Keys to Smart Home Buying Buying a home is one of life's most important investments and exciting adventures. Even experienced buyers, however, can find this complex process a bit overwhelming. We will guide you every step of the way. In addition to the crucial step of locating and presenting properties that match your search criteria, we will help you along the path between "I want this house!" and "I own this house!" The Search Begins You should start your search by determining your price range, and how much can you afford. While lenders use different formulas for arriving at this figure, a general rule of thumb is that you should spend no more than 28% of your gross monthly income on housing costs or PITI (principal, interest, taxes and insurance), and no more than 38% on combined total monthly house and other long-term debt payments. However, each person's financial picture is unique and we'll be happy to put you in touch with a lender we trust to evaluate your buying power. Understanding the Asking Price Many factors influence the price that a seller expects to get for their home. While only you can decide how much you feel comfortable offering for a property, we can gather critical information for you regarding the factors that impact how much you should consider paying for the home. These factors include:
- How long the home has been on the market
- If the price has been reduced
- The prices for other comparable homes in the area
- If there are multiple offers
- Other items that might be included in the sale - furniture, hot tub, etc.
- The "list to sale price ratio," an indication of how competitive the market is for homes in this area.
- Why the seller is selling
- Whether the seller is offering an assumable loan or financing
Getting Your Mortgage Application Started Being pre-approved by a lender can put you in a much stronger negotiating position, because it shows the seller that you are a committed buyer, financially capable of buying the property, and more likely to close on the property. Keep in mind that pre-approval is different from pre-qualification. Pre-qualification is merely an estimate of what you may be able to afford. Pre-approval occurs when the lender has reviewed your credit and believes that you can finance a home up to a specific amount. However, neither pre-approval nor pre-qualification represents or implies a commitment on the part of a lender to actually fund a loan. Here are some of the current documents you'll need to get started:
- Current pay stubs
- W-2s or 1099s
- Tax returns, usually for two years
- Bank statements
- Investments/brokerage firm statements
- Net worth of businesses owned (if applicable)
- Credit card statements
- Loan statements
- Alimony/child support payments (if applicable)
Financing Your New Home The financing process can take anywhere from 10 to 90 days, but typically runs 30 to 45 days. We'll be involved throughout the process to help it run smoothly. The basic timeline for what will happen along the way is as follows:
- You submit the completed application and any required supporting documentation to the lender
- The lender orders an appraisal of the property, a credit report, and begins verifying your employment and assets
- The lender provides a good faith estimate of closing and related costs, plus initial Truth in Lending disclosures
- The lender evaluates the application and your supporting documents, approves the loan, and issues a letter of commitment
- You sign the closing loan documents and the loan is funded
- The lender sends their funds to escrow
- All appropriate documents are recorded at the County Recorder's Office, the seller is paid, and the title to the home is yours
Negotiating the Offer and the Contract You may make your offer subject to certain terms or contingencies, including securing of financing or perhaps the sale of your current home. You may also make the contract subject to various inspections by both you and professional inspectors. Most contracts include some standard provisions, such as property taxes, insurance costs, utility bills, and special assessments, which will be prorated between buyer and seller. Others outline what happens if the property is damaged before closing, or either party fails to go through with the sale. We will review with you every aspect of your offer. Together, we will plan a strategy for getting the most advantageous terms for you - the buyer - at the price you are willing to pay for the property. Inspections Real estate contracts often contain contingency clauses that allow buyers to inspect the property. Certain inspections are required by lenders and others are a matter of observation and what is particular to a region or area. Which party pays for these inspections is negotiable. The two most common types of inspection are: Wood Destroying Pest and Organisms (Termite) Inspection This inspection identifies existing or potential pest, dry rot, fungus and other structure-threatening infestations or conditions. The initial inspection fee covers only those areas which are accessible to the inspector. Inspections of inaccessible areas cost more and are subject to an estimate by the inspector. These inspectors must be licensed and can give estimates to correct noted problems, can make the suggested repairs, and can certify that the work has been completed. General House Inspection This inspection identifies material defects in the essential components of the property based upon a noninvasive physical inspection. There are no licensing requirements for someone to be a home inspector. These inspectors are not allowed to give estimates to correct noted problems, nor can the inspector perform any of the repairs. Title Search Process A title search spells out who has the right of ownership for a property. It is considered "clear" if there are no claims or liens against it. In order to make sure nothing will prevent transfer of the property to you, a title company will conduct a title search and prepare a preliminary title report that indicates what recorded matters affect the title to the property and if the title insurance company is willing to insure the title. At the close of escrow, the title company will issue an Owner's Policy of Title Insurance to protect you against losses that might arise from covered claims on the title. For more information, click here. Preparing For The Closing Costs A home purchase is a complex transaction involving many parties and associated fees. In addition to your deposit and down payment, there are a variety of other costs involved in the close of escrow, including:
- Loan origination fees, appraisals, and reports
- Surveys and inspections
- Mortgage insurance
- Hazard insurance
- Title Insurance, notary, and escrow fees
- Recording fees and stamps
The lender will provide a good faith estimate of these costs prior to the close of escrow, so that you will know in advance what to expect. Some of these costs may be negotiable items with the seller. Naturally, we'll walk you through each item in your good faith estimate to make sure you understand every detail.
Should You Buy or Rent a Home? Is home ownership the right path for you? Should you rent instead? If you rent will you be jeopardizing the possibility of home ownership in the future due to rising real estate values? How fast will your family grow and how much space is needed for your family and their activities? How much money do you have to pay for housing? When is the best time to buy a house? With the rising cost of home ownership in America today, combined with low mortgage rates, many first time buyers are challenged by the answers to these questions. Buying and owning your own home is more complicated than just having the money for the down payment and monthly mortgage payments. Owning a home requires a tremendous commitment of funds, time, and attention. For some people, owning is not the best or only way to have a comfortable and safe living environment. The following topics should help make your decision a little easier.
- Advantages and disadvantages of renting a home
- Advantages and disadvantages of buying a home
- Defining your values
- Are you ready for home ownership
Advantages and disadvantages of renting a home For some, renting can be the best option. Considering the high cost of a down payment on a home, financial considerations are of top priority. Renting can be viewed as a temporary solution while you plan your future. The ADVANTAGES of renting are as follows:
- You are excused from the bulk of home ownership responsibilities such as:
- Grounds maintenance
- Appliance repairs
- Home Improvements
- Property taxes
- Your rental many include amenities such as:
- Tennis courts
- Social/activity rooms
- Laundry facilities
- There is no large down payment, only a security deposit.
- Many of your monthly expenditures (rent, utilities) are fixed making budgeting easy.
- You are not taking any equity risk on the property should there be a downturn in the market
- Close proximity of neighbors often create a sense of security.
- If you do not like where you live, moving is relatively simple.
- It is easier, especially if you travel/commute often.
The DISADVATAGES of renting are as follows:
- No special tax deductions.
- There are no equity gains in the rising value of property.
- Space and storage is usually less than a home.
- Changes to accommodate your life or growing family cannot be made or are limited in scope.
- Rents can rise with inflation and or supply and demand in the rental market.
- You will probably have restrictions on noise level, pet ownership, or children.
Advantages and disadvantages of buying a home The ADVANTAGES of buying a home:
- The home may increase in value, resulting in a significant gain in net worth.
- The emotional high derived from ownership and the sense of status created both at home and in the community.
- Homeowner's tend to have better credit ratings.
- The longer you live in a home, the more equity you build that can be leveraged using an emergency loan.
- Mortgage payments contribute to an investment, particularly if the property is located where it increases in value over a period of years.
- If you have a fixed loan, your payment will remain relatively constant for the life of the loan.
- The interest paid on your loan and taxes are legitimate income tax deductions.
- Ownership may contribute to security, especially in retirement years when income normally decreases.
- A homeowner can borrow against his/her equity, as the value of the home increases.
- More space may be available for family members and their activities.
- As a homeowner you have the freedom to make improvements and changes to the home and surroundings as desired (although a development or association may have restrictions and prohibitions).
- Home ownership can contribute to the general well-being and sense of "roots" of the family, especially for children.
- Homeowners generally are concerned about community affairs and how they may affect their property.
The DISADVANTAGES of owning a home
- A substantial down payment is needed.
- Owning a home requires a substantial commitment in time, emotions, and money.
- Homes may decrease in value if the neighborhood deteriorates, changes quickly, or the real estate market suffers a decline.
- Due to the initial expense of buying a home, financial resources may be limited or reduced for other purchases or activities.
- Maintenance and repairs are inevitable and could be costly.
- Part of home ownership includes procuring enough income to afford insurance of all kinds including loss of the house as a result of a natural disaster.
- Budgeting is cumbersome and a must in preparation for maintenance, repairs, home improvements, and/or home ownership/association dues.
- Depending on where you live property taxes could increase dramatically.
- The cost of buying a home should also include the cost of moving into it and furnishing it.
- Shifts in the neighborhood could drastically affect ones lifestyle.
- Security is an issue if you are not home often due to travel.
- Unexpected loss of income due to job termination or unemployment may limit money available for home ownership costs.
Define Your Values Decisions, decisions. The very best way to proceed is to list all the factors about your life that are important to you.
- What type of living situation would make you feel the best about yourself?
- Do you have certain neighborhood preferences that would be limited by either decision?
- Which decision would strap you the most financially?
- If you have family (married, children) which decision would impact their lives?
- Which is more important to you, what type of place you reside in or the furnishings within, or both?
- What are your lifestyle requirements?
- Do you like to entertain?
- Do you own a boat or RV?
- Do you need a garage because of your hobbies)?
- What is the distance you would have to travel to work, school, church, shopping?
- How important is privacy?
- How much time and what skill sets do you need to have to devote to maintenance and upkeep?
Are You Ready for Home Ownership The Neighborhood. Life can be greater than you thought or it can be a nightmare if you do not consider the neighborhood as part of your decision. Here's a list of things to check and consider.
- Local history
- Local government
- Its proximity to:
- Whether the neighborhood is appreciating or depreciating in value.
- Safety and security.
Accessibility Little things like driving through traffic bottlenecks or through industrial zones to get to shopping, schools or work can be a real issue over time. Consider the convenience of your desired neighborhood in relationship to:
- Shopping areas
- Entertainment and lifestyle activities
- Places of worship
- Condition of the roads
- Available public transportation.
Community Facilities Unless you are on the Internet 24 hours a day seven days a week, you will want to use the local resources to enhance your life. Consider looking into the following:
- Fire stations
- Health facilities
- Sanitation services
- After school activities
- Recreational facilities, such as parks, golf courses, hiking trails, etc.
Other considerations If you are buying consider what the neighborhood offers for you and your particular lifestyle. Furthermore, this might be a good time to evaluate your particular needs and how they might affect the potential to sell the home in the future. As an example, suppose you choose a home far from schools and children's parks because that is not a concern for you in your life now. What you might want to consider is how distance from these facilities might affect the ability to sell your home one day to buyer who may have a keen interest in those things. Conversely if you are renting, these may or may not have a bearing on your life now or after you move. The apartment or home itself
- Space, arrangement, and condition.
- Bedrooms and bathrooms (enough space and privacy).
- Kitchen and work area (well planned and step saving, adequate work and storage areas).
- Dining and living areas (adequate for family entertaining and resting).
- Storage (adequate and well placed).
- Room sizes, shapes, and wall areas to permit use of furnishings and equipment on hand or planned.
- Interior and exterior finishes (acceptable types, condition, and ease of maintenance).
- Heating and lighting (adequate and efficient systems).
- Outdoor space (patio, deck, lawn, garden space, outdoor storage).
How Much House Can You Afford? Buying a house commits you to a long-term relationship with a mortgage and requires a considerable amount of time and energy that most homeowner will tell you becomes second nature. American consumers spend from 21% to 54% of family income on their housing. How much each family spends on housing depends on many factors. Three basic considerations that can help a family determine how much home they can afford are:
- The amount of take-home pay the family can reasonably expect.
- The family's living costs and other debt payments.
- The total amount of housing expenses, including: taxes, insurance, energy, furnishings, maintenance, and mortgage payments.
Because of rising prices and increased housing-related expenses, the old rule-of-thumb on how much to pay for a home no longer applies.
Choosing a Loan There are literally hundreds of lenders offering a multitude of loan options that makes determining the best loan for your situation a complex endeavor. Since you may be making payments on a loan anywhere from 15 years to 40 years depending on the term, it is imperative that you work closely with us in choosing the right lender and loan that works best for you. What follows is a breakdown of the generally available residential loan programs.
- Fixed-rate loans This is a home loan with an ensured interest rate that will remain at a specific rate for the term of the loan. About 75 percent of all home mortgages have fixed rates. One reason for this is that most homes sold are to buyers who plan on living in their property for many years. When you choose the length of your repayment (usually 15, 20 or 30 years), keep in mind that while shorter term loans may have higher monthly payments, they also let you pay less interest and build equity faster.
- 30-year fixed-rate loan The most popular loan is a 30-year fixed-rate loan. The reasons include:
- It provides the borrower with reasonable monthly payments.
- It's ideal for the homebuyer who plans on remaining in the home for more than 5 years.
- 20-year fixed-rate loan The 20-year mortgage often offers a lower interest rate when compared to a 30-year loan. This loan amortizes principal and interest over a 20-year period, 10 years less than the traditional 30-year mortgage. This may save you a considerable amount of total interest when paid over the life of the loan.
- 15-year fixed-rate loan The advantage of a 15-year mortgage is that its interest rate is generally lower than a 30-year or 20-year loan. Such a short-term loan will save you a significant amount of interest over the life of the loan. By paying off the loan in only fifteen years, you also build up equity in your home sooner. A 15-year loan allows you to own your home clear of debt much quicker when compared to longer term loans. This may be important if you are approaching retirement or have other large expenses to cover such as financing your children's education. However, the monthly payments you make on a 15-year loan will be significantly higher than those you make on a 30-year or a 20-year loan for the same loan amount.
- Adjustable-rate loans With an adjustable-rate mortgage (ARM), the interest rate you pay is adjusted from time to time to keep it in line with changing market rates. This means that when interest rates go up, your monthly loan payment may go up as well. On the other hand, when interest rates go down, your monthly loan payment may also go down. ARMs are attractive because they may initially offer a lower interest rate than fixed-rate loans. Since the monthly payments on an ARM start out lower than those of a fixed-rate loan of the same amount, you should be able to qualify for a larger loan. The chief drawback, of course, is that your monthly payment may increase when interest rates go up. The types of people who typically benefit from an ARM are those that are planning to move or refinance in the near future, people with a high likelihood of increasing their income in later years, and people who need lower initial interest rates on their loans to be able to buy a home. How much your payment can increase will depend on the terms of your loan. Before applying for an ARM, be sure you know how high your monthly payment can go - the so-called 'worst-case scenario'. An ARM has two 'caps' or limits on how large an interest rate increase is permitted: One cap sets the most that your interest rate can go up during each adjustment period, and the other cap sets the maximum total amount of all interest adjustments over the life of the loan. The rates on an ARM usually change once or twice a year, and there is typically a lifetime rate cap (or limit) on both the amount of each individual rate adjustment, and the total amount the rate can change over the whole term of the loan.
- Example: If your loan starts at 5 percent, has a 2 percent per-adjustment cap, and a lifetime adjustment cap of 4 percent, you know that your loan might go up to 7 percent the first time the rate changes. You also know that the rate can never go over 9 percent over the life of the loan (5 percent start + 4 percent lifetime cap). Only you can determine if you would feel comfortable paying this interest rate sometime in the future.
Some ARMs offer a conversion feature which allows you to convert from an adjustable-rate to a fixed-rate loan at certain times during the life of your loan. Ask your lender about this feature when researching ARMs. One important thing to know when comparing ARMs is that the interest rate changes on an ARM are always tied to a financial index. A financial index is a published number or percentage, such as the average interest rate or yield on Treasury bills.
- HELOC Loan
- HELOC Loan: What is a Home Equity Line of Credit? A home equity line is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer's largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills and not for day-to-day expenses. With a home equity line, you will be approved for a specific amount of credit -- your credit limit -- meaning the maximum amount you can borrow at any one time while you have the plan. Many lenders set the credit limit on a home equity line by taking a percentage (say 75%) of the appraised value of the home and subtracting the balance owed on the existing mortgage.
- For example: Appraisal of home $100,000 Percentage x 75% Percentage of appraised value $75,000 Less existing loan - $40,000 Potential credit line = $35,000 In determining your actual credit line, the lender will also consider your ability to repay by looking at your income, debts, and other financial obligations, as well as your credit history. Home equity lines of credit often set a fixed time during which you can borrow money, such as 10 years. When this period is up, the plan may allow you to renew the credit line. But in a plan that does not allow renewals, you will not be able to borrow additional money once the time has expired. Some plans may call for payment in full of any outstanding balance. Others may permit you to repay over a fixed time, for example 10 years. Once approved for the home equity plan, usually you will be able to borrow up to your credit limit whenever you want. Typically, you will be able to draw on your line by using special checks. Under some plans, borrowers can use a credit card or other means to borrow money and make purchases using the line. However, there may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line (for example, $300) and to keep a minimum amount outstanding. Some lenders also may require that you take an initial advance when you first set up the line. What Should You Look for When Shopping for a Plan? If you decide to apply for a home equity line, look for the plan that best meets your particular needs. Look carefully at the credit agreement and examine the terms and conditions of various plans, including the annual percentage rate (APR) and the costs you'll pay to establish the plan. The disclosed APR will not reflect the closing costs and other fees and charges, so you'll need to compare these costs, as well as the APRs, among lenders. Interest Rate Charges and Plan Features. Home equity lines of credit typically involve variable interest rates rather than fixed rates. A variable rate must be based on a publicly available index (such as the prime rate published in some major daily newspaper or a U.S. Treasury bill rate). The interest rate will change, mirroring fluctuations in the index. To figure the interest rate that you will pay, most lenders add a margin, such as 2 percentage points, to the index value. Because the cost of borrowing is tied directly to the index rate, it is important to find out what index and margin each lender uses, how often the index changes, and how high it has risen in the past. Sometimes lenders advertise a temporarily discounted rate for home equity lines -- a rate that is unusually low and often lasts only for an introductory period, such as six months. Variable rate plans secured by a dwelling must have a ceiling (or cap) on how high your interest rate can climb over the life of the plan. Some variable rate plans limit how much your payment may increase and also how low your interest rate may fall if interest rates drop. Some lenders may permit you to convert a variable rate to a fixed interest rate during the life of the plan, or to convert all or a portion of your line to a fixed-term installment loan. Agreements generally will permit the lender to freeze or reduce your credit line under certain circumstances. For example, some variable rate plans may not allow you to get additional funds during any period the interest rate reaches the cap. Costs to Obtain a Home Equity Line. Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home. For example: • A fee for a property appraisal, which estimates the value of your home. • An application fee, which may not be refundable if you are turned down for credit. • Up-front charges, such as one or more points (one point equals one percent of the credit limit). • Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes. • Certain fees during the plan. For example, some plans impose yearly membership or maintenance fees. • You also may be charged a transaction fee every time you draw on the credit line. You could find yourself paying hundreds of dollars to establish a home equity line of credit. If you were to draw only a small amount against your credit line, those charges and closing costs would substantially increase the cost of the funds borrowed. On the other hand, the lender's risk is lower than for other forms of credit because your home serves as collateral. Thus, annual percentage rates for home equity lines are generally lower than rates for other types of credit. The interest you save could offset the initial costs of obtaining the line. In addition, some lenders may waive a portion or all of the closing costs. How Will You Repay Your Home Equity Line of Credit? Before entering into a plan, consider how you will pay back any money you might borrow. Some plans set minimum payments that cover a portion of the principal (the amount you borrow) plus accrued interest. But, unlike the typical installment loan, the portion that goes toward principal may not be enough to repay the debt by the end of the term. Other plans may allow payments of interest only during the life of the plan, which means that you pay nothing toward the principal. If you borrow $10,000, you will owe that entire sum when the plan ends. Are Payments Flexible? Regardless of the minimum payment required, you can pay more than the minimum, and many lenders may give you a choice of payment options. Consumers often will choose to pay down the principal regularly as they do with other loans. For example, if you use your line to buy a boat, you may want to pay it off as you would a typical boat loan. Whatever your payment arrangements during the life of the plan -- whether you pay some, a little, or none of the principal amount of the loan -- when the plan ends you may have to pay the entire balance owed, all at once. You must be prepared to make this balloon payment by refinancing it with the lender, by obtaining a loan from another lender, or by some other means. If you are unable to make the balloon payment, you could lose your home. Can My Monthly Payment Change? With a variable rate, your monthly payments may change. Assume, for example, that you borrow $10,000 under a plan that calls for interest-only payments. At a 10 percent interest rate, your initial payments would be $83 monthly. If the rate should rise over time to 15 percent, your payments will increase to $125 per month. Even with payments that cover interest plus some portion of the principal, there could be a similar increase in your monthly payment, unless the agreement calls for keeping payments level throughout the plan. What if I Sell My Home? When you sell your home, you probably will be required to pay off your home equity line in full. If you are likely to sell your house in the near future, consider whether it makes sense to pay the up-front costs of setting up an equity credit line. Also keep in mind that leasing your home may be prohibited under the terms of your home equity agreement. What is an APR? APR stands for annual percentage rate. It is the annualized cost of credit, expressed as a percentage. The APR calculation considers certain fees to reflect the cost of credit in addition to interest. What is LTV? LTV stands for loan-to-value, which is the ratio of the mortgage loan amount to the property's value. For example, if your property is worth $100,000 and $80,000 is owed on the first mortgage, the LTV ratio is 80.
Along with choosing a loan, you should consider the variety of sources for loans as they each offer advantages and disadvantages depending on the loan amount, the interest rate, your down payment amount, and much more. Major categories of mortgage lenders include: Savings & Loans Savings and Loan Associations (S&Ls) are the largest traditional lenders of residential home loans. They remain a major source of funding for home loans. S&Ls are often called Savings Banks in the Eastern U.S. Commercial Banks Commercial banks offer attractive loan terms, particularly if they evaluate their entire banking relationship with you. Some commercial banks have their own real estate lending departments and will service your loan. Other commercial banks sell their loans to Fannie Mae and Freddie Mac, two major government-sponsored enterprises (GSEs) that specialize in buying residential loans from lenders. Mortgage Bankers Mortgage bankers borrow money from banks or pools of investors, underwrite the loans, and sell them to investors for a profit. They often receive a fee from these investors for servicing your loan. Loan servicing includes collecting monthly payments, sending out loan statements, and collecting late payments. Mortgage Brokers Mortgage brokers circulate, or 'shop,' a loan application among lenders to find the most attractive terms for the borrower. In exchange, a lender pays the broker a fee. Homeowners You may find that the current homeowner is willing to offer financing in exchange for selling the home. This means that the seller becomes your lender. A common means of financing is for the seller to accept a note. A note requires you to make monthly payments to the seller instead of a bank or other lender. Credit Unions Since credit unions are owned by their members, they are called cooperative financial institutions. Since they are nonprofit institutions, credit unions may offer attractive loan rates to their members. Like commercial mortgage lenders, credit unions sell their loans to Fannie Mae and Freddie Mac to maintain access to new sources of loan funds. The National Credit Union Administration (NCUA) regulates the credit union industry. When selecting a lender or broker to finance your new home, be sure to do your homework on the company or institution. As interest rates have continued to decline, more and more lenders have appeared in the industry. As rates begin to increase, more and more of these new lenders may go out of business. Always check to make sure your lender is qualified and has the resources to service your note for the life of the loan.