer and reseller of mortgages.
Veterans Administration Guaranteed Loans (VA): VA loans have most of the advantages of FHA loans, and then some, but they also have eligibility restrictions. They are available only to veterans of the armed services, those currently in the service and their spouses. VA loans are typically half a percent or more below market rates, and they can be obtained with no money down.
Home Owner Tips
You’ve done it. You’ve bought a home and now own part of The Dream. In the process you’ve also acquired many responsibilities and concerns. There are mortgage payments to make, records to keep and maintenance work to complete. Below are a few tips for the new owner.
Mortgage payments Every month you’ll receive a statement from your lender reminding you that your mortgage payment is due, or, if you have a coupon book, you’ll have to remember to send your payment on time.
Some lenders can automatically deduct monthly payments from your checking account. This saves time and postage costs. It can also prevent the possibility of missing a payment. Ask your lender about this service.
Furnishing and renovating: You’ve just moved in. Most of your belongings are still in boxes. But you’ve decided the first thing you want to do is redo the first-floor bathroom, buy new furniture for the living room and strip the wallpaper from every wall in the house.
Stop. Put your hands in your pockets, seal your wallet, tie yourself to a chair. Don’t do anything major right away.
Acquiring a home requires some adjustment. Your mortgage payment may be higher than the rent you’ve been paying, so give yourself time to get used to the new cash regimen. Too many new buyers realize too late that they had no idea how much it costs to run a home.
The message here is simple common sense. Go for a slow, smooth transition. You’ll probably be living in this house for a good while; don’t try to do everything at once, even if you can afford it.
Papers to keep: Keep a copy of every document you signed at the closing. It’s especially important to keep a copy of your settlement form. It will be useful when you file taxes and if you sell your home. For example, the real estate taxes and loan discount points you paid as part of your closing costs are tax deductible. So, when you file taxes, refer to the settlement form to get these amounts.
In addition to the closing documents, keep all insurance records, such as homeowners and title insurance. You would need to have access to your homeowners policy if, for example, someone were to sue you because they were injured on your property. You would refer to your title insurance policy if you were to find a flaw in the title after you bought the house.
It’s a good idea to keep these important records in a safe place. You may want to store them in a safety deposit box or a bank vault in addition to keeping a copy at home.
Home maintenance: Your mortgage requires you adequately maintain your property and not allow it to deteriorate. As a homeowner, you can’t afford to sit back and postpone maintenance. You can extend the life of appliances and fixtures and avoid expensive repairs by performing routine maintenance yourself.
It’s a good idea to set up a budget for your home’s regular maintenance and unexpected repairs. You may want to budget 1 percent of the purchase price of your house to cover annual maintenance and repairs. You also may want to stick to a regular savings plan to cover essential bills, emergency repairs and large, periodic expenses such as property taxes and homeowners insurance.
How Much Can You Barrow?
How much you can borrow will depend on your income, down payment, job stability, existing debts, credit references and payment history. Lenders usually use the following two qualifying guidelines to decide how much of a loan you can manage.
Your monthly housing expenses: Mortgage payment, property taxes, insurance, etc. These expenses should be no more than 28 percent of your monthly gross income.
Your monthly living expenses and any long-term debts: Utilities, car and school loan, child support, health and car insurance, etc. These expenses should be no more than 36 percent of your monthly gross income.
How do I obtain title insurance and what does it cost?
Let the title company, attorney or agent handling the closing of your property know that you want to purchase an Owner’s Title Insurance Policy. When choosing a title insurer, look for a company with experience, as well as the financial strength to protect you. In most states, the insurance commission or some other governmental body controls the premiums for title insurance policies. You only pay the premium once. The cost depends upon the purchase price of the property, and your policy amount must be equal to the purchase price.
How long does my coverage last?
Once purchased, title insurance remains in effect for as long as you own your property. Title insurance adds security and peace of mind to home ownership.
What You Want/Need
Here are some suggestions to help you prepare for your search.
Needs and wants list: Make a list of your needs and wants. Do you need an extra bathroom, a garage, a fenced backyard, lower utility bills? Do you want a fireplace, a short drive to work, a lakeside view, or maybe minimal yard work?
Once your list is made, go back over it and decide what is most important to your lifestyle. It may be privacy, creativity, or recreation. Decide which items are musts and which you are willing to give up. Assign each item a priority so that you will know what to look for as you begin house hunting.
Location: Deciding where you want to live may be the single most important factor in choosing a home. Location affects your day-to-day living. Location to employment centers, shopping centers, schools, major traffic arteries, and other attractions are important. Evaluate location carefully. Location of a property is one of the most significant influences on value.
Your choice of location may be limited somewhat by the price you can afford. Even so, make sure you consider such things as:
- Prices of properties and property taxes.
- Distance to work, schools, shopping, and entertainment.
- Proposed changes in land use such as commercial shopping centers and roads, and potential hazards such as flooding and noise from a nearby airport or highways.
Type of home and lot: A single-family detached home is attractive to a lot of people because it typically provides more living space and land area than other types of living units. Typically the detached structure permits you greater freedom (less restrictions) on remodeling, expanding, painting, and altering the appearances of the structure.
If you don’t like spending leisure time on yard work, consider garden or patio homes. These homes are set on small lots. Many garden home developments share common garden areas. A condominium is another option. Condos and patio homes often offer shared greenbelts or membership in private recreational facilities such as swimming, golf, and tennis.
New vs. older homes: In selecting the type of home you want, consider new versus pre-owned homes. Pre-owned homes usually have established yards, and usually the neighborhood or subdivision is built-out. On the other hand, older homes may require more maintenance and need some repairs.
New homes are not without problems. Although they require less maintenance in the first few years, you may have to put in landscaping and call the builder back to correct faults. If buildings are still active in area, you may have to endure nearby construction.
Finally, consider size and style. You may already have in mind a wood-and-glass contemporary lodge with sun decks or a two-story Victorian mansion with a cozy attic. Or you won’t know what you like until you see it. Either way, your Real Estate Professional will listen to your preferences and help you find the right home for you.
Art of Negotiation
Everything is negotiable when buying a house. For some reason, most buyers either don’t believe it or don’t like it. Here’s a partial list of what’s negotiable when you buy a home:
- Closing costs (except where specified by financing or law)
- Occupancy (When can you get the key and move in?)
- Painting (Will the seller repaint a portion of or the entire house?)
- Repairs (Will the seller repair the roof, plumbing, windows, etc., and what kind and quality of repairs will be made?)
- Yard (Will the seller remove unwanted trees, bushes – put in desired landscaping?)
- Fixtures (Which lights, fans, appliances, etc. stay and which go?)
- Wall coverings (Do the drapes stay or go?)
- Furniture (Will the seller include certain pieces?)
- 11. Prepaid taxes and insurance (Will the seller credit you with these?)
Negotiation gives the buyer incredible power in making a favorable transaction. It can also place him or her in a position of immense weakness. Negotiation can determine whether you get the home of your dreams…or whether those dreams end up being a nightmare.
Ultimately, how you fare when buying a home is going to be a direct result of your knowledge. The more you know, the better position you’ll be in to negotiate.
When a buyer makes an offer to purchase your home, your Real Estate Professional will contact you promptly. The Real Estate Professional will scrutinize the document, review it with you carefully, and answer your questions. The written offer is important because it lays out all the terms of the proposed transaction and will become a binding contract if you sign it. The offer states the price the buyer is willing to pay and the financing terms, such as assuming your loan or arranging a new loan.
The offer may be contingent on the buyer’s selling a home first, or obtaining an inspection. Ask the Real Estate Professional how these terms affect you and whether the offer is reasonable and in line with the market. The offer describes the property, states who pays for which closing costs, and specifies dates of closing and possession. Along with making the offer, the buyer may place some earnest money with the escrow agent as a sign of good faith. The earnest money will be kept in an escrow account and applied to the buyer’s down payment or closing costs when the sale closes.
Your options: In reviewing the offer, you have three options: accept, reject, or make a counteroffer. A counteroffer is a rejection of a buyer’s offer with a simultaneous offer from you to the buyer. In making your decision, carefully review the figures compiled earlier to determine your net proceeds. Because the terms and estimated closing costs may be quite different from earlier calculations, you will want to discuss the possibilities with your Real Estate Professional. You are also encouraged to seek the advice of an attorney and a tax adviser.
Seller’s Disclosure: In most residential sales, a seller will deliver a Seller’s Disclosure Notice to a buyer on or before the effective date of a contract to purchase the property. The notice is required by law to be delivered. It provides important information about the seller’s knowledge of the condition of the property. Complete the notice to your best knowledge and belief. Your Real Estate Professional will most likely ask that you complete the notice at the time the listing is first taken. Copies of the completed notice will be made available to the prospects looking at your property.
Lead-Based Paint Disclosure: If your property was built before 1978, federal law requires that before a buyer is obligated under a contract to buy the property, the seller shall:
- Provide the buyer with a lead hazard information pamphlet (as prescribed by EPA);
- Disclose the presence of any known lead-based paint or hazard;
- Provide the buyer with a lead hazard evaluation report or records available to the seller; and
- Permit the buyer to conduct a risk assessment or inspection for the presence of lead-based paint or hazards.
A contract for the sale of property built before 1978 must contain a statutorily prescribed Lead Warning Statement to the buyer. Your Real Estate Professional will provide you with the forms necessary to comply with their law and will suggest procedures to follow in order to comply.
Accepting the offer: Once you and the buyer agree on terms and sign the contract, the buyer will generally have to find a lender and apply for a loan. Your Real Estate Professional may monitor the loan process, which could last several weeks. During this time, your Real Estate Professional will also be busy coordinating other arrangements to prepare for the final sale.
Title search: As part of the process, the title company may order a survey of your property and research the title to your home, making sure the chain of title is clear. Clearing the title may require paying off liens – that is, any monetary claims – against your property. Examples are mechanic’s liens, unpaid state and federal tax liens, court judgments, and probate considerations (if a co-owner has died). The product of the title search can be in the form of title insurance, abstract of title, or certificate of title, depending on what is commonly used in your area.
Inspection and repairs: If the buyer requires inspections of your home, your Real Estate Professional may coordinate the scheduling of inspectors. A buyer may hire an inspector to review many items in the property such as the structural components, mechanical items, electrical systems and plumbing systems. The inspector will report to the buyer the items that the inspector finds to be in need of repair. Most likely the buyer will provide a copy of the inspection report to you and may ask you to complete certain repairs. Do not be surprised when the inspection notes some items in need of repair. An inspector is trained to see items and defects that are not obvious to you and your Real Estate Professional. No matter how new or well maintained a home is, an inspector may very well find some items in need of repair.
About one month away from your move, you’ll want a detailed checklist to make sure nothing is forgotten.
Four weeks to go:
- Call moving companies for a free estimate. Cost will vary depending on distance, weight and optional services.
- Look through your house to determine items to be discarded or donated to charity. Have a garage sale!
- Inform schools of transfer. Make arrangements for enrollment/registration in new schools if necessary.
- Most homeowner’s policies do not provide adequate coverage for moving. Check with your agent and consider purchasing additional coverage from a moving company.
- Begin collecting boxes with covers if you plan to pack your belongings. You can purchase packing materials through moving companies or contact local grocery stores for extra boxes. Be sure to stock up on packing tape!
- Begin consuming perishable and frozen food items to minimize waste.
Three weeks to go:
- Begin packing!
- Notify the post office of your new address and send change of address cards to friends, family, subscriptions and any billing companies.
- 3. Make necessary travel arrangements including interim housing and car rental. Be sure to record confirmation numbers.
- Collect medical records and prescriptions from physicians. Ask for recommendations for doctors in your new area.
- Place legal, medical and insurance records in a safe and accessible place.
Two weeks to go:
- Arrange to disconnect utilities/services in your current residence and coordinate installation of utilities/services in your new home.
- Close/transfer bank accounts and open accounts in your new city.
- Take pets to the vet for immunizations. Ask for advice on moving animals.
- Draw a map of your new home and where the furniture will be arranged.
- Return library books and any borrowed items.
- Be sure to cancel newspaper subscriptions and/or any special services you have (i.e., landscaping/lawn service, snow plow, etc.).
One week to go:
- Prepare car for the trip. Check the oil, tires, brakes, etc.
- Drain water from hoses.
- Drain gasoline and oil from any lawn or power equipment.
- Remember to pick up items sent to the cleaners or for repairs.
- Defrost and clean out refrigerator
- Pack your luggage and separate any items you will need in the first days in your new home (i.e., a current telephone directory – you may need to refer to it for calls to residents or businesses in your former hometown). Label these boxes “Load Last.”
- Reconfirm travel arrangements.
- Reserve ample parking space for the movers and provide clear paths inside the house.
The big day:
- Be on hand to answer any questions.
- Go over your inventory with the driver.
- Be sure to point out all FRAGILE items to the movers.
- Check, double check and triple check to see if anything is left behind!
- Do not leave the house until the movers are gone.
A Few More Moving Thoughts
Moving your computer: Make copies of all your files and software. If possible, pack your computer, monitor, and printer in their original boxes. If not, ask a moving company for boxes made especially for computers.
Packing supplies: Have 1.5″ packing tape, thick markers, packing pellets, scissors, labels, tissue paper, newspaper and blankets on hand.
Inventory: Review inventory list.
Pack photographs between sheets and blankets in boxes for added protection.
At your destination consider hooking up the TV and VCR to occupy children until the truck is unloaded.
Enjoy your new home!
Role of the Title Company
Now that you’ve decided to buy a home, what happens between now and the time you legally own it? The next step is to obtain title for the property from the title company. A title gives the owner the right to possess and use the property. But before receiving title, the title company will need to complete the following:
Earnest money: To show the seller and his agent you are a serious buyer, you will be asked to give the title company a deposit called earnest money. If the sale goes through, the earnest money is applied toward the down payment. If the sale falls through, the earnest money will not be given back unless it is stated in the offer to purchase that it is refundable.
Title search: A title search is a thorough check of the records concerning the property. It is performed to verify the seller’s right to change ownership. A title search will uncover any demands, faults, liens and other privileges or restrictions on the property.
Document preparation: Appropriate forms are prepared for settlement.
Settlement: Many events happen during settlement. The seller signs the deed, the buyer signs the new mortgage, the old loan is paid off and the new loan is established. The seller, real estate professionals, attorneys, surveyors and others performing services for the parties are paid. Title insurance policies are then delivered to the buyer and their lender.
What to Offer
A Real Estate Professional can help you find your perfect home, but only you can decide how much you are willing to offer for it. The Real Estate Professional can supply you with information about the selling prices and marketing time of other houses in the area.
Once you have determined the amount you are willing to offer, the Real Estate Professional will help you prepare a written offer. In most transactions you will offer to deposit earnest money with the escrow agent. Earnest money manifests your sincerity in making a reasonable offer and abiding by the terms of the written contract.
Contract forms: Your Real Estate Professional will help you prepare an offer using standard forms. The offer, if accepted, will become a binding contract. This document is the most important paper you will sign because it lays out all the terms of the transaction. It will contain such things as:
- A legal description of the property.
- Any property that will be transferred with the home (blinds, curtains, fireplace screens, etc.)
- The price.
- Financing conditions and contingencies.
- Amount of earnest money deposit.
- Name of the escrow agent and title company.
- Pro ration of insurance, taxes, and interest.
- Fees to be paid and who pays for which.
- Rights to inspect the property and for repairs to be made.
- Dates of closing and possession.
- What happens if either party defaults on the contract.
Inspections and warranties: Before signing the contract, take precautions to protect yourself against unseen defects in the home. An inspection by a qualified inspector or other professional can provide you with unbiased opinions about the condition of components and systems in the property such as the foundation, mechanical systems, plumbing systems, appliances, etc.
If you can, accompany the inspector at the time the inspection is conducted. When ordering the inspection, ask the inspector the approximate time needed to complete the inspection so you can reserve sufficient time from your schedule. Be sure to ask the inspector to detail the scope of the inspection. Not every inspector inspects every component in a house. For example, does the inspector inspect foundations, air conditioning and heating units, roofs, swimming pools, septic tanks, etc.? The cost of home inspection depends on the size of the home, but the price could prove to be worth it. It’s also a good idea to get a termite and other wood destroying insect inspection.
You may also want to investigate the possibility of buying a residential service contract. Such a contract is an agreement with a residential service company that certain items will be repaired by the company if such items fail to function after you move in. If you buy a new home, the builder may offer a warranty as well. Whether you buy a residential service contract or receive any other warranty, find out how claims will be processed and how any necessary repairs will be made.
Seller’s options: The Real Estate Professional working with you will present the contract to the seller’s agent or seller. The seller has three options: accept, reject or make a counter offer. A counter offer is a rejection of the offer with a simultaneous offer from the seller to the buyer. If a seller makes a counter offer to you, you then have three options: accept, reject, or make another counter offer. Whoever makes an offer or counter offer is giving the power of acceptance to the recipient of the offer or counter offer.
Binding contract: Once you and the seller unequivocally agree to the written terms and both of you sign, the document becomes a binding contract.
As part of the contract you may have the right to have the property inspected and certain repairs may be required to be completed. Be sure that you pay close attention as to when certain items must be completed. Otherwise, you may waive some contractual rights. For example, the contract may provide for you to deliver a copy of the inspection report to the seller within a specified time and to deliver a list of the items you require to be repaired. If you fail to provide the information within the specified time, the contract may provide that you waived certain rights.
The contract may also set out other contingencies that have to be satisfied. We cannot address all conditions and contingencies. Read the contract carefully, know its terms and comply with its requirements timely.
If repairs are required, the contract will specify who will bear the cost of the repairs, who will arrange for the repairs, and when the repairs must be made. Before you close, be sure that the condition of the property meets the required condition specified in the contract.
Traditional Loan Process
You’ve found the mortgage you want and you’re ready for the next step – the loan application. The process costs anywhere from $100 to $500 and is usually non-refundable. Lenders levy the fee to cover the costs of running credit reports and filling out mortgage-insurance applications.
What to Expect
You will need raw material, and lots of it, for the application: Income and balance-sheet figures and evidence, copies of past income-tax returns and the title to your car. Take the paperwork you gathered during the pre-qualifying process with you.
Be prepared to provide the name and phone number of someone who can verify your financial information: Most likely your employer’s personnel office. If you have substantial non-salary income from investments, you’ll be asked to substantiate this through an accountant, stockbroker, trust officer or similar source.
Application forms are usually filled out during the interview: With the help of a loan officer, but you could fill them out at home and return them.
In addition to the application fee, you may be asked to pay a “loan origination fee” or “prepaid point”: Typically 1 percent of the loan amount – when you apply, before approval is made.
Find out what will happen to your origination fee if the lender decides not to approve your loan: Will the 1 percent origination fee be refunded? Get the answer in writing before you pay.
From the time you submit the completed loan application – and appraisal and credit reports are received – the lender has up to 30 days to approve or reject your request and inform you of the decision. Make sure you haven’t been forgotten. During the process, remind the loan officer of your settlement date and check on the progress.
Put it in Writing
Put negotiations in writing. Don’t reveal your strategy, and don’t make oral offers. You want to buy the house, but don’t hand over money until you’re sure the seller is legally capable of conveying a good title and meeting other conditions. The seller, in turn, doesn’t want to deliver the deed until you’ve paid for the property. Now what? Present the seller with a written contract setting out the commitments and promises that you and the seller need to agree on and fulfill to make the sale. A well-drawn contract should protect all parties.
The first contract you submit should be comprehensive; everything of any importance should be included. Once it is accepted by the seller, it may be too late to add or change anything. Your contract should include:
- Offering price
- Down payment
- Legal description of the property
- Method of conveying the title
- Fees to be paid and who will pay them
- Amount of deposit
- Conditions under which the seller and buyer can void the contract
- The settlement date
- Financing arrangements
- A list of appliances, furnishings and personal property being sold with the home
An appraisal of real estate is the valuation of the rights of ownership. The appraiser must define the rights he intends to appraise.
The appraiser does not create value, the appraiser interprets the market to arrive at a value estimate. As the appraiser compiles data pertinent to a report, consideration must be given to the site and amenities as well as the physical condition of the property. An appraiser may spend only a short time inspecting the property, however, this is only the beginning.
Considerable research and collection of general and specific data must be accomplished before the appraiser can arrive at a final opinion of value.
Due to the many types of value, such as Fair Market Value, Insurance Value, Tax Value and Value In Use, the need to precisely define the purpose of the appraisal is essential.
An appraisal is an opinion of value or the act or process of estimating value. This opinion or estimate is derived by using three common approaches, all derived from the market.
Cost Approach: to value is what it would cost to replace or reproduce the improvements as of the date of the appraisal, less the Physical Deterioration, the Functional Obsolescence and the Economic Obsolescence. The remainder is added to the Land Value.
Comparison Approach: to value makes use of other “bench mark” properties of similar size, quality and location that have been recently sold. A comparison is made to the subject property.
Income Approach: to value is of primary importance in ascertaining the value of income producing properties and has little weight in residential type properties. This approach provides an objective estimate of what a prudent investor would pay based upon the net income the property produces. Then, after thorough analysis of all general and specific data gathered from the market, a final estimate or opinion of value is correlated.
Why should appraisals be ordered?
To settle an estate: Taxing authorities such as the IRS often require appraisals to establish the value of an estate when a death occurs. Generally, the survivors want a conservative value estimate that limits their tax liability as much as possible. Most estate appraisals are ordered by attorneys, not by the survivors.
To establish the replacement cost for insurance: Appraisals obtained for establishing the loss risk in case of fire are often limited to providing an estimate of the replacement or reproduction cost of the improvements. The insurable value may not be representative of market value and usually does not include the value of the land. Insurance agents may order appraisals when their standard cost service manuals are not adaptable to an atypical home or structure. Or property owners may order appraisals to contest the annual appreciation increases mandated by some insurance companies, especially when the increase in the insurance coverage results in an unrealistic Premium.
To establish just compensation for condemnation: The appraiser may represent either the landowner or the condemning authority. Usually, the government entity that needs the land for public use orders an appraisal and offers to purchase the land for the value indicated by the appraisal. If the landowner feels that the amount offered by the condemning authority is not enough, then the landowner may also order an appraisal. If the parties cannot agree on a price, then the matter will be settled in court with each appraiser testifying on behalf of their respective value estimates. The appraisers are not advocates for their client; they are expert witnesses trying to support their value estimates.
Often landowners do not consider ordering another appraisal from an appraiser of their choice. Usually, they try to settle with the authority by negotiation rather than incur the expense of an appraisal. It is obvious that the landowner’s negotiating position would be enhanced if a supporting professional appraisal report were available.
To contest high property taxes: If property owners feel that their property is assessed too high, then they may order an appraisal from a qualified appraiser to contest the assessment. In certain parts of the country this practice is common, but many property owners are not aware that this avenue of reducing their tax burden is available. The return on investment is easy to perceive when the cost of an appraisal is compared to several years of lower taxes. Sometimes these assignments include an appearance in front of the equalization board to argue the landowner’s case. The appraiser, however, must be careful not to base the appraisal fee on the dollar amount of the appraised value, which could be a violation of the USPAP.
Why Order an Appraisal
There are many reasons to obtain an appraisal. The most common reason is for Real Estate and Mortgage Transactions, but we have compiled a list of other reasons you may need to order an appraisal:
- To obtain a loan.
- To lower your tax burden.
- To establish the replacement cost of insurance.
- To contest high property taxes.
- To settle an estate.
- To help you make one of the largest financial decisions in your life.
- To provide a negotiating tool when purchasing real estate.
- To determine a reasonable price when selling real estate.
- To protect your rights in a condemnation case.
- To allow you to obtain a qualified appraisal report.
- Because a government agency such as the IRS requires it.
- You are involved in a lawsuit.
Home’s Market Value
In the real world, very few individuals order appraisal reports to establish an offering price or to substantiate a purchase price. At the point that an offer to purchase (in a typical residential transaction) is made, the price has been set by other parties, not the purchaser. The price has been determined by the seller, who wishes to obtain the highest price possible, or the agent, who receives a percentage of the price as compensation and often represents the seller in the transaction.
The real estate agent will typically perform a comparative market analysis (CMA). The appraisal laws in most states allow real estate agents to perform CMAs without an appraiser’s license or certification. A CMA is a necessary part of the agent’s preparation for a listing and consists of examining sales of properties in the area to arrive at a listing price. The reliability of the CMA depends upon the agent’s experience and the characteristics of the property. The agent will suggest a selling price to the seller based upon the analysis. However, neither the seller nor the agent are bound by the results of the analysis, and the agent is not required to follow any formal procedure in completing the CMA. If a seller wishes to list the property at a price higher than the price suggested by the agent, then the agent may be forced to accept the listing at that price or risk losing a commission.
Purchasers believe that they are getting a good deal if they make an offer lower than the listed price. But how far above the market value was the property listed? 10%, 15%, maybe even 20% above the fair market value? A negotiated price of 10% less than the listed price on a property that was listed at 20% above its value is not a bargain. The agent cannot tell the purchaser that the offered price is higher than the value, or even higher than their own CMA. In most states, they must submit the offer to the seller.
The seller of a property may want to order an appraisal before listing the property. Of course, the cost of the appraisal is always a deterrent, especially if the seller knows that a buyer will pay for it when applying for a loan. But the appraisal is often justified. The seller could lose a sale if the property appraised for less than the sale price when appraised by the appraiser.
Appraisal To Obtain Loan
Usually, individuals applying for a loan are only interested in obtaining the loan and unfortunately are not worried about the prudence of buying the property at the agreed price. In fact, many purchasers will try to encourage appraisers to increase the appraised value so that they can purchase the home regardless of its value.
The majority of real estate appraisals are requested by mortgage companies to validate the property’s purchase price for loan purposes. Except for periods of very low interest rates when everyone is refinancing, most loans are for the purchase of real estate and ordered after a sale price is negotiated. Purchasers mistakenly assume that mortgage companies are looking after their interests in the purchase transaction.
The law states that if the mortgage company orders the appraisal, the appraiser is responsible only to the mortgage company. We expect mortgage companies to be prudent and they should be, but being prudent is protecting their interest, not necessarily the purchaser’s. The mortgage company’s position:
- It has two sources of repayment: the purchaser’s income and the property.
- The responsibility to repay the loan is not based upon the property’s value, so the purchaser is obligated to pay the note even if the property value declines to zero.
- The loan may be insured or guaranteed by a government agency.
- The government does not promise to pay the purchaser’s debt if the property value is wrong.
- If the loan is greater than 80% of the value, a portion of the loan may be insured by a private mortgage insurer.
- There is no decrease in risk for the purchaser regardless of the loan-to-value ratio. The investment by the purchaser is the same, a mixture of personal cash and a loan that must be repaid.
Helping the Appraiser
Once you have selected an appraiser, be prepared to answer questions and provide requested information.
- What is the purpose of the appraisal?
- When is the required completion date of the appraisal?
- Is property listed for sale and if so, for how much and with whom?
- Is there a mortgage? If so, with whom, when placed, for how much, type of mortgage [FHA, VA etc.], interest rate, and any other types of financing.
- What personal property, such as appliances, are included ?
- If it is an income-producing property, provide a breakdown of income and expenses for the last year or two and a copy of leases.
- Provide a copy of deed, survey, purchase agreement or other pertinent papers pertaining to the property.
- Provide a copy of current real estate tax bill, statement of special assessments, balance owing and on what [sewer, water, etc.].
Mortgages and Credit Reports
Many home buyers are very worried about how their credit report will affect their ability to buy a home. We even heard one story that an applicant was denied a mortgage because he had returned a rented videotape late!
Of course, that could never happen. Most people will not need to worry about the effects of their credit history during the mortgage process. However, you can be better prepared if you get a copy of your credit report to review before you apply for your mortgage. That way, if there are any errors you can take steps to correct them before you make your application.
If you have had credit problems, be prepared to discuss them honestly with a mortgage professional and come to your application meeting with a written explanation. Responsible mortgage professionals know there can be legitimate reasons for credit problems, such as unemployment, illness or other financial difficulties. If you had a problem that’s been corrected, and your payments have been on time for a year or more, your credit may be considered satisfactory.
ABC’s of Mortgage Credit
The mortgage industry tends to create its own language and credit rating is no exception. BC Mortgage lending gets its name from the grading of one’s credit based on such things such as payment history, amount of debt payments, bankruptcies, equity position, credit scores, etc.
We have compiled a guide to help you estimate your credit grade. This is only a guide as many companies have exceptions that may result in more strict or more lenient guidelines.
A General Guide to Credit Grades
|Credit Score||Debt Ratio||Max LTV||Morgage||Revolve||Install|
A+ None Allowed Within 10 years
A- Minimum 2 Years, Re-Established Credit
B Minimum 2 Years, Some Lates
C Minimum 1 Year
E Possible Current
The figures shown here are estimates. When trying to figure your credit grade, keep in mind the following principles:
Other Things Being Equal: When your have derogatory credit, all of the other aspects of the loan need to be in order. Equity, stability, income, documentation, assets, etc. play a larger role in the approval decision.
Worst Case Scenario: When determining your grade, various combinations are allowed, but the worst case will push your grade to a lower credit guide. Mortgage Lates and Bankruptcies are the most important.
Going Once, Going Twice: Credit patterns are very important. A high number of recent inquiries and more than a few outstanding loans may signal a problem. A “willingness to pay” is important, thus late payments in the same time period is better than random lates as they signal an effort to pay even after falling behind.
Credit Guide Scoring?
In a nutshell, credit scoring is a statistical method of assessing the credit risk of a loan applicant. The score is a number that rates the likelihood an individual will pay back a loan. The score looks at the following items: past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit, number of inquiries.
Credit scoring will place borrowers in one of three general categories.
First, a borrower with a score 680 and above may be considered an A+ loan. The loan will involve basic underwriting, probably through a “computerized automated underwriting” system and be completed within minutes. Borrowers falling into this category may have a good chance to obtain a lower rate of interest and close their loan within a couple of days.
Second, a score below 680 but above 620 may indicate underwriters will take a closer look at the file in determining potential risks. Borrowers falling into this category may find the process and underwriting time no different than in the past. Supplemental credit documentation and letters of explanation may be required before an underwriting decision is made. Loans within this FICO scoring range may allow borrowers to obtain “A” pricing, but loan closing may still take several days or weeks as it does now.
Third, borrowers with a score below 620 may find themselves locked out of the best loan rates and terms offered. Mortgage professionals may divert these borrowers to alternate funding sources other than FNMA and FHLMC. Borrowers may find the loan terms and conditions less attractive than the “A” loans, and it may take some time before a suitable funding source is located.
As more companies utilize credit scoring, the loan approval and closing time will be compressed for most consumers. In the future, a high FICO score may be your ticket to a speedy and competitively priced mortgage loan.
Credit Reporting Agencies
Equifax PO Box 105873 Atlanta, GA 30348 (800) 685-1111
National Consumer Assistance Center PO Box 2002 Allen, TX 75013 Consumer Credit Questions 888 EXPERIAN (888 397 3742)
Trans-Union PO Box 390 Springfield, PA 19064 (800) 916-8800 (800) 851-2674
How to Correct Errors
You have the right, under the Fair Credit Reporting Act, to dispute the completeness and accuracy of information in your credit file. When a credit reporting agency receives a dispute, it must reinvestigate and record the current status of the disputed items within a “reasonable period of time,” unless it believes the dispute is “frivolous or irrelevant.” If the credit reporting agency cannot verify a disputed item, it must delete it. If your report contains erroneous information, the credit reporting agency must correct it. If an item is incomplete, the credit reporting agency must complete it.
For example, if your file showed that you were late in making payments on accounts, but failed to show that you were no longer delinquent, the credit reporting agency must show that your payments are now current. Or if your file showed an account that belongs only to another person, the credit reporting agency would have to delete it. Also, at your request, the credit reporting agency must send a notice of correction to any report recipient who has checked your file in the past six months.
For those items in your credit profile which you feel deserve further explanation (such as an account that was paid late due to the loss of job, military call-up, or unexpected medical bills), you may send a brief statement to the appropriate credit reporting agency. The information will be placed on your credit profile and will be disclosed each time your credit profile is accessed.
A Credit Profile refers to a consumer credit file, which is made up of various consumer credit reporting agencies. It is a picture of how you (as an individual) paid back the companies you have borrowed money from, or how you have met other financial obligations.
There are usually five categories of information on a credit profile:
- Identifying Information
- Employment Information
- Credit Information
- Public Record Information
What is NOT included on your on a credit profile:
- Your race
- Your religion
- Your health
- Your driving record
- Your criminal record
- Your political preference
- Your income
Credit Report Access
The Fair Credit Reporting Act (FCRA) outlines specifically who can see your credit profile. Businesses must have a “legitimate business need,” and a “permissible purpose,” as stated in the federal law to obtain your credit file. Otherwise, only you, and only those who you give written permission, can access your credit files. Your neighbors, friends, co-workers, and even your family members cannot have access to your credit profile unless you authorize it. Some examples of those who can access your credit files are:
- Credit grantors
- Collection agencies
- Insurance companies
- Any company that receives a copy of your credit profile will be listed under the “Inquiry” section of your report.
The Fair Credit Reporting Act (FCRA) is the federal law regulating credit reporting companies like Equifax, Experian, and Trans Union. It has been in effect since 1971. A revised FCRA became effective October 1, 1997. This law protects consumers’ rights, such as the right to review and contest information in their credit profiles. It also specifically defines who can access the information in a credit profile, and how you are notified of this activity.
Credit Questions & Answers
Why do we need credit reporting? Credit reporting is needed because it provides the information that helps consumers make purchases, secure loans, pay for college educations, and manage their personal finances. Credit reporting makes it possible for stores to accept your checks, banks to offer credit and debit cards, businesses to market products, and corporations to better manage their operations to benefit the world’s economy.
What is a credit inquiry? An “inquiry” is a listing of the name of a credit grantor, or authorized user who has accessed your credit file. Each inquiry is posted to the credit file so you know who has obtained a copy of it. Credit grantors post an inquiry before offering you a pre-approval credit card application. These are listed as “promotional” inquiries on your credit file because only your name and address were accessed, not your credit history information. They are NOT sent to credit grantors or businesses for reasons of credit reporting. They are listed for your informational purposes only.
What is the Fair Credit Reporting Act? The Fair Credit Reporting Act (FCRA) is the federal law regulating credit reporting companies like Equifax, Esperian, and Trans Union. It has been in effect since 1971. A revised FCRA became effective October 1, 1997. This law protects consumers’ rights, such as the right to review and contest information in their credit profiles. It also specifically defines who can access the information in a credit profile, and how you are notified of this activity. You may obtain a copy the FCRA from the Federal Trade Commission.
How does divorce affect consumer credit? A divorce decree does not supersede the original contract with the creditor, and does not release you from legal responsibility on any accounts. You must contact each creditor individually and seek their legal binding release of your obligation. Only after that release can your credit history be updated accordingly.
Should I use one of those companies that promise to help correct my credit? It’s your choice. However, beware of companies that promise to remove accurate information from your credit file. Accurate information cannot be removed from a credit file. There is nothing they can do for you that you cannot do for yourself by contacting the credit reporting agencies directly. Only time will heal a delinquent credit history.
What if an item on my credit profile is correct, but I disagree with it being reported? For those items in your credit profile which you feel deserve further explanation (such as an account that was paid late due to the loss of job, military call-up, or unexpected medical bills), you may send a brief statement to the appropriate credit reporting agency. The information will be placed on your credit profile and will be disclosed each time your credit profile is accessed.
FICO® scores were developed by Fair Isaac & Company, Inc. for each of the credit repositories. The scores are: (Equifax) Beacon®, (Experian formerly TRW) Experian/FICO and (TransUnion) Empirica®. They are simply repository scores meaning they only consider the information contained in a person’s credit file; they do not consider a persons income, savings or amount of a down payment for a mortgage.
The scores were designed to assess risk. They are useful in directing applications to specific loan programs and to set levels of underwriting, i.e. streamline, traditional or second review. The scores are objective, consistent, accurate and fast.
Many people in the mortgage business are skeptical about the accuracy of FICO scores. Scoring has only been an integral part of the mortgage process in the past few years; however, the scores have been in use since the 1950’s by retail merchants, credit card companies, insurance companies and banks for consumer lending. The data from large scoring projects emphasizes the accuracy, the predictive quality of the scores. Large portfolios have been scored for mortgage servicing and investment groups, and again, they demonstrate that FICO scores work.
The scores were developed from each repository’s database using actual loan performance. A sample of over 750,000 consumers per repository was used. The repositories have each made great strides to increase the accuracy of their respective database through computer technology and internal monitoring. There is a new standard reporting format for credit grantors to use when sending electronic information to the repositories; this is the critical first step to providing accurate data.
The scores use a multiple scorecard design. Each repository uses 10 individual scorecards, and the models at each repository are the same. This increases accuracy and optimizes the predictive variables for each subpopulation. (For example, a borrower with two 30-day late payments will be scored against a population with some minor delinquencies.) This feature may cause a borrower with delinquencies to score in the same range as a borrower without delinquencies. Scorecards are reviewed and updated every twenty-four months.
The actual scoring process is proprietary, and the algorithms are copyrighted. We can share the predictive variables, the portion of the credit file considered and the weight as provided by Fair Isaac.
- Previous credit performance (35%)
- Trade line information specific to payment history
- Current level of indebtedness (30%)
- Current balance compared to the high credit
- Time credit has been in use (15%)
- Opening date
- Types of credit available (15%)
- Installment loans, revolving accounts, debit accounts
- Pursuit of new credit (less than 5%)
FICO has changed the way it factors credit checks, inquiries. These changes should minimize the “negative” effects that aggressive rate shopping or the normal mortgage process can have on a mortgage applicant. In the new Beacon version, the deduping process has been expanded beyond seven days. One variable counts the number of days within 365 days of scoring. If there has not been an inquiry, the deduping mechanism is not activated. If there is a consumer originated inquiry within the past 365 days from mortgage or auto related industries, these inquiries are ignored for the first 30 calendar days from scoring; then, multiple inquiries within the next 14 days are counted as one. Each inquiry will still appear on the credit report.
Scores should not change significantly because the variable in the model using inquiries contributes less than 5% of the predictive power of the model. According to Equifax statisticians, an average of 5% of the credit reports in the Equifax consumer credit reporting database (over 200 million consumer files) will see a change in score due to this. Fewer than 5% of those will see a change significant enough to effect a loan decision.
In order to get a score a borrower must have the following conditions in his/her file:
- No “Deceased” indicator on the credit file
- At least one undisputed trade line that has been updated in the last six months
- One trade line open at least six months
Scores range from 350 (high risk) to 950 (low risk). A scorecard of 660 will be 660 on Beacon 96, Empirica and Experian/FICO if the data on each file is the same. However, each repository is likely to contain different data.
Every score is accompanied by a maximum of four reason codes. Reason codes identify the most significant reason that a consumer did not score higher. They are not red flags. Consumers with scores in the 800 range get reason codes just as consumers with scores in the 500 range. The reason codes may be used in describing to the consumer the reason for adverse action. Scores are not part of the credit file and are not covered by the Fair Credit Reporting Act. Scores, if disclosed to the consumer, must be related to the credit file – using the reason codes – since the score has no meaning in itself; the meaning or risk level is assigned by the lender and the investor.
When applicants have erroneous information reported, document the inaccuracies. The easiest way to do that is to have your credit-reporting agency upgrade the merged in-file to an edited mid-range report or to a Residential Mortgage Credit Report.
What Makes Low Down Payment Loans Possible?
Simply put, mortgage insurance protects the mortgage company against financial loss if a homeowner stops making mortgage payments. Mortgage companies usually require insurance on low down payment loans for protection in the event that the homeowner fails to make his or her payments. When a homeowner fails to make the mortgage payments, a default occurs and the home goes into foreclosure. Both the homeowner and the mortgage insurer lose in a foreclosure. The homeowner loses the house and all of the money put into it. The mortgage insurer will then have to pay the mortgage company’s claim on the defaulted loan.
For this reason, it is crucial that the family buying the home can really afford it, not only at the time it is purchased, but throughout the time period of the loan.
Although the cost of the mortgage insurance is paid by the home buyer, or borrower, the mortgage insurer works directly with the mortgage company. Mortgage insurance is available to commercial banks, savings & loans and mortgage bankers, all of whom offer mortgage loans to home buyers.
Remember that mortgage insurance is not the same as credit life insurance, also called mortgage life insurance. This type of policy repays an outstanding mortgage balance upon the death of the person who took out the insurance policy.
The Secondary Market
The mortgage company’s decision to use mortgage insurance is driven by the requirements of investors in the mortgage market. Because of the losses that could occur, major investors require mortgage insurance on all loans made with low down payments.
The three primary investors in home loans are Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Government National Mortgage Association (Ginnie Mae). By purchasing and selling residential mortgages, Fannie Mae and Freddie Mac help keep money available for homes across the country.
Unlike Fannie Mae and Freddie Mac, Ginnie Mae does not actually buy mortgages. It adds the guarantee of the full faith and credit of the U.S. Government to mortgage securities issued by mortgage companies.
The Two Choices: Government Insurance and Private Insurance
Now that we have explained how mortgage insurance works and why it is necessary, let’s look at the basic kinds of mortgage insurance. Low down payment mortgages can be insured in two ways — through the government or through the private sector. Mortgages backed by the government are insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) or the Farmers Home Administration (FmHA).
Although anyone can apply for FHA insurance, the other two government mortgage guarantee programs are much more targeted. The VA program is limited to qualified, eligible veterans and reservists. This program is very specialized, so contact your mortgage professional for the details. The FmHA insures loans for the construction and purchase of homes in rural communities.
Obtaining conventional financing is the alternative to obtaining a home loan backed by the government. Conventional mortgages are all home loans not guaranteed by the government, including those guaranteed by private mortgage insurers.
Although government and private insurance are based on the same concept of allowing families to get into homes with less cash down, there are many differences between the two. Often, your mortgage professional will play an important role in suggesting and deciding which insurance is selected.
Home buyers must make a down payment of at least 5% of a home’s value to be considered for private mortgage insurance. However, under some special programs, the down payment requirement allows the buyer to use a gift or grant to cover 2% of the 5% down payment required by private mortgage insurers. The gift or grant may come from a friend, relative, community group or other organization.
Private mortgage insurance is available on a wide variety of home loans and there is no pre-set limit on the loan amount. Although differences such as these may affect whether the mortgage company prefers to work with government or conventional mortgages, your mortgage professional will discuss which one would be better for your situation.
With the wide variety of loans available, home buyers have the freedom to choose the type of loan that best suits their needs. Early on in the home buying process, it is a good idea to meet with several companies to compare the types of mortgages they offer and shop for the best price and terms. Best of all, working with a mortgage insurer can be very easy, whether your loan is insured by the FHA or a private mortgage insurance company, because your mortgage professional handles all of the arrangements.
By making lending money to home buyers safer, mortgage insurance helps more families get into homes of their own.
Down Payment Loans and Gifts
Loans and gifts can help with your down payment but you can not use this strategy for all loan programs. The most popular program for this tactic is the Federal Housing Administration or FHA. FHA allows 100% gift funds for your down payment. The gift can be from any relative or can be collected through new innovative programs, like the Bridal Registry where couples receive money into an account that can be used for the down payment.
Another popular tactic, which can be used in a wider range of programs, is to borrow from your 401K program. If you have a 401K program with your employer, you can withdraw without a penalty for your down payment and pay it back over a specified period. There are some drawbacks, the payment will be used in qualifying and your 401K account will not continue to grow as fast. Even with these drawbacks, it is often a smart move if this is your only option.
Down Payment – Grant That Is Never Repaid By The Home Buyer!
There are national non-profit organizations dedicated to assisting home buyers with their down payment and closing costs.
Buyers can receive a free gift under these programs. Gift amounts vary with each program but are generally available in amounts of 3% with some programs, all the way up to $22,500 with others. Buyers never have to repay these gifts.
It’s easy to receive a free gift from these programs, however qualification guidelines do vary with each program. Each program requires that buyers must qualify for any eligible loan program with their lender (there are many programs that qualify).
While this is the ONLY qualifying requirement of some programs, others have requirements such as requiring that the buyer complete a Home Ownership Counseling Course or provide 1% of their own funds into the transaction. In addition some programs have income/asset restrictions, recapture clauses, reserves required, or geographic boundaries. Each program can provide you with their specific requirements and/or limitations
These programs generally participate with FHA, Conforming, and Non-Conforming loan products. Most of these programs do not underwrite the loan or add any cost in the form of points, fees, etc., they simply provide the gift for the down payment and/or closing costs.
These downpayment assistance programs can be used for Single Family (1-4 unit) homes, Manufactured/Modular Homes, Condominiums, Townhouses, Existing or New Construction, Rehab and Non-Conforming.
Qualifying for a Low Down Payment Loan
To be considered for a low down payment loan, you generally need to have:
- Sufficient income to support the monthly mortgage payment
- Enough cash to cover the down payment
- Sufficient cash to cover normal closing costs and related expenses (explained below)
- A good credit background that indicates your payment history or “willingness to pay”
- Sufficient appraisal value, which shows the house is at least equal to the purchase price
- In some instances, a cash reserve equivalent to two monthly mortgage payments
Closing costs, or settlement costs, are paid when the home buyer and the seller meet to exchange the necessary papers for the house to be legally transferred. On the average, closing costs runapproximately 2% to 3% of the house price. This percentage may vary, depending on where you live.
Closing costs include the loan origination fee (if not already paid), points, prepaid homeowner’s insurance, appraisal fee, lawyer’s fee, recording fee, title search and insurance, tax adjustments, agent commissions, mortgage insurance (if you are putting less than 20% down) and other expenses. Your mortgage professional will give you a more exact estimate of your closing costs.
Points are finance charges that are calculated at closing. Each point equals 1% of the loan amount. For example, 2 points on a $100,000 loan equals $2,000. Companies may charge 1, 2 or 3 points in up-front costs in addition to the down payment. The more points you pay, the lower your interest rate will be. In some cases, you may be able to finance the points.
So How Much of a Mortgage Can You Afford?
There are two basic formulas commonly used to determine how much of a mortgage you can reasonably afford. These formulas are called qualifying ratios because they estimate the amount of money you should spend on mortgage payments in relation to your income and other expenses.
It is important to remember that the following ratios may vary and each application is handled on an individual basis, so the guidelines are just that — guidelines. There are many affordability programs, both government and conventional, that have more lenient requirements for low- and moderate-income families.
Many of these programs involve financial counseling for low- and moderate-income people interested in buying a home and in return, offer more lenient requirements.
Generally speaking, to qualify for conventional loans, housing expenses should not exceed 26% to 28% of your gross monthly income. For FHA loans, the ratio is 29% of gross monthly income. Monthly housing costs include the mortgage principal, interest, taxes and insurance, often abbreviated PITI. For example, if your annual income is $30,000, your gross monthly income is $2,500, times 28% = $700. So you would probably qualify for a conventional home loan that requires monthly payments of $700.
Any expenses that extend 11 months or more into the future are termed long-term debt, such as a car loan. Total monthly costs, including PITI and all other long-term debt, should equal no greater than 33% to 36% of your gross monthly income for conventional loans. Using the same example, $2,500 x 36% = $900. So the total of your monthly housing expenses plus any long-term debts each month cannot exceed $900. For FHA the ratio is 41%.
Maximum allowable monthly housing expense 26% – 28% of gross monthly income – Conventional 29% of gross monthly income – FHA
Maximum allowable monthly housing expense and long-term debt 33% – 36% of gross monthly income – Conventional 41% of gross monthly income – FHA
One way to determine how much to spend for housing is to compare your monthly income with monthly long-term obligations and expenses. Use the worksheet, “Evaluating Your Financial Resources,” to determine how much money you can spend on housing. Be sure to only include income you can definitely count on.
When budgeting to buy a home, it is important to allow enough money for additional expenses such as maintenance and insurance costs. If you are purchasing an existing home, gather information such as utility cost averages and maintenance costs from previous owners or tenants to help you better prepare for homeownership.
Homeowner’s insurance or property insurance is another cost you will have to consider. The lending institution holding the mortgage will require insurance in an amount sufficient to cover the loan. However, to protect the full value of your investment, you might want to consider purchasing insurance that provides the full replacement cost if the home is destroyed. Some insurance only provides a fixed dollar amount which may be insufficient to rebuild a badly damaged house.
Down Payment Assistance
The best-kept secret behind the sustained strength of the residential real estate market is the creation of a new pool of buyers who can afford their mortgage payments but lack the cash for a down payment. In the past these potential buyers had little hope of owning a home. Today, thousands of these individuals are becoming homeowners.
According to both HUD and Minneapolis Federal Reserve, the number one barrier to homeownership in the U.S. is the lack of downpayment money. With President Bush’s initiative to increase minority homeownership by 5.5 million by the year 2010, there is an increased need for organizations that can provide assistance through the use of private capital.
Through the use of private capital, the non-profit down-payment industry now makes possible over 17,000 home purchases each month for low to moderate income buyers. Today these Downpayment Assistance Programs (which are not just for 1st time homebuyers) are helping many people live the dream of home ownership.
These organizations are supported through contributions made by home sellers. The donations help to replenish the pool of funds that are used for future buyers. Additionally the non-profits charge a small service fee, the proceeds of which allow them to stay operational.
Buyers are provided with gifts from the non-profits, which can be used towards their downpayment and/or closing costs. These are true gifts that do not need to be repaid. The grants range from 2%-10% of the purchase price of the home. Home sellers typically agree to participate because they believe that they are receiving a fair offer for their home while at the same time they are benefiting from making a donation to a non-profit organization.
Benefits to Home Buyers
- Get into a home.
- Begin building equity.
- Start taking advantage of tax benefits.
- May not have to deplete their entire savings.
Benefits to Home Sellers
- Expose their home to a larger pool of buyers.
- Typically will receive full price offers.
- Sell their home faster.
- Added benefit of making a donation to a non-profit.
The organizations differ slightly with some providing additional benefits for the home buyer. For instance the Home Down-payment Gift Foundation has a program called “Home Mortgage Protection Plus”. This Program covers gift recipient who are enrolled in the Platinum Program against involuntary loss of employment. Should the gift recipient(s) lose their job during their first year of home ownership, the Foundation will provide for up to six months of mortgage payments (maximum of $1800.00 per month in P.I.T.I.) on their behalf.
The non-profits strongly encourage Home Ownership Counseling prior to the home purchase and some provide post-purchase counseling to its gift recipients.
The Gift Programs generally participate with FHA, Conforming, and Non-Conforming Loan Products. The down-payment assistance program can be used for Single Family (1-4 unit) homes, Manufactured/Modular Homes, Condominiums, Townhouses, Existing or New Construction, Rehab and Non-Conforming.
While they do not provide any lending services, they can make available local mortgage professionals who are familiar with their Program. For more information about these programs you can contact the Home Down-payment Gift Foundation at 1-888-856-4600 or visit their website at www.homedownpayment.org.
State Housing and Finance Authorities
Alabama Housing Finance Authority
P.O. Box 230909 Montgomery, AL 36123-0909
(334) 244-9200 (800) 325-AHFA (2432)
Alaska Housing Finance Corp.
P.O. Box 101020 Anchorage, AK 99510-1020
(907) 330-8447 (800) 478-2432 (outside Anchorage, but within Alaska)
Arizona Department of Commerce Office of Housing Development
3800 N. Central Ave., Suite 1500 Phoenix, AZ 85012-1991
(602) 280-1300 (800) 528-8421 (Toll free in Arizona)
Arkansas Development Finance Authority
100 Main Street / Suite 200 Little Rock, AR 72201
California Housing Finance Agency
1121 L Street Sacramento, CA 95814
California Department of Housing & Community Development
P.O. Box 952050 Sacramento, CA 94252-2050
Colorado Housing and Finance Authority
1981 Blake Street Denver, CO 80202-1272
(303) 297-2432 (800) 877-2432
Connecticut Housing Finance Authority
999 West Street Rocky Hill, CT 06067-4005
Delaware State Housing Authority Division of Housing and Community Development
18 the Green Dover, DE 19901
DC Housing Finance Agency
815 Florida Avenue, N.W. Washington, DC 20001
Florida Housing Finance Corporation
227 North Bronough Street / Suite 5000 Tallahassee, Florida 32301-1329
Georgia Residential Finance Authority
60 Executive Park South, N.E. Atlanta, GA 30329
Hawaii Housing Authority
1002 North School Street P.O. Box 17907 Honolulu, HI 96817
Idaho Housing Agency
P.O. Box 7899 565 W. Myrtle Boise, ID 83707-1899
Illinois Housing Development Authority
401 N. Michigan Avenue / Suite 900 Chicago, IL 60611
(800) 942-8439 (312) 836-5200
Indiana Housing Finance Authority
115 West Washington St., #1350, South Tower Indianapolis, IN 46204
(317) 232-7777 (800) 872-0371 (Toll free in Indiana)
Iowa Finance Authority
100 East Grand Avenue / Suite 250 Des Moines, IA 50309
(515) 242-4990 (800) 432-7230
Kansas Office of Housing Department of Commerce
1000 S.W. Jackson Street, Suite 100 Topeka, Kansas 66612-1354
Kentucky Housing Corporation
1231 Louisville Road Frankfort, KY 40601-6191
(502) 564-7630 (800) 633-8896 (Toll free in Kentucky)
Louisiana Housing Finance Agency
200 Lafayette Street / Suite 300 Banton Rouge, LA 70801-1203
Maine State Housing Authority
353 Water Street Augusta, ME 04330-4633
(207) 626-4600 (800) 452-4668
Maryland Department of Housing and Community Development
100 Community Place Crownsville MD 21032-2023
(410) 514-7000 (800) 756-0119 (Toll-Free in Maryland)
Massachusetts Housing Financing Agency
One Beacon Street Boston MA 02108
Michigan State Housing Development Authority
735 E. Michigan Ave P.O. Box 30044 Lansing, Michigan 48912
Minnesota Housing Finance Agency
400 Sibley Street, Suite 300 St. Paul, MN 55101
(651) 296-7608 (800) 657-3769
Mississippi Home Corporation
735 Riverside Drive Jackson, MS 39202
Missouri Housing Development Commission
3435 Broadway Kansas City, MO 64111-2415
Montana Board of Housing P.O. Box 200528
301 S. Park Ave. Helena, MT 59620-0528
Nebraska Investment Finance Authority
200 Commerce Court, 1230 “O” Street, Lincoln, NE 68508-1402
(402) 434-3900 (800) 204-6432
Nevada Department of Commerce Housing Division
1802 N. Carson Street / Suite 154 Carson City, NV 89701
New Hampshire Housing Finance Authority
P.O. Box 5087 Manchester, NH 03108
New Jersey Housing Agency
637 S. Clinton Ave. P. O. Box 18550 Trenton, NJ 08650-2085
(609) 278 – 7400
Mortgage Finance Authority
344 4th Street SW Albuquerque, NM 87102
(505) 843-6880 (800) 444-6880 (Toll free in New Mexico)
State of New York Division of Housing and Community Renewel
One Fordham Plaza / 2nd Floor Bronx, NY 10458
New York State Housing Authority
641 Lexington Avenue New York, NY 10022
(212) 688-4000 (800) 382-4663
North Carolina Housing Finance Agency
3508 Bush Street Raleigh, NC 27609-7509
North Dakota Housing Finance Agency
1500 East Capitol Avenue PO Box 1535 Bismarck, ND 58502-1535
(701) 328-8080 (800) 292-8621 (Toll free in North Dakota)
Ohio Housing Finance Agency
57 East Main Street Columbus, Ohio 43215-5135
Oklahoma Housing Finance Agency
P.O. Box 26720 Oklahoma City, OK 73126-0720
(405) 848-1144 (800) 256-1489
Oregon Housing Agency Housing Division
1600 State Street PO Box 14508 Salem, OR 97309-0409
Pennsylvania Housing Finance Agency
2101 North Front Street Harrisburg, PA 17105-8029
Rhode Island Housing and Mortgage Finance Corp.
44 Washington St. Providence, RI 02903-1721
South Carolina State Housing Financing and Development Authority
919 Bluff Road Columbia, South Carolina 29201
South Dakota Housing Development Authority
404 James Robertson Parkway, Suite 1114 Nashville, Tennessee 37243-0900
Tennessee Housing Development Agency
404 James Robertson Parkway, Suite 1114 Nashville, Tennessee 37243-0900
Texas Housing Agency
P.O. BOX 13941 Austin, TX 78711-3941
Utah Housing Finance Agency
554 S. 300 E. Salt Lake City, UT 84111 (801) 521-6950
(800) 284-6950 (Toll free in Utah) (800) 344-0452 (Outside Utah)
Vermont Housing Finance Agency
P.O. Box 408 Burlington, VT 05402-0408
Vermont State Housing Authority
One Prospect Street Montpelier, Vermont 05602
(802) 828-3295 (800) 820-5119 (Message Line)
Virginia Housing Development Authority
601 S. Belvedere Street Richmond, VA 23220
(804) 782-1986 (800) 968-7837
Washington State Housing Finance Commission
1000 Second Avenue, Suite 2700 Seattle, WA 98104-1046
(206) 464-7139 (800) 767-4663 (Toll free in Washington State)
West Virginia Housing Development Fund
814 Virginia Street East Charleston, WV 25301
Wisconsin Housing and Economic Development Authority
201 W. Washington Ave., Ste. 700 P.O. Box 1728 Madison, WI 53701-1728
(608) 266-7884 (800) 334-6873
Wyoming Community Development Authority
155 North Beech Casper, Wyoming 82602
How to Save Money on Homeowners Insurance
12 Ways to Save Money on Home Owners Insurance
SHOP AROUND. Friends, family, the phone book and Internet are some of the sources you can use to find homeowners insurers. Get a wide range of prices from several companies. But don’t consider price alone. The insurer you select should offer both a fair price and excellent service. Quality service may cost a bit more, but you buy insurance in case you need to make a claim, so it’s important to get a company with a good reputation. Talk to a number of insurers to get a feeling for the type of service they give. Ask them what they would do to lower your costs. Check the financial ratings of the companies with AM Best or Standard and Poor’s.
RAISE YOUR DEDUCTIBLE. Deductibles are the amount of money you have to pay toward a loss before your insurance company starts to pay. Deductibles on homeowners policies typically start at $250. Increase your deductible to $ 500 — save up to 12 percent $1,000 — save up to 24 percent $2,500 — save up to 30 percent $5,000 — save up to 37 percent.
BUY YOUR HOME AND AUTO POLICIES FROM THE SAME INSURER. Some companies that sell homeowners, auto and liability coverage will take 5 to 15 percent off your premium if you buy two or more policies from them.
WHEN YOU BUY A HOME… Consider how much insuring it will cost. A new home’s electrical, heating and plumbing systems and overall structure are likely to be in better shape than those of an older house. Insurers may offer you a discount of 8 to 15 percent if your house is new. Check the home’s construction: In the East brick is better, because of its resistance to wind damage, and in the West frame is better, because of its resistance to earthquake damage. Choosing wisely could cut your premium by 5 to 15 percent. Avoiding areas that are prone to floods can save you about $400 a year for flood insurance. Homeowners insurance does not cover flood-related damage. The closer your house is to firefighters and their equipment, the lower your premium will be.
INSURE YOUR HOUSE, NOT THE LAND. The land under your house isn’t at risk from theft, windstorm, fire and the other perils covered in your homeowners policy. So don’t include its value in deciding how much homeowners insurance to buy. If you do, you’ll pay a higher premium than you should.
IMPROVE YOUR HOME SECURITY AND SAFETY. You can usually get discounts of at least 5 percent for a smoke detector, burglar alarm, or dead-bolt locks. Some companies offer to cut your premium by as much as 15 or 20 percent if you install a sophisticated sprinkler system and a fire and burglar alarm that rings at the police station or other monitoring facility. These systems aren’t cheap and not every system qualifies for the discount. Before you buy such a system, find out what kind your insurer recommends and how much the device would cost and how much you’d save on premiums.
STOP SMOKING. Smoking accounts for more than 23,000 residential fires a year. That’s why some insurers offer to reduce premiums if all the residents in a house don’t smoke.
SEEK OUT DISCOUNTS FOR SENIORS. Retired people stay at home more and spot fires sooner than working people and have more time for maintaining their homes. If you’re at least 55 years old and retired, you may qualify for a discount of up to 10 percent at some companies.
SEE IF YOU CAN GET GROUP COVERAGE. Alumni and business associations often work out an insurance package with an insurance company, which includes a discount for association members. Ask your association’s director if an insurer is offering a discount on homeowners insurance to you and your fellow graduates or colleagues.
STAY WITH AN INSURER… If you’ve kept your coverage with a company for several years, you may receive special consideration. Several insurers will reduce their premiums by 5 percent if you stay with them for 3 to 5 years; by 10 percent if you remain a policyholder for 6 years or more.
COMPARE THE LIMITS IN YOUR POLICY TO THE VALUE OF YOUR POSSESSIONS AT LEAST ONCE A YEAR. You want your policy to cover any major purchases or additions to your home. But you don’t want to spend money for coverage you don’t need.
LOOK FOR PRIVATE INSURANCE FIRST. If you live in a high-risk area, one that is especially vulnerable to coastal storms, fires, or crime, and have been buying your homeowners insurance through a government plan, you should check with an insurance agent or company representative. You may find that there are steps you can take that would allow you to buy insurance at a lower price in the private market
Mortgage insurance can usually be canceled by the home buyer after he or she has at least 20 percent equity in the home. Borrowers should contact their servicer to find out the procedure for canceling mortgage insurance when they think they have achieved 20 percent equity. Guidelines for canceling private mortgage insurance are set by investors. Typically, investors will require an appraisal on the property. The servicer can recommend qualified local appraisers.
Private Mortgage Insurance
Private mortgage insurance is a type of insurance that helps protect the mortgage company against losses due to foreclosure. This protection is provided by private mortgage insurance companies and allows mortgage companies to accept lower down payments than would normally be allowed.
Private mortgage insurance also enables mortgage companies to grant loans that would otherwise be considered too risky to be purchased by third party investors like the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). The ability to sell loans to these investors is critical to maintaining mortgage market liquidity, which in turn, allows mortgage companies to continue originating new loans.
PMI VS FHA MIP
Although the insurance protection concept is similar, there are differences between private mortgage insurance and FHA mortgage insurance. FHA insurance is a government-administered mortgage insurance program that does have certain restrictions. FHA has maximum regional loan limits that are lower than those with private mortgage insurance. FHA may be more expensive, take longer to receive approval, and have fewer payment plan options. FHA insurance lasts for the life of the loan, unlike private mortgage insurance which is cancel-able in most circumstances. FHA is a good choice for some borrowers with credit history problems that might need special assistance.
A policy of title insurance is a contract of indemnity between the insured and the insuring company relating to the title to the land described in the policy, protecting the insured against loss of damage by reason of defects, liens or encumbrances of the insured title existing at the date of the policy and not expressly excepted from its coverage.
The policy is issued after a complete search and examination of the public records and shows the condition of the record title, including any money obligations outstanding against the property, easements and other matters which may affect the rights of ownership, possession and use of the property.
Title insurance protects the “record” title, insuring it is good subject only to the exceptions expressly set out in the policy. lt also insures against certain matters which do not appear of record, such as forgery, identity of parties, incompetence of former owners, interest of missing heirs, and status of individuals not having the “right” to sell property.
There are different types of policies. Owners policies are issued to real estate owners. Purchasers policies are issued to purchasers of real estate under contract. Mortgage policies are issued to mortgage companies. In addition there are several other special forms of policies. There is a type of policy to meet the requirements of almost any form of real estate transaction.
Title Insurance FAQ
What Protection Does Title Insurance Give? It insures that the “record” title, is good subject only to the exceptions expressly set out in the Policy. lt also insures against certain matters which do not appear of record, such as forgery, identity of parties, incompetence of former owners, interest of missing heirs, and status of individuals not having the “right” to sell property.
What Risks Are Not Covered? The standard owners policy and standard mortgage policy are based on public records of the recording district in which the land is located. It does not insure against matters which would only be disclosed by actual inspection or survey of the property. It does not insure against certain matters not shown by the public records such as unrecorded easements, liens or money obligations; unrecorded utility rights of way, public or private roads, community driveways and other types of encumbrances, or against the rights or claims of persons in possession of the property which are not shown by the public records.
Can Protection Be Obtained Against Matters Not of Record? Upon application, the issuing company may specially cover matters which are disclosed by a physical inspection and/or a survey of the property, subject to any exceptions which the inspection will determine to be proper. An additional risk premium is charged for this type of coverage. Insurance of this kind is called ‘extended coverage’.
Are There Different Kinds of Policies? Yes. Owners Policies are issued to real estate owners. Purchasers Policies are issued to purchasers of real estate under contract. Mortgage Policies are issued to mortgage companies. In addition there are several other special forms of policies. There is a type of policy to meet the requirements of almost any form of real estate transaction.
When Is the Policy Issued? An owner’s policy protects only the owner while a Mortgage policy protects only the holder of the mortgage on the property. Separate policies are required to protect both interests. Special rates are available when both Owner’s and Mortgage policies are applied at the same time.
The Owners Policy of title insurance usually is issued after the deed to the buyer is ‘delivered’ and recorded. A Purchasers Policy is usually issued after the contract has been executed by both parties or after the signed contract has been recorded. The mortgage policy of title insurance is usually issued after the mortgage or deed of trust has been properly executed and recorded.
If I Was Insured When I Bought the Land, Why Should I Have It Re-Issued to My Purchaser When I Sell? The coverage of your policy is against all matters that appeared of record up to the date of issuance of your policy. Since that time many documents may have been recorded, some of which may affect the title to your land. Taxes and assessments may have accrued and be unpaid. There may have been actions in court affecting your title. The purchaser is entitled to have full information and protection as to the condition of the title right up to the date of his purchase. In addition, there may be matters of record which would prevent either the seller or buyer from selling, buying, or mortgaging land until such matters have been cleared. These items include such things as federal tax liens, judgements, incompetencies, divorce actions and other conditions which the title search may disclose.
How Are Premiums for Title Insurance Determined? Title Insurance Premiums are determined by the amount and type of coverage provided. Unlike other insurance premiums, however, the title insurance premium is paid only once as the policy is effective for so long as title or “ownership” remains in the name of the insured, or his heirs or devises. Rates are filed with the insurance commissioner who regulates the activities of title insurers.
Title Insurance Protection
Title Insurance insures that the “record” title is good subject only to the exceptions expressly set out in the policy. lt also insures against certain matters which do not appear of record, such as forgery, identity of parties, incompetence of former owners, interest of missing heirs, and status of individuals not having the “right” to sell property.
The standard owners policy and standard mortgage policy are based on public records of the recording district in which the land is located. It does not insure against matters which would only be disclosed by actual inspection or survey of the property. It does not insure against certain matters not shown by the public records such as unrecorded easements, liens or money obligations; unrecorded utility rights of way, public or private roads, community driveways and other types of encumbrances, or against the rights or claims of persons in possession of the property which are not shown by the public records.
Upon application, the issuing company may specially cover matters which are disclosed by a physical inspection and/or a survey of the property, subject to any exceptions which the inspection will determine to be proper. An additional risk premium is charged for this type of coverage. Insurance of this kind is called extended coverage.
Issuance of Title Insurance Policy
An owner’s policy protects only the owner while a mortgage policy protects only the holder of the mortgage on the property. Separate policies are required to protect both interests. Special rates are available when both owner’s and mortgage policies are applied at the same time.
The owners policy of title insurance usually is issued after the deed to the buyer is delivered and recorded. A purchasers policy is usually issued after the contract has been executed by both parties or after the signed contract has been recorded. The mortgage policy of title insurance is usually issued after the mortgage or deed of trust has been properly executed and recorded.
The coverage of your policy is against all matters that appeared of record up to the date of issuance of your policy. Since that time many documents may have been recorded, some of which may affect the title to your land. Taxes and assessments may have accrued and be unpaid. There may have been actions in court affecting your title. The purchaser is entitled to have full information and protection as to the condition of the title right up to the date of his purchase. In addition, there may be matters of record which would prevent either the seller or buyer from selling, buying, or mortgaging land until such matters have been cleared. These items include such things as federal tax liens, judgments, incompetencies, divorce actions and other conditions which the title search may disclose.
Flooding is not covered by a standard homeowners insurance policy.
To determine if you need flood insurance, ask your insurance professional, mortgage company or neighbors about the flood history in your area. If there is a potential for flooding, you should consider purchasing a policy that covers the structure and your personal belongings.
Flood insurance can be purchased from an insurance agent or company under contract with the Federal Insurance Administration (FIA), part of the Federal Emergency Management Agency (FEMA). Flood insurance is only available where the local government has adopted adequate flood plain management regulations under the National Flood Insurance Program (NFIP).
Finding the Best Real Estate Professional
Finding the right real estate professional requires doing a little research and asking a few questions. You need to know everything about the selling process. What is the marketing strategy? What kind of advertising will be done? Is the Real Estate Professional capable and willing to communicate effectively? Can the Real Estate Professional effectively present and sell the less-noticeable assets of the property?
Real estate professionals also need to be knowledgeable about the community. They need to have a feel for the history of the area and the approximate price that people will be willing to pay. Also, real estate agents should know what the competition is and how much it will effect your sale.
NEVER choose a Real Estate Professional on price alone. Remember that a Real Estate Professional cannot magically raise the selling price of the house. Consider the buyer. The purchaser won’t willingly pay too much; it’s most likely that he or she will do research on the market and try to find the best product for the best price. The facts simply cannot be changed, no matter which Real Estate Professional you select. In spite of these unchangeable factors, the Real Estate Professional you select must still be diligent and knowledgeable.
If your property does not elicit attention within several weeks, the cause can most likely be attributed to one of these three factors: location, condition, and price. The location obviously cannot be changed. You should consider examining the conditioning of your property and reevaluating the marketing strategy. Ask your Real Estate Professional to offer an explanation of the competition and your pricing strategy.
How to Buy Your First Home… The Easy Way
Avoid the 10 Most Common, Painful, Frustrating Mistakes First-Time Home Buyers Make
Buying a residence can be a hair raising experience. You will experience a roller coaster of emotions while finding the right place, securing the loan and finally moving in. For most of us, the first time home purchase is the largest investment we’ve ever considered. The emotions of purchasing something so expensive and personal can often cloud our business judgment. Most home purchasers do little or no research before they invest their nest egg. Doesn’t it make sense to become as completely informed as possible before you buy your first home? This special report is designed to help you avoid 10 common and crucial mistakes. The right real estate professional can help you make good sound business decisions based on your personal situation.
Inspect, Inspect and Inspect: Go over the inspection report with a fine tooth comb. Make sure the report was done by a professional organization. For condo purchases go over the CC&R’s, By-Laws, and Association Fees. Don’t take anything for granted… inspect everything!
Imagine the Property Vacant: Your furnishings and decorations will be the ones filling this new residence. Don’t be swayed by beautiful furniture; it leaves with the owner.
Income + Lifestyle = Mortgage Payment: Sit down with your professional real estate agent and honestly discuss your income level and living expenses. Take into account future considerations, children, add-ons, amenities, and fix-ups. Your dream home is certainly worth a sacrifice but don’t mortgage your entire future.
View Several Homes: See at least 7-10 properties. Don’t move too slow but don’t move on the first property you see. With your agent’s help you should be able to view enough properties to get a good overall perspective of the home market. When you find the right property all the leg work will be worth it.
Utilize Your Team: By aligning yourself with the right real estate professional you will have an entire team at your disposal. Utilize your lender, title rep and agent. Each of them should work hand in hand for your benefit. Explore all the options before you sign.
Be Columbo: Check out all costs and expenses before you sign. Utilities, taxes, insurance, maintenance and home owner dues if applicable. Make sure all utilities (gas, electricity, and water) are on during your walk-through so you can inspect everything in working order. Ask lots of questions and be very detail conscious.
Do a Final Walk-Through: Visit the property after all furnishings have been moved out to be sure there are no surprises. Be absolutely positive the property was left exactly as you had agreed upon in the contract. Things that could have been spotted in a final walk-through are often unintentionally overlooked.
Plan For Flexibility: Closing dates are not written in stone. Allow for contingencies and have a back-up plan. If you or the sellers need a little more time to conclude the final arrangements, don’t let these delays upset or frustrate you. These types of circumstances are not uncommon in a real estate transaction.
If It’s Not In Writing, It Doesn’t Exist: All promises and discussions should be in writing. Don’t make any assumptions or believe any assurances. Even the best intentions can be misinterpreted. Have your professional keep an ongoing log in writing of all discussions and get the seller’s written approval on all agreements.
Loyalty Breeds Loyalty: Be open, honest and up front with your team. Hard feelings and disloyalty will cause head aches, delays or may even keep you from getting into the home you worked so hard to locate. Take the time to select the right team in the beginning and your first home purchase will be a pleasing and memorable experience.
How Much Home Do I Qualify For?
Income. Debt. Down Payment. Closing Costs. Two Years Income Tax Returns. Assets. Liabilities. IRAs. You want WHAT? Just what can I afford? Buying a home in today’s marketplace is a bit intimidating. And your new home purchase is likely to be one of the most important decisions you’ve ever had to make. Usually it’s one of the single most valuable assets you’ll own.
Where to Start: Before you invest hundreds of hours searching–and to avoid any heartbreak if you find yourself unable to qualify for your dream home–sit down with a lender. Your lender can perform a simple verbal pre-qualification in about twenty minutes and a full-fledged pre-qualification in about 5 days. Pre-qualification not only allows you to focus your search in the correct price range, saving a lot of wasted time and frustration, but it can also give you an edge when competing with other offers on a home that you find. If a seller is deciding between two offers—-yours who has been qualified and another unqualified offer, they are much more likely to pick yours. Pre-qualification will also give you leverage when negotiating with a seller in a non-competitive atmosphere; it essentially makes you a cash buyer. The amount of home that you qualify for will be determined by three key factors: your down payment, your ability to qualify for a mortgage and closing costs.
The Down Payment: Whereas a current homeowner can rely on equity from their home sale, a first time home buyer is limited to the money they can save. The days of having to put 20 percent down on a home are in the past, although putting a large amount of money down definitely makes it easier to qualify for a mortgage and to get the lowest interest rates available. With the various programs that are available today, you can put as little as 3 percent down on a home.
Qualifying for the Mortgage: There are two basic guidelines that lenders use to determine what size mortgage you are eligible for.
- Your monthly mortgage payment of principal, interest, taxes and insurance (PITI) should not exceed 25 to 28% of your monthly gross income.
- Your monthly housing cost (PITI) plus other long-term debt should not exceed 33 to 38% of your monthly gross income.
Specifically, most lenders will consider 4 key factors to determine your ability to qualify for a home loan:
- Income: This first element can include not only your gross monthly income and secondary income (commissions, bonuses) but also your history of employment, stability of income, education, even potential for future earnings.
- Credit History: This encompasses your history of debt repayment, total outstanding debt, highest balance, and your highest monthly debt balance.
- Assets: Your assets consist of cash on hand, savings and checking accounts, CDs, stocks, bonds or any other type of liquid asset.
- Property: The home you are planning to purchase will be appraised to determine the market value. The estimated value must be sufficient to secure the loan. Lenders will loan you no more than a certain percentage (usually 95%) of this value.
Closing Costs: Keep in mind that in addition to your down payment, you will also be responsible for paying fees for the loan and closing costs. These will be required at the time of closing unless you qualify and choose to have these included in your financing.
- Closing Costs generally will range between 2 percent and 6 percent of the mortgage loan, depending on the loan and lender. You will be provided with a “Good Faith Estimate” of closing costs so you can know what to expect.
- “Points”, which are one-time charges equal to one percent of your loan amount, may be required by your lender at closing.
- Your closing agent will charge a fee at the close of the sale.
Which Mortgage Should I Choose
Key Questions to Ask Yourself and Lenders When Shopping for a Mortgage!
Traditional Fixed Rate Mortgage? Graduated-Payment Mortgage? Adjustable Rate Mortgage? FHA Mortgage? Two-Step Mortgage? You are wondering which kind of mortgage is best. The answer: There is no one correct answer. Deciding which type of mortgage will best fulfill your needs can be difficult. There are so many types of loans and different term lengths. Your choice is extremely important and can take some time and effort to research. While often neglected by home buyers, a little research before choosing your mortgage can save you thousands of dollars in the long run. There are several elements of a loan that should be analyzed. While one of these elements may suggest one type of loan, another may call for a different type. You must weigh each ingredient separately and collectively. You will find that your answers to the questions below will ultimately determine the type of mortgage that best fits your needs.
How long do you plan to stay in this home? Five years? Ten years? Thirty years? The length of time you will be in the home will certainly play a part in determining which loan to apply for. If you only plan to be in the home for 5–7 years or less, you should seriously consider an adjustable rate loan. If you intend on staying 20–30 years, a fixed rate mortgage may be right for you.
How much risk are you willing to accept? If you are the type of buyer that needs to know exactly what you will be paying each month for the term of the mortgage, a fixed rate mortgage will fulfill this need. The fixed rate loan, however, will also net a higher interest rate. If you are willing to take some risk of fluctuations in the interest rate, you may be able to receive a lower interest rate.
What are your income expectations? Plan for the future. Do you anticipate a gradual or dramatic increase in your income in the next few years? If you expect a big increase, a graduated payment mortgage may be best for you.
How much cash do you have available for upfront costs? If you have the resources, you may want to make a larger down payment to lower your monthly payment. By keeping a higher monthly payment however, you might be able to shorten the term of the loan to a 15-year loan in order to pay it off quicker. Keep in mind that you’ll have closing costs and fees to pay in addition to your down payment. If you don’t have much cash saved for your upfront costs, don’t despair. You may be need to accept a higher monthly payment or even lower your monthly obligation by choosing an adjustable rate mortgage. In addition to choosing a type of loan, you must also consider which lender to use. Once again, several factors will influence your decision.
Annual Percentage Rate (APR): This is most likely the best way to make an “apples-to-apples” comparison of lenders. The APR reflects the cost of credit on a yearly rate and includes any points and fees in addition to the interest rate.
Interest Rate: Find out the rate the lender will commit and how long the lender will guarantee it. Get any commitments in writing. As with any transaction, if it isn’t in writing it doesn’t exist.
Points and fees: These factors will vary greatly. Look out for hidden fees. Make sure the lenders disclose all fees; ask what they charge and what is included and what is not.
Loan Approval: Both approval and funding time should be considered. You don’t want to lose a prospective home because your lender takes weeks to fund your loan. A lender should be able to fund the loan within ten days.
Lender Reputation: Don’t rely on solely someone else’s recommendation. You, not your friend, must feel comfortable with your lender. If you do feel good about your lender and trust him , it will be much easier to trust his advice on what kind of mortgage will best suit your needs.
The Nine Most Common Mistakes to Avoid When Obtaining a Home Mortgage
You are about to make what will most likely be the largest transaction of your life: your home mortgage. Unfortunately, many home buyers do not take the time to research some of the little but weighty intricacies of mortgages. Researching the mortgage process takes little time compared to the tens of thousands of dollars it could save you. Doesn’t it make sense to become as completely informed as possible before you buy your next home? This special report is designed to help you avoid nine common mistakes. Remember that the right lender can help you make good, sound business decisions based on your personal financial situation.
Find a Reputable Lender: This is the most important choice you can make when starting the mortgage process. If you don’t trust your lender, you are in for a long and stressful home-buying experience.
Pricing: Don’t be lured into a mortgage company strictly by promises of low rates. Find out how long the advertised rate is guaranteed for. Make sure there is enough time to close on your loan. Some companies may make these “promises” but will try changing the rate prior to closing. They may claim that your “lock-in” rate has expired so make sure you have the expiration date in writing. In some cases, the lender may even try to delay your closing to break the “lock-in” rate. In other cases the delay may be beyond the lender’s control. Make sure to allow yourself plenty of time for closing. Delays in the process are common and everyone (builders, title companies, even yourself) is responsible.
Programs: You will see several programs that offer special low-interest rates. Keep in mind that they may not be the best program for your situation. Make your lender explain what programs they feel best serve your needs and more importantly, why.
Fixed or Adjustable Rate Mortgage (ARM): Conventional thinking is that fixed is always better and while this is sometimes true, it is not always the case. The key here is to ask, “How long am I going to live at this property?” An ARM can actually be a better choice if you are going to be in the home for a short time. The average for how long a first time home buyer keeps their mortgage is less than four years. In general, the longer you plan on staying in your home, the better a fixed rate mortgage will suit your needs.
Don’t try to bottom out the market: Deciding when to lock in to a mortgage rate can be difficult. Many people will float, trying to guess when rates have hit bottom. Unfortunately, a lot of times they will wait too long and end up with a much higher interest rate. There is nothing wrong with floating but keep a close eye on economic indicators. Your daily newspaper or even the nightly news can be an excellent source of information on the latest interest rate activity. As closing nears, it might be worth locking in.
Negotiate problems prior to closing: Its common for a problem to arise before closing. Waiting until closing will rarely be in your best interest. For instance, if you accept $400 at closing in lieu of the seller making a repair and after closing you find that the repair will actually cost $600, you’ve obviously made a poor decision. Whether the builder agreed to add an item and has not or the seller has made a repair that is not acceptable to you, discussing a solution prior to closing will give both parties time to analyze and determine options.
Be prepared for closing costs: In addition to the down payment, you will be required to pay fees and other closing costs at the time of the final transaction. Closing costs typically range from 2 percent to 6 percent but will be dependent upon your situation. Lenders must provide you with a “Good Faith Estimate.” The “Good Faith Estimate” will breakdown all costs so that you may know what to expect at closing.
Close at the end of the month: When making a mortgage payment, you will be paying interest that has accrued from the previous month. Upon closing however, your lender will charge you prepaid interest for the date the loan is recorded through the end of that month. Therefore, one way to lower your closing costs is to close in the latter part of the month. This will lower the amount of prepaid interest that you must pay.
Look out for hidden fees: Check for certain miscellaneous fees such as inspection, notary, and document preparation. These types of fees can mean hundreds of dollars in closing costs. Remember that this is your money at stake. Never should you be afraid to ask for explanations of fees you are being charged.
5 Secrets to Buying the Best House for Your Money
1. Get “Pre-Approved” – Not “Pre-Qualified!”
Do you want to get the best property you can for the least amount of money? Then make sure you are in the strongest negotiating position possible. Price is only one element in the negotiations, and not necessarily the most important one. Often other terms, such as the strength of the buyer or the length of escrow, are critical to a seller.
In years past, I always recommended that buyers get “pre-qualified” by a lender. This means that you spend a few minutes on the phone with a lender who asks you a few questions. Based on the answers, the lender pronounces you “pre-qualified” and issues a certificate that you can show to a seller. Sellers are aware that such certificates are WORTHLESS, and here’s why! None of the information has been verified!
Many times unknown problems can come to the surface! Some of the problems I’ve seen include recorded judgments, alimony payments due, glitches on the credit report due to any number of reasons both accurately and inaccurately, down payments that have not been in the clients’ bank account long enough, etc.
So the way to make the strongest offer today is to get “pre-approved”. This happens AFTER all information has been checked and verified. You are actually APPROVED for the loan and the only loose end is the appraisal on the property. This process takes anywhere from a few days to a few weeks depending on your situation. It’s VERY POWERFUL and a weapon I recommend all my clients have in their negotiating arsenal.
2. Sell Your Property First, Then Buy the House
If you have a house to sell, sell it before selecting a house to buy! Contingency sales aren’t nearly as strong as one that comes in with a ready, willing and able buyer. Consider this scenario: You’ve found the perfect house – now you have to go make an offer to the seller. You want the seller to reduce the price and wait until you sell your house. The seller figures that this is a risky deal, since he might pass up a buyer who DOESN’T have to sell a house while he’s waiting for you. So he says OK, he’ll do the contingency but it has to be a full price offer! You have now paid more for the house than you could have because of the contingency, and you have to sell your existing house in a hurry! Otherwise you lose the house! So to sell quickly you might take an offer that’s lower than if you had more time. The bottom line is that buying before selling might cost you THOUSANDS of dollars.
If you’re concerned that there is not a house on the market for you, then go on a window-shopping trip. You can identify possible houses and locations without falling in love with a specific house. If you feel confident after that then put your house on the market.
Another tactic is to make the sale ”subject to seller finding suitable housing”. Adding this phrase to the listing means that WHEN YOU DO FIND A BUYER, you will have some time to find the new place. If you don’t find anything to your liking, you don’t have to sell your present home.
3. Play the Game of Nines
Before house hunting, make a list of things you want in the new place. Then make a list of the things you don’t want. You can use this list as a guide to rate each property that you see. The one with the biggest score wins! This helps avoid confusion and keeps things in perspective when you’re comparing dozens of homes.
When house hunting, keep in mind the difference between ”STYLE AND SUBSTANCE”. The SUBSTANCE are things that cannot be changed such as the location, view, size of lot, noise in the area, school district, and floor plan. The STYLE represents easily changed surface finishes like carpet, wallpaper, color, and window coverings. Buy the house with good SUBSTANCE, because the STYLE can always be changed to match your tastes. I always recommend that you imagine each house as if it were vacant.
Consider each house on its underlying merits, not the seller’s decorating skills.
4. Don’t Be Pushed Into Any House
Your agent should show you everything available that meets your requirements. Don’t make a decision on a house until you feel that you’ve seen enough to pick the best one.
A decade ago, homes were selling quickly, usually a few days after listing. In that kind of market, agents advised their clients to make an offer ON THE SPOT if they liked the house. That was good advice at the time. Today there isn’t always this urgency, unless a home is drastically underpriced, and you’ll know if it is.
Don’t forget to check into the SCHOOL DISTRICTS of the area you’re considering. Information is available on every school; such as class sizes, % of students that go on to college, SAT scores, etc. You can get this information from this web site.
5. Stop Calling Ads!
Please note – ads are sometimes created to make the phone ring! Many of the homes have some drawback that’s not mentioned in the ad, such as traffic noise, power lines, or litigation in the community. What’s not mentioned in the ad is usually more important than what is.
For this reason, I want you to be very careful when reading ads. Remember that the person writing the ad is representing the seller and not you! The most important thing you can do is have someone on your side looking out for your best interests. Your own agent will critique the property with an eye towards how well it meets your needs and will point out any drawbacks you should know about. So whether you decide to work with me or not, pick an agent you feel comfortable with and enlist the services of that agent as a buyer’s broker. Then you become a client with all the rights, benefits, and privileges created by this agency relationship, and you’re no longer just a shopper. Did you know that many homes are sold WITHOUT A SIGN ever going up or an AD EVER BEING PUT IN THE PAPER? These “great deals” go to those people who are committed to working with one agent. When an agent hears of a great buy, who do you think he’s going to call? His client, who he has a legal obligation to work hard for you, or someone who just called on the phone and said “keep your eyes open”? So to get the best buy on a property, I always recommend that you hire your own agent and stick with him or her.
A Few Points About Interest Rates
Less is more.
If you’re new to investing or real estate and don’t know the first thing about interest rates, here’s a good tip: the higher the interest rate, the more expensive it’s going to be. High interest rates mean you will have to pay back more on the money you borrow. Another good rule of thumb is that affordability increases if you use an adjustable rate mortgage (it’s easier to qualify this way). Of course, there will be a wide range of prices that you can choose from, depending on what kind of financing you choose.
Not even the Fed knows for sure.
The Fed holds a considerable amount of power, but they can’t control everything. Mortgage interest rates are affected by many unpredictable political, economic and social events. So there is no guarantee what direction interest rates will go, despite the forecasts of the experts. Therefore, make your financial decision based on where things are today including your budget, your needs and your future plans.
Locking in rates assures your lowest interest.
If you do decide you want to lock in at a certain interest rate, you will need to complete a loan application and send it to your lender as soon as possible. This must be done so that your commitment doesn’t runout before your loan is approved. Follow up and be se sure that the lender is receiving all of the necessary documentation. Get a property appraisal, which usually costs about $300, through your loan agent as soon as possible.
Don’t obsess and miss a good real estate deal.
Although rising interest rates can create more problems for home buyers, waiting and hoping for low rates is not necessarily a smart move. You may end up paying a higher price. Also, refinancing is always an option in the event that interest rates come down.
Limit the Deadline to Your Advantage
When it comes to real estate contracts, time is of the essence. In many cases, placing time constraints on your offer can often work to your advantage.
If you’ve ever seen a telethon fund-raiser, you would notice that over 90 percent of the donations are generated in the last half hour. Even if the telethon has been running for weeks; it doesn’t matter. In the last few moments, just before the telethon goes off the air, the money starts rolling in.
In many sports, the game is often decided within the last few minutes. Take for example the two-minute drills in basketball or the two-minute warnings in football. How often does the game rest on the final basket or field goal?
The same rules apply in getting sellers to accept your offer. If you don’t set a deadline for acceptance, the sellers may simply procrastinate to the point the deal falls through; even if it’s an offer they might otherwise have taken!
Often, buyers underestimate the importance of limiting the sellers time to accept. This is unfortunate since it is a critical element in formulating the deal. Remember that by allowing for a lengthy deadline, you (the buyer) are committing yourself while the seller takes their time to either accept or reject your offer.
By setting a strict deadline, you are forcing the sellers to either accept, reject, or counter your offer. By placing the ball in their court, you are demanding they take action or risk losing a potential buyer. By countering or accepting your offer, they will be “locked in”, thus preventing other buyers from offering competing bids.
How Much Time Should You Give the Sellers?
Now that you understand the importance of setting a deadline. The question remains: How much time should you give the sellers?
From my experience, give them the shortest time possible. So, if you know that it is possible to present your offer within an hour, then give them an hour. By doing this, you are forcing them to seriously consider your offer or risk losing a potential buyer.
Don’t be worried about having your offer rejected. At least if it is rejected, you won’t be wasting your time with indecisive sellers. If they counter your offer, you can always increase your price or revise the terms.
Since decisions typically require the coordination of several individuals — one may be working, out shopping, or otherwise unavailable. Naturally, it may be difficult to have your offer considered within an hour. In most cases, allowing until midnight of the same day is reasonable.
Sometimes, it may be hard to get the sellers together all at once. They may be on vacation, have dinner plans, or be off on a business trip. Whatever the reason, I recommend offering no longer than 24 hours. If they need more than 24 hours, wait!! In today’s age of cell phones, fax machines, and next day delivery, there is no excuse for taking longer than a day to decide. If the seller is serious, they will make themselves available to consider your offer.
Don’t be Pressured by Agents Insisting on More Time
Some agents may hesitate to place pressure on sellers. Many are unsure of their negotiating skills. Others may be unwilling to present an offer that has a potential of being rejected.
Some agents may suggest that it’s impolite to demand such a short deadline. Others may say “since your offer is weak, you should give the sellers more time to think about it.” This is very bad advice. Whatever the reason, don’t back down on forcing a strict deadline.
Buying a house is serious business. Sellers should not be offended by any offer you present. Instead, they should be thankful to get it!
Remember that the sellers’ only motivation for letting your offer sit is that they are hoping for a better deal to come along. It is very possible this will happen. By setting a strict deadline, you minimize the possibility of opposing bids.
The deadline applies the pressure to get the deal you want.
The art of the deal is negotiating. The goal, when you’re countering a buyer’s offer, is to get the highest price and best terms possible. Once you reject the initial offer, you must decide how much to counter. The answer is easy when the market is hot. You will counter at full price or more.
If the market is normal, you may receive less than full price for your property. In this case, one strategy would be to set your asking price higher than normal. How much lower than your asking price will you counter-offer?
Beware of Setting a Minimum Counter Price.
Setting a firm minimum counter price is a big mistake that some sellers make. Depending on the deal and the buyer your counter offer should be flexible. For example, after investigating the market, you set your asking price at $350,000. Your minimum price may be $320,000. If you are offered your minimum, you sell. If you are offered lower, you don’t sell. It sounds simple.
Unfortunately, in this mindset, you box yourself into a limited deal. You want to be flexible when negotiating. Let us review our last example. The buyer offers $300,000. The seller rejects and counters with the minimum of $320,000.
The buyer counters with $305,000 again. Where do you go from here? You have already offered your lowest minimum counteroffer. The only recourse would be to repeat your same offer.
One strategy would be to counter lower at $315,000. Or what if the buyer is willing to pay more than your minimum?
The buyer might be willing to pay $330,000. You will actually have lost money again by countering too low.
There are housing situations where you are just lucky to be paying off the mortgage, commission, and closing costs. You might be offered a little less but you accept to some cash to save your credit. In this case, setting a minimum price would be reasonable.
If you do feel the need to set a minimum counter price, don’t set it in stone.
Try to Get a Sense of the Buyer.
Your counteroffer is not the final transaction. It is one step in the negotiating process. You counter. The buyer will counter your offer. You will then counter back. This process will repeat until the a deal is made.
Therefore, your counteroffer should not be your best and lowest. The buyer’s first offer is usually a low-ball offer. A seller’s first counter is a high-ball offer. Both parties are testing to see how the other will respond.
Let the buyer know you are willing to negotiate. You ask $340,000, the buyer offers $300,000. You counter $335,000. You must also send the message that you are not willing to drop your price too much.
Some buyers will cave and accept the counteroffer and others will not. Anytime you reject and counter, you are opening negotiations but you are also taking the risk of losing the deal.
There are some buyers who are just looking for a desperate seller. They make a lot of low-ball offers until they find the property. You are not going to find a good price with that type of buyer.
Others will counter with close to what they originally offered, in this case say $305,000 (now you’re still $30,000 apart).
What if You’re Close Together in Price?
After a few counters, You are only a few thousand dollars apart. You countered at $335,000 and the buyer countered back at $330,000. Now you’re only $5000 apart. Should you accept the buyer’s counter?
You can simply accept the deal. Another strategy would be to tell the buyer or the agent the you want to split the difference. They accept. You will then have sold your property at $332,500.
Splitting the difference can be an effective way of closing out negotiations to bring about a win-win situation.
What If You’re Far Apart?
You counter at $335,000 and the buyer counters at $305,000. You’re $30,000 apart. That’s serious money.
There are only two ways of handling this situation. You could hold your original counter. The buyer would understand that this is your final offer. This could be a deal breaker. If you are highly motivated to sell, a steep decline of your price would get the ball rolling again. You counter at $320,000 saying this is your best but last offer.
This action could spark the buyer’s interest. He/She could accept or at least make a higher counteroffer.
Is There a Time to Walk Away?
There are only two reasons to walk away from negotiations. You are truly angry and will not lower your price.
The second is for effect. You are willing to take less, but you want the buyer to think you’ve made your last, best offer. You say, “Take my last offer or leave it. I’ll give you an hour to decide.”
As a tactic, walking away can start negotiations. You could get your price or lose the deal.
There are no guarantees when negotiating real estate. The final outcome is often determined by the following percentages:
10%–how good you are at negotiating
45%–how motivated you are to sell
45%–how motivated the buyer is to purchase
How to Use Contingencies
Everyone is familiar with the conversation where the other person says, “Yes, but..” This person is agreeing with you but only if certain conditions are met.
A purchase agreement is similar in that you are agreeing to buy a property subject to certain things being met. The conditions you set are called contingencies.
It is uncommon to have a purchase agreement without contingencies. In fact, contingencies are an essential part of many offers. In general, contingencies are added to protect you (the buyer) but may also serve to protect the seller.
All of the contingencies of a purchase agreement must be met before the sale can be competed.
What are some Examples?
Contingencies can be virtually any conditions you wish to set. They can be anything such as having your Uncle John approve the central furnace or your Aunt Mary is satisfied with the kitchen sink. The sale is “contingent” upon all of the conditions being met. Contingencies are also called “subject to’s” since the sale is “subject to” something happening.
An important contingency is a financing contingency. It states that the purchase is subject to the buyers being able to obtain a loan for the required amount. If you can not get the loan you need, the sale is canceled and you deposit is refunded. It is very important to have this contingency since you will loose you deposit if you are unable to get a big enough loan. Making an offer without a loan contingency is very risky.
What are Some Common Contingencies?
There are many contingencies that will protect you (the buyer). Here are some you will definitely want in your purchase agreement:
* You will be able to inspect the property and must approve the inspection.
* The sellers must disclose problems with the property and you must approve of such disclosures.
* You will be allowed to make a final inspection of the property just before the deal closes and confirm that the is no new damage since you originally inspected it.
* You will get your deposit back if the sellers back out.
* You can back out if you are unable to get financing.
Depending on your situation, there are many other contingencies you should add. For example, if you are moving to the area because of a new job. You will want a contingency stating that if you don’t get the job, you can cancel and get your deposit back.
Make sure that you clearly state your needs to the agent or attorney preparing you agreement. If there are any special conditions that must be meet (such as being able to cash in some stocks for a down payment), make sure it is in writing a contingency. Otherwise you may be unable to complete the purchase on time and lose you deposit. In some cases, you may be sued by the sellers for performance. They may demand you complete the purchase or pay associated damages.
Who Writes In the Contingencies?
A contingency is a legal document and must contain the proper language to be legally binding. For this reason contingencies are ideally crafted by attorneys. However, since this is a normal part of business, many real estate agents are extremely versed in writing contingencies. In fact, agents may be far more experienced in this area than an attorney. In practice, your agent will be more than capable of writing the contingencies you need.
Whom Does the Contingencies Protect?
The contingencies noted so far are intended to protect you (the buyer). They allow you to back out of the deal without consequences if something does not work out — you can’t get financing, you discover problems with the house, you lose you job, etc..
As noted, contingencies may also be added to protect the sellers. Such examples are the sellers may insist that the transaction be completed within 30 days. If you are unable to get you cash together or get your financing, you could lose the house and your deposit!
Some sellers may want you to purchase the house “as is.” That is, no matter what’s wrong with it, the sellers won’t be responsible for it. You may for example find that after making an offer, the septic system badly needs $15,000 worth of repair. If you agreed to by the property “as is” then you will be stuck paying the difference.
Contingencies Can Become Deal Points
Naturally, you will want to have contingencies that benefit you (the buyer) and want to exclude those that potect the seller. This is therefore a process of negotiation where contingencies become deal points which you can influence the actual cost of the transaction.
A deal point is a specific point on which the deal depends. For example, you want the sellers to replace the broken sprinkler system. So you include a contingency stating that the sellers must repair it. If the sellers refuse — perhaps they have been watering the lawn by hand and are unwilling to fix it for the buyers.
Now you have a deal point. What are you going to do?
Well, this depends on how important the sprinkler system is to you. If you feel that you can’t live without it and are unwilling to budge, you can refuse to remove the contingency. The seller can either accept the offer or reject it. If the sellers accept, you’ve got your sprinklers. However, if they reject, you’re not getting your new home.
Often a better way if dealing with this situation is to calculate the cost of repairs and adjust the contingencies to compensate. For example you may retract your contingency for the sprinklers and insist that they leave the ceiling fans you really like. Perhaps the sellers were not looking forward to taking them down anyway and are willing to compromise on this point. In which case, although you will need to get the sprinklers fixed, you have saved several hundred dollars on the purchase of new fans.
You Can Use A Contingency to Get Yourself a Better Deal
The skillful negotiator will use contingencies to improve the deal. And there is really no limit to the type of contingency you can craft. Deal points can be over anything ranging from the date escrow closes to the specific closing costs the buyer and sellers must pay.
A great way to start negotiating is to find the sellers weak point and apply the pressure there. For example, the sellers may absolutely need to close the deal within 25 days so that they can purchase a new home. You agree as long as they fix the septic system, lower the price, repair the sprinklers, and leave the ceiling fans. In this way, they have met their criteria by giving you the superior deal.
Remember, that although contingencies are great points for negotiations, they are there to protect you. They offer you an easy way to back out if something goes wrong.
Avoid Unnecessary Contingencies
Sometimes when buyers discover the great protective value of contingencies, they insist that extra ones be placed in the purchase offer. For example, you insist that the purchase become contingent on you not losing your job before the deal closes. (You pretty much get this protection in any event, since if you lose your job, the lender probably won’t give you a mortgage, and you can back out using the financing contingency.)
Or you insist that the deal be contingent on your not getting ill during the escrow period, or your spouse not falling out of love with the home, or your getting approval of the purchase from you parents. Remember, you can make the deal contingent on anything!
The problem is that each time you add a contingency, you weaken the deal. The sellers ask themselves, “Why does the buyer insist on this?” If the quickest answer is that the buyer is wishy-washy and may not go through with the deal, the sellers may simply refuse to sign. You may squash a perfectly marketable deal simply by insisting on unnecessary contingencies.
As many real estate agents have witnessed, lawyers can ruin an otherwise marketable deal by adding contingencies favoring their clients to the point where the other party simply won’t go along. While legal advice is great, sometimes common sense and human nature play a stronger role.
Demand Inspections and Disclosures
You can never be too trusting when it comes to buying real estate. The buyer is entitled to know what he/she is getting for their money. The buyer should insist on an inspection and full disclosure of the house being purchased.
Why Do You Need an Inspection?
An inspection is an opportunity to have an expert give you an oral and written report as to the condition of the property you are purchasing.
After researching recent sales in the area, you decide that 30 year old home for $180,000 is worth the money. You make an offer which is accepted. The next step would be to hire an inspector. The report shows that the concrete foundation is cracked. The roof and plumbing need to be replaced. The cost for repairs adds up to $40,000. Your inspection contingency would let you back out of this deal or negotiate.
Remember to accompany the inspector during the visit. He/She will give oral comments that give more specifics as to the problems of the property. When writing a report, the inspector must abide by certain legalities on paper. He/She will be more open in person.
Why Do You Need Disclosures?
In most states, the law requires the seller to disclose any knowledge about the condition or history of their home to the buyer. For example a seller would disclose information ranging from a leaking roof to their house being built on a sacred Indian burial site.
Disclosure contingency gives you protection. Upon discovering the roof needs replacing, you can either back out of the deal or renegotiate for the cost of repairs.
It also makes the seller responsible legally. A seller may go on record saying nothing is wrong with the house. You move into your newly purchased house only to discover that cracks in the foundation that were filled in and painted over. A court of law can view the disclosure statement as evidence that you had no prior knowledge. The seller is held liable for the repairs.
How Do You Get an Inspection?
The inspection is written in as a contingency in your offer. Many real estate contracts automatically have an inspection written into the terms.
The buyer is responsible for the inspector’s fee. Ask your real estate agent to recommend a list of local inspectors. Please check references carefully. This type of service may not be regulated in your area. A retired city or county building inspector may be your best bet.
There are two national trade organizations. One is the American Society of Home Inspectors(ASHI) or the National Association of Home Inspectors(NAHI).
How Do You Get Disclosures?
In California, the law states that a disclosure statement be provided to the buyer who then has three days to approve or disapprove. If the buyer does find the defects acceptable then the agreement is broken. Your agent or attorney can clarify the laws pertaining to disclosures in your state.
If there is no statutory procedure in your area, the buyer must request it as a contingency in the list of terms. Your investment is not worth being jeopardized. Insist on a home inspection and full disclosure. Make your purchase contingent on approving the results of both.
A “final walk-through” is not a home inspection. Structural problems are only revealed with a home inspection. A walk-through is designed to make sure the seller has not damaged the property since your first visit.
How to Stop Paying Rent
As you know, renting has two big problems – the rent can go up, and you don’t have anything to show for it except a pile of rent receipts. Me, I like knowing that every month I’m $50 or $100 richer, no matter what. That doesn’t sound like much, but if you saw a $100 bill lying on the ground, you’d sure as heck pick it up, wouldn’t you? Owning a home is like that – Uncle Sam gives you such incredible incentives, they’re just lying there on the ground, and yet some people step right over them, and never scoop them up.
In this article, I will show you in real dollars how you can benefit by owning a home. Maybe no one’s ever explained it to you in detail before, or you didn’t “get it”. Well, if you stick with me though this discussion, I think the light will go on for you.
One of the facts of life is that if you want to have a roof over your head, you have to pay somebody for that roof. In real estate we have a saying, “Whether you rent or whether you buy, you pay for the space you occupy.”
You might be thinking, “I can barely make the rent, how in the world can I afford to buy?” There’s an answer to that, and I’ll get to it later on. But first, let’s start with why it’s to your advantage to own your own home, then we’ll figure out how to make it happen.
Renting is being out of control – the rent can go up, or the owner can tell you that you have to move. Owning your own home is a rock of stability that can’t be taken from you. It gives you a stake in the community, a sense of belonging. And for most people, it is the majority of their net worth.
Look at it this way – in 30 years, if you rented at $1000 a month, you would have paid out $360,000 and have nothing to show for it. But if you bought a home today for $250,000, at the end of 30 years you would have paid it off and you would own it free and clear.
Obviously this example is way too simple, because we all know that rents go up, so you would have paid much more than $360,000. And we all know that home prices go up too, so the house would be worth much more than $250,000. How much more? How does a million dollars sound?
The Rule Of 72
Now might be a good time to bring up the “rule of 72”. This rule tells you how long it takes your money to double at a given interest rate. For example, if the interest rate were 5%, it would take 72/5, or 14.4 years for your money to double.
Did you know that home prices have gone up 7% a year on average for the last 30 years? Now I’m not talking about Hawaii, I’m talking about the entire country, in good times and bad, the average was 7% a year, according to the National Association of Realtors. This means that if we see only average appreciation, home prices will double in 72/7 or 10.3 years!
Yes, in fact it was about 10.3 years ago when I remember them saying “We’ve just sold the last house under $100,000 in Escondido”. And just this last week I read in the paper a similar article declaring, “Homes under $200,000 are just about extinct in Escondido.”
Become A Millionaire
So how do you become a millionaire? Buy a house for $250,000 and pay it off in 20.6 years and you’ll be one. How? In 10.3 years the house will be worth $500,000 and in another 10.3 years it’ll be a million. Oh, you haven’t paid off the loan yet? That’s right, you still owe around $100,000 on it, so really you have $900,000 in equity, which is what we call the difference between what the house is worth and what you owe on it. OK, so you have 9 more years to go, but in any event, at the end of the 30 years you’ll own the house free and clear, and it’ll be actually worth closer to $2 million by then.
I know this sounds ridiculously hard to believe, but consider that 30 years ago people were buying houses for $40,000. Then consider the Bay Area around San Francisco where small old houses, like the $200,000 Escondido ones, are going for $600,000 today. Is it so ridiculous to imagine that this area might become like that in the next 30 years? Most cities in San Diego County have no building room left, or are very close to it. After that, watch prices take off.
I mean, imagine you’re on the moon, looking at the earth, looking at the USA from far above. Now imagine everyone in the USA all wanting to live in the little strip of land in the middle of the Pacific Ocean. Got the picture? I realize not everyone wants to live here, but I want you to understand that a great many people do.
In Hawaii, prices are expected to continue to rise because our population is increasing faster than we are building houses. That’s the bottom line. People are coming from other states, from other countries, and we’re having babies. Unless some disaster causes the number of people to decrease, home prices are expected to continue to climb.
So the question is, what do you do about it? Continue to watch? Or participate and take control of your financial future?
But I Can’t Afford A Home!
Let’s say you’d like to buy a home of your own, but think you can’t afford to do it. I would say just the opposite – that you can’t afford not to do it. Let’s see if I can make it easier for you to swallow.
The government doesn’t want you to pay rent your whole life and end up being dependent on the state, and so Uncle Sam is willing to subsidize your home purchase! Your mortgage interest and real estate taxes are tax-deductible. I’ll explain.
Before you get your paycheck, your employer takes out the taxes, and then you get what’s left to pay your rent, put gas in your car, whatever. But when you buy a house, you take your house payment out of your salary first, and then pay tax on what’s left.
This is such a huge, critical, and important difference that I need to repeat it. As a renter, you’re used to the idea of the government getting their share first and you living on what’s left. As a homeowner, you use your salary to pay for your home first, and then let the government have a share of what’s left. This is how the wealthy think. They think “how much tax do I want to pay?” not “gee, I wonder how much I’ll have left after taxes are taken out.” And owning your own home is a key step in starting to think like the wealthy.
Look At These Numbers!
In practice, it works like this. Let’s say your family income is $70,000 and you pay $1200 in rent. If you buy a home for $240,000 with 20% down, your payment might be $1558 a month. Don’t get upset about the 20% for now, just follow me here for the sake of discussion.
The $1558 comes from a home loan at 7%, real estate taxes, and insurance.
I know $1558 per month is more than $1200, but wait! $1479 of that is a tax deduction, meaning in the first full year of homeownership, you would pay taxes on an income of $52,255 instead of $70,000. Since you are in the 28% tax bracket, you would save $4969 a year in taxes, or $414.05 a month!
(Disclaimer! I’m not a CPA, so I’m not qualified to give tax advice. The numbers I used assume you are already itemizing deductions on Schedule A. Consult your tax professional to see how the numbers work out on your specific tax return.)
So let’s recap. Your rent was $1200, and now your mortgage payment is $1558, but Uncle Sam is giving you $414.05 of it! So your new cost to have that roof over your head is really $1143.95, less than you were paying in rent!
But it’s actually better than that, because I haven’t figured any state income tax savings. Oh, and remember that $50-100 a month I talked about back at the beginning of this article? That’s the part of the loan that goes towards paying it back, called “principle reduction”. I didn’t figure that into the calculation either, but that’s like putting that money every month right into the bank, the bank of your own home.
But you say, “getting money back from Uncle Sam is great, but how can I possibly make the $1558 payment with my current take home pay?” Well, you don’t have to, you can take the extra money out of your check now, and let Uncle Sam tax what’s left, remember? You do this by telling your employer to take less taxes out of your check using a W-4 form. This way, you get the extra $414 a month now to make the mortgage payment with, rather than getting a huge tax refund at the end of the year!
“But I still have a big problem”, you’re thinking, “Where do I get the 20% down, that’s $48,000!” Yes, it is. Now we get to where the rubber meets the road. You have to really want your own home, really believe that this is what you have to do for yourself or for your family.
You can of course, buy with 10% down, 5% down, or even zero down, but in those cases, your monthly housing expense will be higher than rent, even after figuring the tax savings. If you can handle the payment, it still works out in your favor, because remember the 7% a year? That $240,000 house will be worth $256,800 next year, an increase of $16,800! So you might have to spend $200 a month more than you did in rent, but look – you paid $2400 a year more, but you gained $16,800. That’s an amazing return, way better than a 401K, even a company matched 401K! If it were me, I’d put less in the stock market and buy my own home instead.
The Amazing Power Of Leverage
That reminds me of one of the best advantages to buying real estate, the benefit of leverage. As I said, if you buy a house for $300,000 in ten years it’ll be worth $600,000 so you doubled your money in 10 years. In fact, we own a house in Carlsbad that we bought for $300,000 five years ago, and now it’s worth $450,000, a 50% increase, right on schedule.
But here’s my point – you didn’t have to come up with the whole $300,000 for the house, you only put 10% down. You only invested $30,000! So when your $30,000 becomes $300,000, that isn’t a double, it’s a ten-fold increase in your money!
More Benefits Down The Road
Oh, and there’s more – once the value of your home increases, you can borrow against it and use the money for whatever you want. The money is tax-free, and the interest on this money is tax deductible. So while your renting buddies are paying 11% on their car loans with after tax money, you’re deducting the interest on your car payment because you’re a homeowner.
I know people who have used this method to pay for college for their kids, get the down payment to buy a second home or an investment property, or just borrowing against the house for tax-free retirement income.
And here’s the best one – when you sell that $600,000 house that you paid $300,000 for, you can pocket the gain tax-free, up to $500,000 for a married couple. The money in your 401K may grow tax-deferred, but when you take out the money to spend in your retirement, you must pay taxes on it. With your personal residence that you’ve lived in for 2 years, you just put the gains in your pocket and pay no tax. This is incredible advantage that no other investment can offer! In fact, there are some interesting ways to retire using these tax-free gains, but that’s another subject.
I challenge you to find me an investment other than real estate that gives you appreciation, leverage, tax deductions and tax-free capital gain.
Until you can do that, I think I’ll keep my money in real estate.
How To Get That First House
So if you’re convinced that you should own a home, how do you actually go about it? What if it’s just too darn expensive in Honolulu? Well, there are a number of special first time buyer programs to make it easier, and we’ll definitely explore those together. But what if it’s still too expensive?
In that case, “you gotta do what you gotta do”. You could get a 4 bedroom place and rent out a couple of the bedrooms to roommates to help pay for it. You could go where real estate is cheaper, like Ewa Plain or Mililani to get your first house. Some people who work in Honolulu are going even further than that to get their foot in the door. I know it’s hard, and it wasn’t easy for me to get my first place either. You just have to grit your teeth and do it. The hardships are temporary, but the benefits last a lifetime.
My advice to you is to just go for it. Even if the first house isn’t your dream house, you have to start somewhere. Face your fears and get it done. It’s not just me saying this. In the book, “The Millionaire Next Door”, the author says that more millionaires were made through real estate that any other method. Robert Kiyosaki in his “Rich Dad-Poor Dad” series talks about the “3 mountains” of financial security – your own business, stocks, and real estate.
Why Now Is The Perfect Time?
Are you afraid it’s the top of the market? With interest rates the lowest in 30 years, I think the risk is greater that the interest rates will go up, not that home prices will go down. But even if prices do go down a little, if interest rates tick up, the monthly payment on that house will be higher, even if the price is less. So your risk in trying to “pick the bottom” is that you’ll miss out on today’s very low interest rates. And besides, I don’t believe that prices will fall in the entry-level price range, for a number of reasons that I’d be happy to share with you personally.
The next step is up to you. I’d suggest sending me an email or giving me a call and we’ll see what can be done. Even if your lease isn’t up yet, we should still get the ball rolling, because we may have some credit work to do, and that could take 3 months or more. If you’re not ready to talk yet, but would like to be kept up to date with the real estate market, then sign up for my email newsletter.
Either way, do something. Get something to show for your efforts. Don’t be like the old saying, “Work your fingers to the bone, and what do you get? Bony fingers.” You know, next year at this time you could still be renting, or you could be in your own home building equity. You might even discover you’re handy at doing home improvements, as some of my clients have done, and they’ve really increased the value of their properties quickly.
Who knows what you’ll accomplish once you have this big unfinished business of not owning your home out of the way? You know you need to do it – it’s like a big weight holding you back until you get it done. Today’s a good a day as any.
What You Should Know About Home Inspections
Since obtaining a home inspection is one of the most important steps in purchasing a home, I thought I’d take the opportunity to provide some insight into the home inspection process.
A qualified inspector can point out potential costly problems with the home you are considering buying, and a good inspector will give maintenance advice and ultimately give you peace of mind about your home investment. All home buyers — whether they are buying an older home or building a new one — should have the home inspected by a professional after making an offer and before closing.
There are a few things you need to know before hiring a home inspector. First, the home inspection industry is becoming more professional and regulated. There are professional organizations with codes of ethics, like the National Association of Home Inspectors and the American Society of Home Inspectors, but membership is voluntary.
The average home inspection costs $300, which is paid on the day the inspector examines your home. Lower or higher fees do not necessarily reflect the expertise of the inspector. Finding an experienced home inspector who provides value for your money is most important.
The American Society of Home Inspectors (www.ashi.com) recommends interviewing at least three professional inspectors in order to find one you trust and with whom you communicate well. I can provide a list of local home inspectors for you to interview, and you should ask friends and family members for recommendations as well.
Ask inspectors about their qualifications. Do they have experience in the construction or engineering industry? Do they have special training or accreditation from a professional organization? How long have they been inspecting homes in the local area? Are they familiar with problems specific to our area like drainage issues, pests or building material failures?
Once you have found a qualified professional, it’s important that you attend the inspection with me and your home inspector. Some buyers like to climb into the crawl space and attic with the inspector to look at the home’s major systems. At a minimum, be on site to ask questions, examine the problem areas and learn about the ongoing maintenance your home will need.
The standard home inspector’s report will review the condition of the home’s heating, plumbing and electrical systems. The report will also include information about the structure including the foundation and basement, as well as the roof, attic, walls, ceilings, floors, windows and doors. It may include photos of problem areas or recommendations for repairs.
Reduce Your Tax Burden Through Home Ownership
Here’s a nice surprise…good news involving the word “taxes.”
Recent changes in the tax laws have made real estate a more attractive investment than ever before. As a homeowner you are eligible to take advantage of these tax changes and deductions to keep more money in your pocket this year.
Profits from the sale of your home
Congress did homeowners a huge favor by passing the Taxpayer Relief Act of 1997. Today, you can exclude up to $250,000 in profits (or $500,000 if you are married and filing a joint return) from the sale of your primary residence from your taxable income. Previously, this type of deduction only applied to those who were age 55 or older.
Let’s say a married couple purchased a home for $300,000 five years ago and sold it for $450,000 in 1998. They get to keep the $150,000 profit tax-free, provided they have lived in the home for at least two years. The IRS allows people of any age to claim the exemption each time they sell their home, but no more frequently than once every two years.
Homeowners looking to downsize will benefit the most from the tax change. You no longer have to reinvest the profits in a home that is similar in price to avoid paying capital gains tax, and you free up cash for additional investments like rental property, mutual funds, education and more.
Mortgage interest, real estate taxes and points
In most cases, the interest you pay on your primary mortgage and your real estate taxes are fully deductible on your tax return. Your lender will send you Form 1098, outlining the amount you paid in interest and real estate taxes over the course of the year.
Mortgage points are also deductible. If you bought a home last year, you can deduct the full amount of the points you paid as home mortgage interest. Meanwhile, if you sold a home in 1998 and paid points, you cannot deduct them as interest but you can claim them as a selling expense if your profit is subject to a taxable gain.
One last point about points. If you were one of the many homeowners who took advantage of low interest rates and refinanced your mortgage last year, the points you paid on the refinanced mortgage are not fully deductible on your 1998 return. You can, however, deduct refinancing points as mortgage interest over the life of the loan. And, if you are refinancing for the second or third time, don’t forget to deduct the remaining balance of your previous refinance (those points not yet deducted). This extra deduction can be claimed in the same year your do your new refinance.
Home office deduction
Writing off your home office is a little tricky. To qualify for the home office deduction your office must be your principal place of business — the place where you meet with clients, customers or patients — and must be used exclusively for your business. Rooms that double as an office by day and family room by night do not apply. If you meet all of these criteria, you may be able to deduct a percentage of your real estate taxes, mortgage interest, utilities, depreciation and repairs.
Beginning in 1999, your home office may qualify under a new liberal definition of “principal place of business” if you use it for management and administrative tasks related to your business but meet with clients elsewhere. Under this new law, the home office deduction may be available to more homeowners.
Be sure to report any income you receive from rental property on your return and deduct your expenses as well. Allowable expenses include depreciation, repairs and operating expenses such as advertising, taxes, utilities and interest.
Since these rules are generalizations, it is best to consult with your tax adviser to find out how these deductions apply to you and your tax strategy. Meanwhile, please call me for more information about how a real estate investment can pay off and other benefits of home ownership.
Feeling a Little Cramped? Moving Up
If your home is giving you “the squeeze” because your family has grown or you’re seriously thinking about buying a home in a more upscale neighborhood, then you may be ready to move up to your next home. But how do you get started?
Begin with a “reality check.”
Take some time to really look at what the next step may be. Visit the neighborhoods you may be interested in. Tour open houses or homes for sale to see what kind of home is available in your price range. I can show you neighborhoods and homes that you might not have considered, but that will meet your needs. Trust your instincts and focus on what you know fits your lifestyle. Then I can help advise you on the value and investment quality of the homes on the market.
Next, talk to your lender to see what kinds of mortgage programs and rates are available, as well as how much you will qualify for. More important, take a hard look at your household budget to realistically determine how much of a mortgage payment you can afford each month. If you don’t already have a good relationship with a lender, I’d be happy to refer you to lenders who offer mortgage programs that meet your needs.
In the meantime, I can perform a Comparative Market Analysis (CMA) for your current home to see how it compares to other homes sold in your neighborhood. Then we can determine a realistic asking price. I can also recommend ways to prepare your home for sale. Once you have made a realistic assessment of what you’re getting into, then we can put your house on the market and begin to seriously look for your next home.
What if you find a home before yours sells…or vice versa
One of the biggest concerns of move-up buyers is what happens if they find their dream home before their current one sells, or if their home sells before they find a new one. Here’s a brief look at several options (please call me for greater detail or help with your particular situation):
If you have an acceptable offer for your home on the table but haven’t yet found a new house to move to, you can:
Go for it with the understanding that you may have to move twice – once to a short-time rental unit, the second time to your new home. Accept the offer with the stipulation that you want a long closing and the right to rent back from the new owner for 60, 90 or 120 days. Assure the buyer that you will do everything possible to move things along so they may be able to take possession of the home sooner than the specified terms. Inform the buyer you’ll sell the home only if you can find a house you like and it will take 30 to 60 days to determine if, indeed, you will sell. This may seem a bit risky but this approach can be successful if you allow the buyer to do their inspection (not appraisal) and get their financing in order while you shop for a new home. You also allow them to continue looking at other homes on the market. If the buyer finds something they like better, then you agree to let them out of the deal and refund their inspection cost (typically it’s only $200-$300). This a good way to avoid having to take your home off the market while you’re looking, only to have the buyer then do an inspection after you’ve found a new home, giving them an opportunity to renegotiate the deal when they know you’re over a barrel. To prevent surprises at the outset, we can include in your listing description a phrase such as “…the sale of this house is contingent on the seller finding a suitable home…”
Think about the future
When looking for your new home, try to think more about your future needs than your current needs. Generally, I recommend buying as much home as you can afford without overextending yourself, especially if you’re buying a new home with few maintenance issues. By stretching a bit within your personal budget, the home will better meet your current and future lifestyle, you will likely hang on to it longer, and it will be a better-performing investment in the long run.
With all that said, remember that you will likely not live in your new home forever. According to U-Haul, the average American relocates 11 times over the course of his or her life (Ladies Home Journal, July 1998). If your new home meets many of your needs, then go for it. You likely will be moving up again in the future
Historic Charm or Modern Conveniences
Antique moldings, a unique staircase and a colorful past give one listing a historic charm that can’t be replicated, yet another home is brand-new with all of the latest high-tech amenities. Which one is right for you?
We’re fortunate to have a variety of home styles – and ages – to choose from in the area. Each has its own appeal, depending on your lifestyle, price range and personal taste. I can help you find a home that meets your needs and style. In the meantime, here’s a look at some of the points to consider when choosing between an older, more historic home and a new, state-of-the-art property.
Craftsmanship: Older homes feature special touches that, in some instances, can’t be replicated. Beautiful columns, antique lighting fixtures, stained or beveled glass, wood trim, crown moldings and period accents give a home character and verve.
A Colorful History: Buying an older home often comes with an interesting story. Perhaps a local celebrity lived there at one time. Maybe the home was once the local doctor’s office or a popular business. Who needs an interesting knickknack when your entire home is a conversation piece?
Mature Landscaping: Homes in established neighborhoods are surrounded by mature trees and landscaping.
A Hobby for the Handy: If you enjoy puttering around the house, you may be well suited to an older home that requires your loving touch. Many owners of older properties get a lot of satisfaction by treating their home as a hobby of sorts — a place where they can restore antique fixtures, renew a tired structure and, generally, bring an older home back to its glory days.
Convenience: Newer homes have the latest amenities, including built-in appliances, central heating and air, and high-tech wiring for today’s computer, telephone and television equipment.
Energy Efficiency: Better windows, efficient heating and cooling equipment, enhanced air filtration, and the latest insulation materials increase energy efficiency in newer homes.
Maintenance: If you’re all thumbs when it comes to home repairs, you might consider a new home. With a home built today, for example, you can get siding, windows and trim that never need painting. New homes even have wood decks made of pressure-treated lumber to resist rot and pests.