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Buying Title

Buying a Home

How much house can you afford?

There are several ways to gauge how much you can afford to spend on a house.

But, before you go house-hunting, get pre-qualified for a mortgage so you’ll know in what price range you can shop.

It is not unusual for first-time buyers to be somewhat baffled abouthow to estimate what mortgage payment they will be able to handle eachmonth, plus how much money they’ll need for a down payment and closingcosts.

That’s why it is a good idea to get pre-qualified through a lenderbefore you even start to look for a home. Pre-qualification lets a buyerknow exactly how much a lender is willing to loan them. Withpre-qualification in hand, the buyer can save a lot of time-andfrustration.

Pre-qualification does not obligate buyers to take a loan from thelender, nor should it involve any fees (until later, when they actuallyapply for the loan).

At the same time, you must understand that pre-qualification is notpre-approval for a loan either which is a much more involved formalizedprocess that results in an actual letter of credit from a lendinginstitution for a specific loan. Depending on your unique circumstances,you may wish to consider pre-approval as an option, but it is notnecessary-consult with your real estate professional to decide what isright for you.

The less formal process of pre-qualifying on the other hand is atremendous tool for buyers to have when making an offer. Usually,pre-qualified buyers have an edge when making a purchase offer becausethe seller knows that the buyer is pre-qualified, and that there is atleast one lender ready to make it happen.

In addition, it allows you the flexibility to choose the mortgagethat is best for you at the time of actual purchase-which is sometimesmonths down the road. That can be important given the volatility ofinterest rates.

When a lender pre-qualifies, they are more concerned about the buyer’s paying ability than the price of the property.

For this reason, lenders are interested in more than just a buyer’sincome. They also want to know how much existing debt a buyer has, whattheir on-going financial obligations happen to be, and what the buyer’smonthly budget looks like.

Lenders use an established debt-to-income ratio, usually between .28to 1 and .38 to 1, to calculate the amount of the loan they are willingto give to a buyer. For instance, a lender who uses a .3 to 1debt-to-income ratio has determined that payments toward debtreduction-including existing debt plus new debt associated with buying ahome-cannot be more than 30% of they buyer’s gross monthly income.

An important factor that may influence a lender to authorize a loanwith a higher debt-to-income ratio – (where debt payments take a higherpercentage of a buyer’s income) – is a larger down payment. Buyers whoput a larger percentage of the purchase price down (5%, 10%, 15%, 20%,etc.) are considered better “risks,” because the theory is that the morea person has actually invested in the purchase, the less likely theyare to default on the loan.

Buyers usually discover that the pre-qualification process willproduce a home purchase price that is roughly 2 1/2 to 3 times theirgross annual income. The 2 1/2 -to-3 guideline is only a general rule ofthumb, however, and it doesn’t take a buyer’s full financial situationinto consideration. Since the lender’s calculations will also consider abuyer’s actual debts and ongoing expenses, the loan pre-qualificationamount may be higher or lower.

Regardless of the price bracket a buyer targets, they should keep pre-qualification in mind.


How much should you budget to own your own home?

Aside from the down payment, the three largest expenditures involvedwith the purchase of a home are usually your monthly mortgage payment,insurance and taxes. Obviously, the amount of your mortgage paymentdepends upon your down payment, rate of interest and the price of theproperty.

Take, for example, a home that has a $200,000 mortgage. An 7% fixedmortgage for 30 years, will run approximately $1330 per month. Whatabout taxes? The rate will often times vary from city-to-city, butgenerally you might expect your yearly tax bill to total around 1.25% ofthe purchase price. That means, for a home with a market value of$250,000, yearly taxes might run around $3125. A local real estate agentcan help prospective homeowners refine these figures.

In addition, it is important to keep in mind that there are manyadditional expenses incurred with home ownership, some of the mostobvious are utilities and trash collection. Smart homeowners should alsobudget for one other item, maintenance and upkeep of the home. Ifpossible, a small amount should be set aside each month to pay for those“rainy day” repairs such as painting, plumbing (hot water heaters,garbage disposals), adding storm windows (to improve energy usage),insulation (in attics), etc.

But home ownership is not just a one way street-that is, aside fromspending money on repairs and maintenance, homeowners can profit fromtheir property. The most significant benefit is the tax deduction. It isno secret that among the last real income tax deductions available toconsumers today are the interest paid on the home loan, and the propertytaxes. This can amount to thousands of dollars in deductions each year.

And, of course, the primary benefit of home ownership isappreciation-equity that builds every month. A home, aside from being aplace that provides shelter, can be a profitable investment, and therising value of the property oftentimes provides another “savings”account.

So, when it comes to buying a new home, remember one thing … the purchase of a property requires budgeting and planning.


How do you go about finding a mortgage?

The commotion of house hunting is finally over. You found just theright house, and your offer has been accepted. It was a great buy. Now,just one more hurdle-getting a loan-and you’re home free.

Often, buyers are so eager to get this “final detail” behind them,they rush through this portion of the transaction, and end up withless-than-ideal terms. Borrowers, however, have something lenderswant-their business. This positions them to negotiate the best possibleprice (cost of loan), terms and service.

Let’s look at price, or the cost of the loan. The first thing to dois find out what the current rates are, information readily available onthe internet, in your newspaper or from your real estate agent. Whencomparing rates, figure the annual percentage rate (APR), which includesinterest, extra fees and costs amortized over the life of the loan.Also determine the number of points, if any, that the lender will chargeto make the loan. (A point is equal to one percent of the loan amount.)

Next, consider what loan options the lender offers. There are six orseven basic types of loans, which vary in their duration. Check howrates are calculated (fixed versus variable), and whether charges arefully amortized over the life of the loan, or whether you’ll have to paypoints up front and/or balloon payments at the end.


Is there a pre-payment penalty clause?

Which terms are best for you depends on such factors as what changesyou expect in your income and what you predict will happen in loan ratesin the years ahead.

For example, if you only plan to reside in the home for a year ortwo, starting with a lower Adjustable Rate Mortgage (ARM) might be thebest choice. If you have no plans to move, and feel that inflation willrise rapidly, a fixed rate would obviously be better.

Finally, and perhaps most importantly, consider speed and service.Buyers shouldn’t have to wait days for approval and weeks for closingjust because the lender is slow.

Remember, qualified buyers are great prospects for lenders – so giveyour business to the lender who demonstrates they not only want it, theydeserve it.


How difficult is it to qualify for a mortgage if you have a past credit problem?

Credit problems can make it harder to qualify, but it’s quite possible for buyers with poor credit to obtain a home loan.

Anyone who has had a financial problem-whether it was a matter oflate credit payment, delinquent taxes, or even a judgment that wasfiled-should expect this data to be a factor when applying for amortgage.
How critical a factor?
Minor lapses will probably have little or no effect. However, buyerswith serious problems may still qualify for a loan, but they may have topay a higher rate of interest or provide a larger down payment.

There are three steps that a person with past credit problems should take before applying for a loan.

First, request a credit profile from one of three major creditreporting agencies. To get copies of your credit report, start at:Credit Now – Credit Reports

Second, the buyer should optimize his or her credit profile by citingprompt payment of rent, utilities, and other bills not reported on thecredit profiles.

Finally, the buyer should be prepared to provide comprehensive andcandid explanations for any late payments to the loan officer. This isimportant because problems not reported by the buyer but discovered bythe lender will reflect unfavorable.

Many lenders are understanding about one-time problems such as the loss of a job, a medical emergency, etc.

Buyers with patterns of delinquent payments might want to consideradding six months or a year of flawless credit to their track recordbefore pursuing their home-buying plans.

So remember-if you are thinking about purchasing a home, but are worried about your past financial record-don’t give up.

There are solutions, lenders and agents who are in business to help.


What are the five most common mistakes made by first-time buyers, and how can you avoid them?

A good home-buying decision is one that fits your lifestyle and yourbudget-a house you’ll be able to resell when the time is right. Soundsimple? Not always.

Five common mistakes frequently made by first-time buyers.

1. Looking outside your price range. To avoid disappointment, contacta real estate agent who can help you pre-qualify before you startlooking for a home. The agent can also provide valuable insight on taxesand other expenses associated with a home (utility bills, etc.)

2. Buying on impulse. Buyers-especially first-timers-may be impressedby the first two or three homes they view. Look at a good selection.List the positives and negatives. Narrow the prospects to three or four,and then return for a closer look. Evaluate more than just theproperty. Look at the surrounding area and community amenities. Is thiswhat you-and your family-want and need?

3. Not planning ahead. Think seriously about any personal changes you are planning in the next five to seven years.

For instance, if you are planning on having children, consider howthe home will meet both your current and future needs. If adouble-income is necessary to qualify for financing-and make yourpayments-do your plans foresee an income sufficient to continue makingpayments?

4. Failure to focus on location. Don’t just focus on the house,examine the neighborhood. Is the area safe, well maintained, moderatelyquiet and close to work, stores, and schools?

Find out about zoning and what new construction is planned on any vacant land in the immediate neighborhood.

Will the property be easy to market when you are prepared to sell it?

5. Failure to understand the home buying process. Once you select ahome, get involved. Find a real estate agent willing to spend time withyou, and don’t hesitate to ask questions. Have them explain thenegotiation, financing and escrow processes and other elements involvedin the transaction.

Home-buying involves knowing the price, and what is inside and aroundthe property. Consider all your options carefully. This may be the mostimportant financial transaction of your life.


What’s the real difference between a new home and an old one?

While each offers its own style and charm, the difference usually boils down to two things:

1. How the home fits into the buyer’s lifestyle.

2. The condition of the property.

Homes that are 10 years old or less are generally better insulated –or have dual-glazed windows or thermal panes – which translate intolower heating and cooling bills. And, in today’s rising energy costenvironment, these considerations are significant. Although there aresome exceptions, homes that have been built with all-electric systems,generally have higher utility bills.

Homes that range between 15 and 20 years old may be in need of newwater pipes, especially if the old ones were galvanized and if a watersoftener was used. Water softeners and galvanized pipe can be deadlyand, after 15-20 years, re- plumbing is usually required. Have a plumberor general contractor inspect the pipes. Needless to say, it can beexpensive to re-plumb an entire system. Check the built-in fixtures andappliances for any signs of damage.

Flush toilets, test all the water taps and the electrical sockets, open and shut the windows, and try all the lights.

A window that will not open may be a sign of a more significantproblem-for example, a wall may have shifted, or worse yet, it couldindicate a problem with the foundation itself.

It is also a good idea to ask the seller for copies of past utilitybills. Examine them for some insight into what you can expect monthlygas and electric costs to be.

Although newer homes may be free of significant physical orstructural problems, there are other things to consider in making yourdecision.

Generally, room size and yard size tend to be smaller in some newerhomes. While, on the other hand, they usually offer the benefit of thelatest building and design technology. Many new homes also have morewindows and natural light incorporated into their design plan, allowingfor a more spacious feel and efficient energy usage.


Should a buyer get a professional inspection for the home they are buying?

Definitely. Hiring a professional home inspector can save a greatdeal of grief for buyers. The one exception would be when the home isnew and carries a written warranty by the builder.

Many buyers mistakenly believe that the only reason to have a homeinspection is to make sure that the house they’re buying doesn’t havedefects serious enough to warrant backing out of the transaction. Butthere’s more to it than that.

Certainly, an inspection will usually reveal major problems that mayeven surprise the seller. The obvious ones are corroded plumbing,antiquated and unsafe electrical systems, or structural and foundationproblems. And, the discovery of such problems may cause the buyer to re-think his or her offer.

Although a competent inspector can uncover deal-crushing defects,these problems are usually not commonplace. Typically, the seller willalready have told the buyer about anything major. More often,inspections reveal less serious problems; problems that may not beserious but can be aggravating.

For instance, there could be a minor electrical defect, or inferiorventilation of a heating system or fireplace. If so, the buyer isusually in the position of having the purchase price reduced, or thedefect corrected. More important, it also prevents the minor problemfrom developing into a major disaster a year or two down the road.

There is, of course, the possibility that the home inspection willproduce another outcome: everything is fine. In this case, they buyergains piece of mind, confident about the major investment he or she isabout to make. That, too, is an enormous benefit for the cost of theinspection.


How does a buyer find a home inspector?

By asking their real estate agent, friends, or lender. Inspectors arealso listed in the Yellow Pages under “Home Inspection Services.” But, aword of advice, don’t hire a contractor. Contractors earn their livingdoing repair and renovation work, so their recommendations aren’t likelyto be as objective as those of a professional inspector. 

Is real estate a wise investment?

There are fewer investments that have shown a better return. However,the key to investing wisely in real estate is understanding how theindustry differs from others.

For example, when the defense industry dips, it usually shows anational decline and the stock prices of defense-oriented firms dropacross the board. The same is true of most industries. They are impactednationally.

That is not the case with real estate, which is actually an industryand investment driven by local conditions. One community may suddenlylose a manufacturing facility, and almost overnight the market isflooded with properties for sale. An excellent example is southernCalifornia. Several years ago, when defense cutbacks began an excess ofhomes went up for sale, increasing the supply and lowering demand.There, it was a buyer’s market. At the same time, Bakersfield, acommunity less than 150 miles from Los Angeles continued to experiencehigh demand for real estate. With supply short, it was a seller’smarket.

Obviously, the key to successful real estate investing, like stocksand bonds, is to buy low and sell high. But, how do you know when the“low” has been reached? Or, for that matter, how can you judge when youproperty may be peaking in value?

Some investors rely partially on the media. They read the dailynewspaper, watch television and follow the trends. Although the mediaprovides a good deal of information, remember that by the time thingsare printed or broadcast, the news may be old.

For instance, you will find statistics frequently quoted in the mediathat have been supplied by the National Association of REALTORS (NAR).But, NAR statistics-like most- tell you where things have been, notwhere they are going.


So, what can you do?

First, check local economic indicators. If, for example, a communitydepends on defense spending, and there is a government cutback, you canbe assured that your area will be impacted.

Even if the community does not have a major defense contractor, it may have subcontractors.

The local chamber of commerce can frequently help. They usually haveinformation on which companies are moving in and out of an area.

Logically, the relocation of a firm into a community generallyindicates that demand for real estate in that marketplace willincrease-while if firms are moving out of the area, housing demand willoften shrink.

Aside from economic indicators, check real estate trends and cycles.Talk to a real estate agent. They can provide statistics on how quicklyhomes have sold, how prices have fluctuated in the past six to 12months, and projections of future home sales. They can show you howtoday’s market compares to last year’s. Are sales headed up? Down? Thesame?

The answers will not only help you determine what the market is likein your area, but they will also be critically important in helping youdetermine when and where to make your real estate investment.


Does a home warranty protect a buyer in the event something goes wrong after they have purchased a property?

Sometimes. That’s because home warranties are often timesmisunderstood and not every warranty provides the same protection. Allwarranty companies are not equal, either.

Warranties, of course, were designed to protect buyers from problemsthat emerged after they moved into a dwelling. For example, if a majorappliance breaks or the roof leaks, the ideal warranty kicks in and paysfor the repairs.

On the surface, this sounds simple and straight-forward. But, most of the time it is not.

First, all warranties differ. Aside form the obvious differences, theamount of deductible required, they may also vary as what is coveredand what is not. For instance, with some warranties if the hot waterheater works on the day of closing, but suddenly does not work sixmonths later, then it may be covered. And, with other policies if thewater heater was not in good working condition when the home waspurchased, and it breaks a week or two later, there is no coverage.

Warranties can be critically important when it comes to newconstruction, too. Obviously, the reputation of the builder is animportant consideration. However, problems with new homes can beenormously expensive if they are not covered by a warranty.

There are two types of defects when it comes to new homes – patent or latent.

Patent are those problems which can be seen. Cracked plaster, a fence that is off-kilter, etc.

Latent problems develop later, and may not show up for five or sixmonths. Ground shifting, for example. Latent problems are usually moreexpensive than patent problems.

Thus, the warranty for a new home can be one of the most important documents executed during the buying process.

Whether you’re purchasing a new home or a resale, remember thatwarranties definitely have a place when it comes to protection and peaceor mind in the real estate transaction, but make sure that you checkthem out carefully.


Is a final walk through, an inspection of the property by the buyer before they move in – really important?

Yes, it is. The intent of a pre-closing inspection is to give thebuyer one last opportunity to verify that they are getting all that waspromised in the sales contract. Although buyers still have legalrecourse if they discover-even after closing-that the condition of thehome is not as it should be.

The best time to identify problems is before closing, when the sellerwill be motivated to correct any deficiencies in order to close thetransaction.

Typically, a buyer takes possession of a property one to three monthsafter signing the sales agreement. But, a lot can happen before theactual move-in. Appliances and fixtures can break down, and walls,carpets and doors can be damaged during the seller’s move-out. Sometimesthe seller will simply have forgotten that he or she had agreed toleave the refrigerator or window coverings with the house. Whatever thereason, problems identified before closing have the best chance of beingremedied.

If possible, schedule the inspection right before the closing, suchas the day before. Ask your real estate agent to attend the inspectionwith you. What should you be inspecting? Using a copy of the salescontract as a checklist, first make sure that all items that should bein place (appliances, built-in furniture, window coverings, fixtures,etc.) are there.

Test each appliance to make sure they work properly. Test allelectrical switches and the garage door opener, if there is one. Run thegarbage disposal and turn on every water faucet, checking under thesinks for leaks. Flush the toilets. Inspect the floors, carpets, wallsand doors for recent damage.

If you discover that something is damaged or missing, make a note of it and inform your agent immediately.

In most cases, the seller is usually able to take care of smallproblems immediately, either by making a needed repair or offeringcompensation to handle it. And, if there are major problems the sellercan even sign a statement acknowledging the deficiency and agree tocorrect it. Although pre-closing inspections take time and may beinconvenient, they are important and well worth the buyer’s time.


What are “contingencies” and why are they important?

A “contingency,” is an escape-clause that is added in-writing to acontract which allows a buyer to back out of the transaction if certainconditions aren’t met.

Some contingencies, often called “riders” – like attorney approval ofthe contract, or the passing of a home inspection-are obviouslydesigned to protect buyers from a poorly written contract or a defectivehome.

Other purchase contingencies may hinge on the buyer’s current livingsituation, or his or her cash-flow. For example, when it comes tocontingencies many first-time buyers can be better prospects for aseller’s home than move-up buyers. Why? Because offers from homeownersusually are contingent upon the sale of their present home. And, even ifa move-up buyer has an offer for their home in-hand, their buyer’soffer may be contingent on another contingency (or sale) and so on downthe line. If one transaction in the chain falls through, they all might.

Cash offers can also be more attractive to sellers.

Why?
After all, the seller will get their money at closing whether or not the buyer has cash or takes out a loan.

True, but cash offers don’t require lender approval, and loanapproval is never a certainty and may delay or prevent closing.(Incidentally, for this reason, buyers who get pre-qualified for a loanhave an edge over other buyers. A pre-qualified buyer is the same as acash buyer.)

Buyers offering a larger-than-customary amount of “earnest money”, (adeposit that accompanies an offer) can be more appealing too. Moremoney deposited with the signed contract often demonstrates greatersincerity and motivation to close the transaction.

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