As soon as you get a ratified contract in step #5, you can begin working on the mortgage in step #6 and preparing for the closing in step #7. As well as obtaining a mortgage, you need insurance and a closing attorney. The bank will require a certain level of insurance on the home. You should certainly shop around for insurance. Their rates will vary widely. A new thing that has started recently is that they charge you now based on your credit score as well as the cost to replace the home. You do not have to insure the land of course, but you will need liability insurance as well as hazard insurance. Liability insurance covers you in case someone gets injured while on your property. Hazard insurance covers fire, wind, hail, etc. You may need separate flood insurance as well depending on what flood zone the property is in. If you are buying a condo or townhouse, the insurance may be included in the regime fee. If so, you will still need a policy to cover the personal property contents you have inside the condo.
After you have negotiated the home inspection repairs, you should arrange to hire a closing attorney. This should be someone who does a lot of real estate closings. They will search the court records of the property, record all the documents involved, set up a survey if a recent one doesn't exist, coordinate with your lender and create the HUD settlement statement that shows all of the costs involved. Many times, the closing attorney will also have a title insurance company that will provide you with title insurance. This covers you and the bank in case there was something overlooked in the court records. Many of the attorney's fees are negotiable as well. Don't forget to actually make an appointment with the attorney for the closing. They get booked up near the end of the month.
As you get near the closing date, make sure to set up the transfer of utilities and change your address with the post office.
On the day of closing, you should do a final walk through of the home with your realtor to make sure everything is alright before you go to closing.
Thursday, January 31, 2008
Monday, January 28, 2008
Step 6 to Purchasing a Home
Once you have a ratified contract on a home, you must start working on obtaining your loan. Actually, you should have laid some of the groundwork for this in step #2. There will be dates on the contract that will restrict your time frame for obtaining the loan. Try to obtain your loan directly from a bank. Using mortgage brokers can lead to all sorts of problems and extra fees and should be avoided if possible. There are many types of loans. The most popular is a 30 year fixed amortized convential loan. Your monthly payment will include interest to the bank for the loan and some principal payment that lowers the amount of principal that remains to be paid. At the beginning of the loan, an extremely large percentage of your payment is interest while only a very small portion goes to paying down the principal. This will change every month. Over time, you will finally reach a point where your principal portion is larger than your interest portion. Another type of loan is one with an adjustable interest rate, also known as an ARM. Initially, the interest rate is lower than a convential loan, but after a predetermined time(3-5 years), the rate fluctuates within certain guidelines. Since the rate can go up and change your monthly payment, this can be quite risky. However, it can be the right thing if you know that you're going to sell your home before the rate changes. Even risker is the interest only loan that does not include any amount to reduce the principal payment. This is only of interest for those willing to bet that the value of their home is going to significantly increase while they own the home.
Generally, banks like for you to make a down payment of at least 20% of the purchase price. However, with homes at $200k and above, this would mean a $40k down payment. Since most people don't have that kind of money to put down, we are seeing loans for as much as 100% of the purchase price. In the case where you have less than 20% to put down, the bank will penalize you by forcing you to pay an extra monthly fee added to your payment that is called Private Mortgage Insurance(PMI). This makes them feel a little better about the fact that they are loaning you such a high percentage of the purchase price. This extra fee will go away once you have made enough payments to reduce the amount of principal left on the loan to 80%. If you make your payments on time, you can possibly apply to have the PMI removed before that point. Some banks have programs that reduce or waive PMI if you meet certain restrictions or if the property qualifies. One of these is called the Community Committment Program.
Who the bank gets the money from can be important. They may be a local bank and have the ability to make the loan themselves, but more likely, the money will actually come from higher lending institutions such as Freddie Mac, Fannie Mae, or FHA. FHA has become a very popular type of loan in the last year. In the past, it has been reserved for those with less than stellar credit and had lots of restrictions and fees. However, FHA has relaxed many of the restrictions and you can usually get a lower interest rate.
Now, here's the hard part. All lender fees are very negotiable. If you don't make them compete with each other, they will charge you far too much. It's unfortunate, but that's the way it is. They will reduce their fees and possibly their rates if you have them compete with each other. Here's how you're going to do that. Go to one and get prequalified and then they will give you an estimate of the costs and the monthly payments. Once you have that Good Faith Estimate, you take that to 2 other lenders and you ask them what they can do for you. They will beat the numbers given to you by your first lender, even if your first lender is your best friend. You then take the new good faith estimates back to the first lender and the first lender will reduce their price to beat these new estimates. You can do this about 2 or 3 times until they won't budge anymore. Then you select the best deal that works for you, keeping in mind who you are most comfortable with. Everyone hates this part of the process, but it will save you money.
Finally, once you have a ratified contract, don't finance any major purchases such as furniture or cars during the approval process. This could have a negative effect on your qualification for a loan.
Generally, banks like for you to make a down payment of at least 20% of the purchase price. However, with homes at $200k and above, this would mean a $40k down payment. Since most people don't have that kind of money to put down, we are seeing loans for as much as 100% of the purchase price. In the case where you have less than 20% to put down, the bank will penalize you by forcing you to pay an extra monthly fee added to your payment that is called Private Mortgage Insurance(PMI). This makes them feel a little better about the fact that they are loaning you such a high percentage of the purchase price. This extra fee will go away once you have made enough payments to reduce the amount of principal left on the loan to 80%. If you make your payments on time, you can possibly apply to have the PMI removed before that point. Some banks have programs that reduce or waive PMI if you meet certain restrictions or if the property qualifies. One of these is called the Community Committment Program.
Who the bank gets the money from can be important. They may be a local bank and have the ability to make the loan themselves, but more likely, the money will actually come from higher lending institutions such as Freddie Mac, Fannie Mae, or FHA. FHA has become a very popular type of loan in the last year. In the past, it has been reserved for those with less than stellar credit and had lots of restrictions and fees. However, FHA has relaxed many of the restrictions and you can usually get a lower interest rate.
Now, here's the hard part. All lender fees are very negotiable. If you don't make them compete with each other, they will charge you far too much. It's unfortunate, but that's the way it is. They will reduce their fees and possibly their rates if you have them compete with each other. Here's how you're going to do that. Go to one and get prequalified and then they will give you an estimate of the costs and the monthly payments. Once you have that Good Faith Estimate, you take that to 2 other lenders and you ask them what they can do for you. They will beat the numbers given to you by your first lender, even if your first lender is your best friend. You then take the new good faith estimates back to the first lender and the first lender will reduce their price to beat these new estimates. You can do this about 2 or 3 times until they won't budge anymore. Then you select the best deal that works for you, keeping in mind who you are most comfortable with. Everyone hates this part of the process, but it will save you money.
Finally, once you have a ratified contract, don't finance any major purchases such as furniture or cars during the approval process. This could have a negative effect on your qualification for a loan.
Friday, January 18, 2008
Step 5 to Purchasing a Home
Once you have finally chosen a home to make an offer on, you will need to sit down with your realtor and fill out a contract. Most of it is standard, but filling in the blanks is an art best dealt with by a highly competent realtor. Many things are negotiable. Most important may be price. Where you start may depend on many factors. How badly do you really want this particular home? How well is it priced? What can you afford? What kind of market is it, how many other people are looking at this home, and how many other homes would you be satisfied with? It's possible that making a strong price offer will help you acquire other negotiations such as closing costs.
The next negotiable item is the amount of earnest money. This will be held in a 3rd party escrow account until closing and credited back to you then. If anything out of your control causes the contract to fall through, you will be refunded your earnest money. The amount depends a little on the price of the home. The more you put down, the more serious you seem to the seller.
Most of the time, there are many contingencies put in the contract to protect the buyer. Examples of these include contingent upon financing, appraisal, inspection, termite letter, and your ability to obtain insurance. You certainly don't want to be forced to buy the property if the bank won't give you a loan, or if it doesn't appraise for as much as the bank will give you, or if the condition of the property is much worse than you thought, or if it is found to have termites, or if you cannot obtain insurance at a reasonable price. Of course, your contract looks weaker to a seller as you increase the number of these contingencies.
Another very important negotiable item is closing costs and prepaid items. These generally costs a buyer about 3% of the purchase price. Closing costs include money to the bank for the loan and money to an attorney for title searches, title insurance, and paperwork. Prepaid items include insurance and taxes. The bank wants you to pay for your insurance a year in advance and 3 more months on top of that. They also want you to pay some of your property taxes in advance. In fact, part of your monthly payment will include a portion to be set aside by the bank so they can pay your T&I for you at the end of the year. This is called an escrow account. The amount of extra prepaids that they collect at closing for T&I will be held in this escrow account to protect the bank. On a $200,000 home, 3% would amount to $6000. That can be a lot of money for buyers to come out of pocket with at closing. One way to alleviate this burden at closing is to have the buyer get a loan for $206,000 and have the seller pay for the buyer's closing costs and prepaid items. Essentially, the buyer has financed these extra costs into the cost of the home.
Another negotiable item is a home warranty. Many sellers offer this upfront. Most others are willing to buy one for one year for the buyer.
Another item that some sellers offer is a buy-down. For a certain amount paid to the bank, the seller or buyer can buy down the interest rate for the either one year, two years, etc. This can be important to a buyer that really needs to keep his monthly payment down for the first year or two.
Once the contract is written up and sent to the listing agent and the seller, they can either accept your terms or make a counteroffer. You can then accept their counteroffer or make one of your own. Once both sides have agreed to all items on the contract, we say that it is ratified and it becomes a legally binding agreement. Once this has been achieved, you can move on quickly to step 6 of purchasing a home. That will be obtaining a mortgage. Hopefully, you have already laid some of the groundwork for this.
The next negotiable item is the amount of earnest money. This will be held in a 3rd party escrow account until closing and credited back to you then. If anything out of your control causes the contract to fall through, you will be refunded your earnest money. The amount depends a little on the price of the home. The more you put down, the more serious you seem to the seller.
Most of the time, there are many contingencies put in the contract to protect the buyer. Examples of these include contingent upon financing, appraisal, inspection, termite letter, and your ability to obtain insurance. You certainly don't want to be forced to buy the property if the bank won't give you a loan, or if it doesn't appraise for as much as the bank will give you, or if the condition of the property is much worse than you thought, or if it is found to have termites, or if you cannot obtain insurance at a reasonable price. Of course, your contract looks weaker to a seller as you increase the number of these contingencies.
Another very important negotiable item is closing costs and prepaid items. These generally costs a buyer about 3% of the purchase price. Closing costs include money to the bank for the loan and money to an attorney for title searches, title insurance, and paperwork. Prepaid items include insurance and taxes. The bank wants you to pay for your insurance a year in advance and 3 more months on top of that. They also want you to pay some of your property taxes in advance. In fact, part of your monthly payment will include a portion to be set aside by the bank so they can pay your T&I for you at the end of the year. This is called an escrow account. The amount of extra prepaids that they collect at closing for T&I will be held in this escrow account to protect the bank. On a $200,000 home, 3% would amount to $6000. That can be a lot of money for buyers to come out of pocket with at closing. One way to alleviate this burden at closing is to have the buyer get a loan for $206,000 and have the seller pay for the buyer's closing costs and prepaid items. Essentially, the buyer has financed these extra costs into the cost of the home.
Another negotiable item is a home warranty. Many sellers offer this upfront. Most others are willing to buy one for one year for the buyer.
Another item that some sellers offer is a buy-down. For a certain amount paid to the bank, the seller or buyer can buy down the interest rate for the either one year, two years, etc. This can be important to a buyer that really needs to keep his monthly payment down for the first year or two.
Once the contract is written up and sent to the listing agent and the seller, they can either accept your terms or make a counteroffer. You can then accept their counteroffer or make one of your own. Once both sides have agreed to all items on the contract, we say that it is ratified and it becomes a legally binding agreement. Once this has been achieved, you can move on quickly to step 6 of purchasing a home. That will be obtaining a mortgage. Hopefully, you have already laid some of the groundwork for this.
Thursday, January 3, 2008
Step 4 to Purchasing a Home
Once you have expressed your wants and needs to your realtor in step 3, he can set up an autosearch for you on the MLS. This will automatically email you listings that match your criteria. This is a much better tool than the average internet search. Unlike the average internet search, it will sort out the active listings that are currently under contract. It will also notify you of price changes on properties that match your criteria. As you look through the listings, you can decide which ones you'd like to take a look at. Your realtor will then set up appointments for the showings. It's best not to look at more than 5 in any one day. It gets a little confusing if you try to do more than that. After each home you look at, you should decide whether or not you like it better than the best one you have seen so far. That way you're only comparing 2 homes, the one you just looked at to the best one you've seen previously. Once you've decided on a home, your agent will get you a copy of the Seller's Disclosure Statement and, if applicable, the Lead Based Paint Disclosure. The Seller's Disclosure Statement is required from all sellers. It is a list of any defects in the property that the seller has knowledge of. The Lead Based Paint Disclosure is only necessary if the home was built prior to 1978. The agent should also check to see if there are any regime fees or Home Owners Association(HOA) fees or covenents. Condo regime fees may include things such as insurance, pest control, cable, etc. Once you have decided to make an offer on a home, we can move to step five which is writing the contract and negotiating the offer.
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