Buying your new home is a serious venture. It can be an absolute pleasure or a massive headache. Your house is not just your home, it is a serious investment in the dwelling, the area and your future.
When buying a home – you’re bound to have many questions. For example, “In what area can I find a home that suits my needs?”, “How much money will I need to afford the monthly payments?” and “How long will the home buying process take?”
Below are some articles that you might find useful in the home buying process. Please feel free to click on one of the links below to read more.
- Pre-Qualification: Meet with a mortgage broker and find out how much you can afford to pay for a home.
- Pre-Approval: While knowing how much you can afford is the first step, sellers will be much more receptive to potential buyers who have been pre-approved. You’ll also avoid being disappointed when going after homes that are out of your price range. With Pre-Approval, the buyer actually applies for a mortgage and receives a commitment in writing from a lender. This way, assuming the home you’re interested in is at or under the amount you are pre-qualified for, the seller knows immediately that you are a serious buyer for that property. Costs for pre-approval are generally nominal and lenders will usually permit you to pay them when you close your loan.
- List of Needs & Wants: Make 2 lists. The first should include items you must have (i.e., the number of bedrooms you need for the size of your family, a one-story house if accessibility is a factor, etc.). The second list is your wishes, things you would like to have (pool, den, etc.) but that are not absolutely necessary. Realistically for first-time buyers, you probably will not get everything on your wish list, but it will keep you on track for what you are looking for.
- Representation by a Professional: Consider hiring your own real estate agent, one who is working for you, the buyer, not the seller.
- Focus & Organization: In a convenient location, keep handy the items that will assist you in maximizing your home search efforts. Such items may include:
- One or more detailed maps with your areas of interest highlighted.
- A file of the properties that your agent has shown to you, along with ads you have cut out from the newspaper.
- Paper and pen, for taking notes as you search.
- Instant or video camera to help refresh your memory on individual properties, especially if you are attending a series of showings.
- Location: Look at a potential property as if you are the seller. Would a prospective buyer find it attractive based on school district, crime rate, proximity to positive (shopping, parks, freeway access) and negative (abandoned properties, garbage dump, source of noise) features of the area?
- Visualize the house empty & with your decor: Are the rooms laid out to fit your needs? Is there enough light?
- Be Objective: Instead of thinking with your heart when you find a home, think with your head. Does this home really meet your needs? There are many houses on the market, so don’t make a hurried decision that you may regret later.
- Be Thorough: A few extra dollars well spent now may save you big expenses in the long run. Don’t forget such essentials as:
- Include inspection & mortgage contingencies in your written offer.
- Have the property inspected by a professional inspector.
- Request a second walk-through to take place within 24 hours of closing.
- You want to check to see that no changes have been made that were not agreed on (i.e., a nice chandelier that you assumed came with the sale having been replaced by a cheap ceiling light).
- All the above may seem rather overwhelming. That is why having a professional represent you and keep track of all the details for you is highly recommended. Please email me or call me directly to discuss any of these matters in further detail.
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Buying a home is one of the most important purchases most people will make. In order to make the right decision the first time, potential buyers need to be prepared. Consider the following before starting negotiations:
Be prepared. Research the housing market in the target area. Once you have information about the general area, focus on the particular property and seller. Look for answers to questions such as:
- Why is the homeowner selling? (If they’re moving because they find the area undesirable, you might want to consider this issue.)
- How long has the home been on the market? (If it has been on the market for a long time, perhaps there are negative facts about the property that you need to know.)
- How much did the seller pay for the home compared to the current asking price? (If the seller paid more, find out why. Was it a general real estate trend, or did property values in that particular neighborhood go down?)
- What is the seller’s time frame for selling and moving? Does it fit within your needs?
- Are there any defects in the home or problems with the surrounding neighborhood? (For example, is the roof so old that it will likely leak during the next storm? Is there a new construction project in the area that will lead to major traffic congestion?)
As the potential buyer, you want the advantage. While you want answers to all your questions to the seller, reveal very little about your circumstances.
Do not give the seller personal information such as your income, the maximum you are able to pay for a down payment or the home, or when you want to move.
Make sure that your agent knows not to reveal any such information to the seller or his/her agent.
Also, do not let the seller see how much you want the property. If you appear desperate or overly enthusiastic, the seller then has the stronger bargaining position. When meeting with the seller or listing agent, keep your emotions in check.
Establish a Timeline. Find out if the seller needs to have the sale closed sooner rather than later. If the seller is feeling pressured to sell, use that to your advantage in negotiating. Even if you, the buyer, are the one with the deadline for purchasing a home, don’t let yourself be rushed into making concessions or a purchase you may regret later.
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Fortunately for buyers, there are a variety of mortgages to choose from. It is in your best interest to investigate each of them to determine which is the best for your situation. You probably won’t qualify for all of them. In fact, you may only qualify for one. But if you do qualify for more than one, you may save yourself money (and worry) in the long run if you do your homework before signing on the dotted line.
Consider a fixed rate mortgage if either of the following describes you:
- You plan on living in your new home for many years, and/or
- You are not a risk-taker and prefer the stability of knowing how much your payment will be each month.
Since most home loans are for a period of 30 years, if you want a payment you can count on for that long of a period of time, a fixed rate mortgage may be what works best for you.
Once your loan amount and interest rate are calculated and locked in, a fixed rate mortgage will guarantee that you will have the same payment over the life of the loan. Making extra payments to principal will allow you to pay your loan off sooner.
This may not always be the best choice, however. If interest rates are very high at the time you take out your loan, with a fixed rate mortgage you’ll be stuck with that high interest for the life of the loan (unless you choose to refinance).
Conversely, if interest rates are very low, you’ll come out the winner with interest rates that will stay low no matter how high interest rates go in the future.
The following are the advantages and disadvantages of the varying lengths and terms of fixed-rate mortgages:
- Pay off the loan in half the time of a 30-year loan.
- Equity builds up more quickly than in a 30-year loan.
- Payments are higher (which may be a problem if you lose your job or become unable to work).
- Pay off the loan in 2/3 the time of a 30-year loan.
- The overall interest paid is considerably less than for a 30-year loan.
- The most common choice, especially for first-time homebuyers, as it’s the easiest of the fixed-rate loans to qualify for.
- Monthly payments are lower than for 15-year and 20-year loans. This can prove especially helpful if you do not have a lot of “padding” between the amount you can afford to spend and the monthly payment for your desired property.
- More desirable if you plan on staying in the same home for years, since equity builds more slowly than for shorter-term loans.
- For income tax purposes, this term provides the maximum interest deduction.
If you are more comfortable in taking a risk with your money or if interest rates are very high at the time you take out your loan, an adjustable-rate mortgage (ARM) may be the solution for you. You might also choose this type of loan if your planned ownership of the property is short-term or if you expect your income to increase to cover any potential rise in the interest rate.
Generally, the interest rate when you take out your loan will be lower than a fixed-rate mortgage. Please note that this is true initially, not necessarily long-term.
Since an ARM rate rises and falls depending on the prevailing interest rate, your mortgage payment will rise and fall accordingly. If your income is not sufficient to cover the highest possible payments, then this option is not for you. On the positive side, the lower initial payments will allow you to qualify for a larger loan than if you choose a fixed-rate. The downside is that your payments will increase if/when the rates go up.
Typically, ARM interest rates are tied to a specific financial index (such as Certificate of Deposit index, Treasury or T-Bill rate, Cost of Funds-Indexed Arms or COFi, or LIBOR [London Interbank Offered Rate]) and your payment will be based on the index your lender uses plus a margin, generally of two to three points. Get the formula used by your lender in writing and make sure you understand what it means.
Fortunately, the amount an ARM can increase is limited. There are “caps” on how much your lender can increase your rate, both for a period of one year and for the life of the loan. Plan ahead, and have your lender calculate what the maximum payment would be if your rate went to the highest amount allowed by the cap for your particular mortgage. If you are not confident you’ll be able to pay that amount on a monthly basis, perhaps you should reconsider this type of loan.
If neither the fixed-rate nor the adjustable-rate mortgage seems like the best option, perhaps the convertible ARM will be right for you. This alternative combines the initial advantage of an ARM with a fixed rate after a predetermined number of years. Obviously, this type of mortgage has more advantages when the initial interest rate is low and the future rate is not guaranteed.
Another mortgage option available to some people is a government loan, providing that you meet the qualifications for these loans.
- VA Loans: Veterans may qualify for a loan from the Veterans Administration. There is a limit on the amount you can borrow, so this
option works best for those buying a lower priced home.
FHA Loans: The Federal Housing Association offers loans to lower-income Americans. Look for the phrase “FHA approved” when looking at ads for homes.
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Naturally, you want to get the best deal for the least amount of money. This holds true for mortgage rates as well.
A lower interest rate means a lower monthly mortgage payment, which can save you money in the long run. Also, it is easier to qualify for a lower payment
than a higher one.
You basically have two routes to finding the best rate. The first is to do all the research on your own. The second is to use a mortgage broker.
With the advent of the Internet, much of this information is readily available online. Once you have educated yourself sufficiently about real estate loans, all it takes is the time and energy to sift through online resources to find the information you need.
Rates change quickly. That great rate you find today might not be there tomorrow. Once you find the rate you are looking for, submit a loan application and lock in that rate.
Some sources for interest rates on the Internet include:
Bank Rate Monitor (http://www.bankrate.com)
When comparing loans, make sure that you’re comparing loans of the same type. For example, you find that “Loan A” for a 30-year loan has a much lower interest rate than “Loan B” (also for 30 years).
Upon further inspection, you find that “Loan A” is technically an adjustable rate mortgage. Its payment is based on a 30-year amortization, but becomes due through either payment or refinancing at the end of 5 or 7 years.
These are frequently referred to as a 5-year or 7-year fixed-rate mortgage. While both said “30-year”, they are not the same type of loan.
Ask the lender for a statement detailing all fees associated with the loan. Factors such as “points” (loan fee), interest rate and “garbage fees” (extra fees which some lenders charge) can vary greatly from one lender to another.
If you do not have the time or experience to “do it yourself,” look for a qualified mortgage broker that can assist in finding the right mortgage for
you. Ask friends and associates who have refinanced or purchased recently if they have a broker they can recommend. You’ll want to find a broker who is
energetic, flexible and knowledgeable about finance and loans and someone who has your best interests in mind.
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You’ve Opened Escrow, Now What?
Congratulations, you are on your way to owning your very own home! Follow these suggestions (and your realtor’s advice) so that escrow and settlement will go as smooth as possible.
You will be asked for a down payment on the home you are purchasing. You can choose to put down as much or as little as you want (depending on your mortgage), but remember, the more you put down toward the total price of your home, the less time it will take you to pay off and the less your mortgage payments will be every month.
During this period of purchasing your home, you are going to need an escrow or settlement company to act as an independent third party so that you know when and who to give your money to get the deed to your new home. The escrow or settlement company will hold your deposit and coordinate much of the activity that goes on during the escrow period. This deposit check may also be held by an attorney or in the broker’s trust account. Make sure that there are sufficient funds in your account to cover this check.
The deposit check will be cashed. Assuming the sale goes through, this money will be applied to the purchase price of the home. If for any reason the sale is not consummated, you may be entitled to receive all of your deposit back, less standard cancellation fees. In certain instances, the seller may be able to retain this money as liquidated damages. Prior to executing a purchase contract, it would be wise to speak with your counsel regarding whether or not it is your best interest to have a liquidated damages clause as part of the contract.
The period that you are “in escrow” is often 30 days, but may be longer or shorter. During this time, each item specified in the contract must be completed satisfactorily. By the time you have opened escrow, you have come to an agreement with the seller on the closing date and the contingencies. Each contract is different, but most include the following:
- Inspection contingency: this should be completed as soon as possible after the contract to purchase is signed as unsatisfactory results of the inspection may mean that you will want to cancel the contract.
- Financing contingency: once the contract is signed, you have a period of time to secure funding. If, for any reason, you are unable to secure funding during the period of time granted to you by the contract (and the seller will not provide a written extension of time), you must decide whether you want to remove the contingency and take your chances on getting a loan. You may choose to cancel the purchase contract.
- A requirement that the seller must provide marketable title.
With an attorney or title officer, review the title report. The title must be “clear” to ensure that you do not have legal issues regarding your ownership.
Check into local and state ordinances regarding property transfer and make sure that you and/or the seller have complied with them.
Secure homeowner’s insurance. This will probably be required before you can close the sale. Due to such requirements as special fire and earthquake insurance, obtaining this insurance may require a lengthy period of time. It would be in your best interest to apply for insurance as soon as possible after the contract is signed.
Contact local utility companies to schedule to have service turned on when you close escrow.
Schedule the final walk-through inspection. At this time, you should make sure that the property is exactly as the contract says it should be. What you thought to be a “permanently attached” chandelier that would come with the property might have been removed by the seller and replaced with a different fixture entirely.
You’ve made it! Once the sale has closed, you’re the proud owner of a new home. Congratulations!
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6 STEPS WHEN BUYING A HOME
Purchasing a property is most likely the biggest financial decision you will ever make. Whether this is your first purchase or you are an experienced buyer, this decision must be made carefully
Why Do You Want To Buy?
Are you tired of paying rent? Have you decided to pay your own mortgage and not your landlord’s? Have you outgrown your current home? Are you looking for an investment portfolio? Are you looking for a rental property? Would you like a larger yard? Would you rather live in a different area? Do you want to shorten your commute? Having a clear sense of your reasons for buying will help you choose the right property.
Has Your Income Grown?
Property ownership is an excellent investment; whether you are looking for your dream home, a rental property, or to expand your investment portfolio. Owning real estate is one of the least risky ways to build equity or to obtain a greater return on your initial investment.
Before you start shopping for your property, it is a good idea to make some preparations.
Build Your Green File.
A green file contains all your important financial documents. You will need it to secure financing for your property. The typical green file should contain:
- Financial statements
- Bank accounts
- Credit cards
- Auto loans
- Recent pay stubs
- Tax returns for two years
- Copies of leases for investment properties
- 401K statements, life insurance, stocks, bonds, and mutual account information.
Check Your Credit Rating.
Your credit score will have a huge impact on what type of property you can buy, and at what price. It is first recommended to check your credit rating with an experienced lending institution so that we can determine what you can afford. The lender will research your credit ratings from the three credit reporting agencies Equifax, Experian and Trans Union. We will be happy to recommend experienced, knowledgeable lenders in the residential, construction, and commercial and investment real estate fields.
Be Careful With Your Finances.
Now is not a good time to make sudden career changes or large purchases. You want to approach your property purchase from a position of financial stability.
Buying a property requires making many important financial decisions, understanding complex issues and completing a lot of paperwork. It helps to have an expert in your corner when undertaking such a large purchase. We can guide you through this process, and also provide you with access to property listings before they hit the general market.
Here are some factors to consider when choosing your real estate professional:
- Look for a full-time agent – one who has experience completing transactions similar to yours.
- Interview a few agents: Are they familiar with the area in which you are interested?
- Ask how much time the agent will have for you, and if they are available at night and on weekends.
- Ask about their credentials and education: A good agent will continually strive to improve and gain knowledge of the latest real estate trends and hold the highest designations in their respective fields of expertise.
- Does the agent return your calls promptly? Time is money when attempting to buy a property.
- Ask for a list of properties they have sold or a list of references.
- Choose an agent who listens attentively to your needs and concerns. Pick an agent, with whom you feel comfortable.
Once those preparations are out of the way, it is time to find the right property for you.
Take a Drive.
Get to know the neighborhoods, complexes, or subdivisions, which interest you. Drive around and get a feel for what it would be like to own a property in the area. Start getting a sense of the properties available in those areas.
Narrow Your Search.
Select a few properties that interest you the most and have your real estate agent make appointments to visit them. Ask your real estate agent about the potential long term resale value of the properties you are considering.
Time to Buy.
Once you have picked out the property you want to purchase, your real estate agent can help you make an offer that the seller will accept. A good agent will investigate the potential costs and expenses associated with the new property. An agent can also help you draft your offer in a way that gives you the advantage over another offer.
The Process, Step-by-Step
The Initial Agreement and Deposit.
An effective agreement is a legal arrangement between a potential purchaser and the property’s seller.
Some important tips to keep in mind to streamline the process:
- Keep written records of everything. For the sake of clarity, it will be extremely useful to transcribe all verbal agreements including counter-offers and addendums and to convert them into written agreements to be signed by both parties. We will assist you in drafting all the paperwork for your purchase and make sure that you have copies of everything.
- Stick to the schedule. Now that you have chosen your offer, you and the seller will be given a timeline to mark every stage in the process of closing the real estate contract. Meeting the requirements on time ensures a smoother flow of negotiations so that each party involved is not in breach of their agreements. During the process we will keep you constantly updated, so you will always be prepared for the next step.
The Closing Agent.
Either a title company or an attorney will be selected as a closing agent. The closing agent will hold the deposit in escrow and will research the complete recorded history of the property to ensure that the title is free and clear of encumbrances by the date of closing and that all new encumbrances are properly added to the title. Some properties are subject to restrictions which limit various activities such as building or parking restrictions. There may be recorded easements and encroachments, which limit the rights to use your property.
How to Hold Title.
You may wish to consult an attorney or tax advisor on the best way to hold title. Different methods of holding title have different legal, estate and tax implications, especially when selling or upon death of the title holder.
Once your offer is accepted by the seller, you will need to have a licensed property inspector inspect the property within the time frame that was agreed upon in the effective contract to purchase. You may elect to have different inspectors inspect the property, if you wish to obtain professional opinions from inspectors who specialize in a specific area (eg. roof, HVAC, structure). If you are purchasing a commercial property, then you will need to have an environmental audit done on the site for the lending institution. We can recommend several different inspectors.
Depending on the outcome of these inspections, one of two things may happen:
1. Either each milestone is successfully closed and the contingencies will be removed, bringing you one step closer to the close, or
2. The buyer, after reviewing the property and the papers, requests a renegotiation of the terms of contract (usually the price).
Appraisal and Lending.
It is imperative that you keep in close communication with your lender, who will let you know when additional documents are needed to approve your loan application and fund your loan. If the agreement is conditional upon financing, then the property will be appraised by a licensed appraiser to determine the value for the lending institution, via a third party. This is done so that the lending institution can confirm their investment in your property is accurate. Appraisers are specialists in determining the value of properties, based on a combination of square footage measurements, building costs, recent sales of comparable properties, operating income, etc. When you are within two weeks of closing, double check with your lender to be sure the loan will go through smoothly and on time.
If the property that you are purchasing is conditional upon an association approval, request the rules, regulations, and other important documents from the seller as soon as you have an effective agreement to purchase. Make sure that the application documents and processing fees are submitted to the appropriate person at the association by the required time. Fill out all of the information completely and legibly so there is no delay in processing the application. If you are required to meet with the association for your approval, make an appointment as soon as possible for the interview. Most associations require a certificate of approval before move-in. Your closing agent will request that the original copy of this approval letter be brought to the closing, so that it can be recorded with the deed in the county public records.
If you are obtaining a loan, you will be required by your lender to purchase a certain amount of insurance on the property. The value will depend on the lending institution and the purchase price of the property. You may be able to save hundreds of dollars a year on homeowners insurance by shopping around for insurance. You can also save money with these tips.
- Consider a higher deductible. Increasing your deductible by just a few hundred dollars can make a big difference in your premium.
- Ask your insurance agent about discounts. You may be able get a lower premium if your home has safety features such as dead-bolt locks, smoke detectors, an alarm system, storm shutters or fire-retardant roofing materials. Persons over 55 years of age or long-term customers may also be offered discounts.
- Insure your house NOT the land under it. After a disaster, the land is still there. If you do not subtract the value of the land when deciding how much homeowner’s insurance to buy, you will pay more than you should.
We will be happy to recommend experienced knowledgeable insurance agents for every property type.
If you have come this far, then this means that it is almost time for a congratulations, but not yet. Do not forget to tie up these loose ends:
Final Walk-Through Inspection.
More of a formality than anything else, the final inspection takes place a day before, or the day of the closing. You will visit the property to verify that all is in working order, everything is the same as when you last viewed the property, that there are no extra items left behind, and that everything included in your purchase is still at the property.
Home Services and Utilities.
We will provide a list of useful numbers for the activation of home services and utilities after the closing occurs.
We are ready to assist you should an unforeseen glitch pop up, even at this last stage. Something at the property breaks down, or some other minor detail – no need to worry. We have encountered these problems before so we know how to handle them efficiently and in a stress-free manor.
The closing agent will furnish all parties involved with a settlement statement, which summarizes and details the financial transactions enacted in the process. You and the seller(s) will sign this statement, as well as the closing agent, certifying its accuracy. If you are obtaining financing, you will have to sign all pertinent documentation required by the lending institution. If you are unable to attend the scheduled closing, arrangements can be made depending on the circumstances and the notice that we receive. If you are bringing funds to the transaction, you can elect to either have the funds wired electronically into the closing agent’s escrow account, or bring a certified bank check to the closing in the amount specified on the settlement statement. The seller should arrange to have all property keys and any other important information for you at the closing so that you may receive these items at this time.