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Buying a Home
Buying a home can be one of your most
significant investments in life. Not only are you choosing your dwelling
place, and the place in which you will bring up your family, you are
most likely investing a large portion of your assets into this venture.
The more prepared you are at the outset, the less overwhelming and
chaotic the buying process will be. The goal of this page is to provide
you with detailed information to assist you in making an intelligent and
informed decision. Remember, if you have any questions about the
process, I’m only a phone call or email away!
Benefits of Owning Your Own Home
Important Things to Avoid Before
Buying a Home
Don’t Buy a Car -
or Did You Already Buy One?
The Business Cycle and Buying a
Home
Comparable Sales and
Your Offer Price
Major Factors
Influencing Your Offer Price
Offering to Purchase Real Estate -
The Basics
Writing an Offer - Safeguards
Regarding the Property
How Financing Details
Affect Your Offer
How FHA and VA Financing Affects
Your Offer
Selecting Service Providers
The Best
Investment
As a fairly general rule, homes appreciate about three-five percent a
year. Some years will be more, some less. The figure will vary from
neighborhood to neighborhood, and region to region.
Five percent may not seem like that much at first. Stocks (at times)
appreciate much more, and you could earn over six percent with the
safest investment of all, treasury bonds.
But take a second look…
Presumably, if you bought a $200,000 house, you did not pay cash for the
home. You got a mortgage, too. Suppose you put as much as twenty percent
down - that would be an investment of $40,000.
At an appreciation rate of 5% annually, a $200,000 home would increase
in value $10,000 during the first year. That means you earned $10,000
with an investment of $40,000. Your annual "return on
investment" would be a whopping twenty-five percent.
Of course, you are making mortgage payments and paying property taxes,
along with a couple of other costs. However, since the interest on your
mortgage and your property taxes are both tax deductibles, the
government is essentially subsidizing your home purchase.
Your rate of return when buying a home is higher than most any other
investment you could make.
If you are moving to a home for the first time, you are going to be very
pleased with all the new space you have available. You may have to even
buy more "stuff."
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Income Tax
Savings
Because of income tax deductions, the government is
basically subsidizing your purchase of a home. All of the interest and
property taxes you pay in a given year can be deducted from your gross
income to reduce your taxable income.
For example, assume your initial loan balance is $150,000 with an
interest rate of eight percent. During the first year you would pay
$9969.27 in interest. If your first payment is January 1st, your taxable
income would be almost $10,000 less - due to the IRS interest rate
deduction.
Property taxes are deductible, too. Whatever property taxes you pay in a
given year may also be deducted from your gross income, lowering your
tax obligation.
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Stable Monthly Housing Costs
When you rent a place to live, you can certainly
expect your rent to increase each year - or even more often. If you get
a fixed rate mortgage when you buy a home, you have the same monthly
payment amount for thirty years. Even if you get an adjustable rate
mortgage, your payment will stay within a certain range for the entire
life of the mortgage - and interest rates aren’t as volatile now as
they were in the late seventies and early eighties.
Imagine how much rent might be ten, fifteen, or even thirty years from
now? Which makes more sense?
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Forced Savings
Some people are just lousy at saving money, and a
house is an automatic savings account. You accumulate savings in two
ways. Every month, a portion of your payment goes toward the principal.
Admittedly, in the early years of the mortgage, this is not much. Over
time, however, it accelerates.
Second, your home appreciates. Average appreciation on a home is
approximately five percent, though it will vary from year to year, and
in some years may even depreciate. Over time, history has shown that
owning a home is one of the very best financial investments.
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Freedom and Individuality
When you rent, you are normally limited on what you
can do to improve your home. You have to get permission to make certain
types of improvements. Nor does it make sense to spend thousand of
dollars painting, putting in carpet, tile or window coverings when the
main person who benefits is the landlord and not you.
Since your landlord wants to keep his expenses to a minimum, he or she
will probably not be spending much to improve the place, either.
When you own a home, however, you can do pretty much whatever you want.
You get the benefits of any improvements you make, plus you get to live
in an environment you have created, not some faceless landlord.
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More Space
Both indoors and outdoors, you will probably have
more space if you own your own home. Even moving to a condominium from
an apartment, you are likely to find you have much more room available -
your own laundry and storage area, and bigger rooms. Apartment complexes
are more interested in creating the maximum number of income-producing
units than they are in creating space for each of the tenants.
If you are moving to a home for the first time, you are going to be very
pleased with all the new space you have available. You may have to even
buy more "stuff."
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Don’t Move
Money Around
When a lender reviews your loan package for
approval, one of the things they are concerned about is the source of
funds for your down payment and closing costs. Most likely, you will be
asked to provide statements for the last two or three months on any of
your liquid assets. This includes checking accounts, savings accounts,
money market funds, certificates of deposit, stock statements, mutual
funds, and even your company 401K and retirement accounts.
If you have been moving money between accounts during that time, there
may be large deposits and withdrawals in some of them.
The mortgage underwriter (the person who actually approves your loan)
will probably require a complete paper trail of all the withdrawals and
deposits. You may be required to produce cancelled checks, deposit
receipts, and other seemingly inconsequential data, which could get
quite tedious.
Perhaps you become exasperated at your lender, but they are only doing
their job correctly. To ensure quality control and eliminate potential
fraud, it is a requirement on most loans to completely document the
source of all funds. Moving your money around, even if you are
consolidating your funds to make it "easier," could make it
more difficult for the lender to properly document.
So leave your money where it is until you talk to a loan officer.
Oh…don’t change banks, either.
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The Effect
of Changing Jobs
For most people, changing employers will not really
affect your ability to qualify for a mortgage loan, especially if you
are going to be earning more money. For some homebuyers, however, the
effects of changing jobs can be disastrous to your loan application.
How Changing Jobs Affects Buying a Home:
For most people, changing employers will not really affect your ability
to qualify for a mortgage loan. For some homebuyers, however, the
effects of changing jobs can be disastrous to your loan application.
Salaried Employees:
If you are a salaried employee who does not earn additional income from
commissions, bonuses, or over-time, switching employers should not
create a problem. Just make sure to remain in the same line of work.
Hopefully, you will be earning a higher salary, which will help you
better qualify for a mortgage.
Hourly Employees:
If your income is based on hourly wages and you work a straight forty
hours a week without over-time, changing jobs should not create any
problems.
Commissioned Employees:
If a substantial portion of your income is derived from commissions, you
should not change jobs before buying a home. This has to do with how
mortgage lenders calculate your income. They average your commissions
over the last two years.
Changing employers creates an uncertainty about your future earnings
from commissions. There is no track record from which to produce an
average. Even if you are selling the same type of product with
essentially the same commission structure, the underwriter cannot be
certain that past earnings will accurately reflect future earnings.
Changing jobs would negatively impact your ability to buy a home.
Bonuses:
If a substantial portion of your income on the new job will come from
bonuses, you may want to consider delaying an employment change.
Mortgage lenders will rarely consider future bonuses as income unless
you have been on the same job for two years and have a track record of
receiving those bonuses. Then they will average your bonuses over the
last two years in calculating your income.
Changing employers means that you do not have the two-year track record
necessary to count bonuses as income.
Part-Time Employees:
If you earn an hourly income but rarely work forty hours a week, you
should not change jobs. There would be no way to tell how many hours you
will work each week on the new job, so no way to accurately calculate
your income. If you remain on the old job, the lender can just average
your earnings.
Over-Time:
Since all employers award overtime hours differently, your overtime
income cannot be determined if you change jobs. If you stay on your
present job, your lender will give you credit for overtime income. They
will determine your overtime earnings over the last two years, then
calculate a monthly average.
Self-Employment:
If you are considering a change to self-employment before buying a new
home, don’t do it. Buy the home first.
Lenders like to see a two-year track record of self-employment income
when approving a loan. Plus, self-employed individuals tend to include a
lot of expenses on the Schedule C of their tax returns, especially in
the early years of self-employment. While this minimizes your tax
obligation to the IRS, it also minimizes your income to qualify for a
home loan.
If you are considering changing your business from a sole proprietorship
to a partnership or corporation, you should also delay that until you
purchase your new home.
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No Major Purchases
of Any Kind
This includes furniture, appliances,
electronic equipment, jewelry, vacations, expensive weddings…
…and, of course, Don't Buy a Car
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Don’t Buy a Car
- or Did You Already Buy One?
When an individual’s income starts growing and
they manage to set aside some savings, they commonly experience what may
be considered an innate instinct of modern civilized mankind.
The desire to spend money.
Since North Americans have a special love affair with the automobile,
this becomes a high priority item on the shopping list. Later, other
things will be added and one of those will probably be a house.
However, by the time home ownership has become more than a distant and
hopeful dream, you may have already bought the car.
It happens all the time, sometimes just before you contact a lender to
get pre-qualified for a mortgage.
As part of the interview, you may tell the loan officer your price
target. He will ask about your income, your savings and your debts, then
give you his opinion. "If only you didn’t have this car
payment," he might begin, "you would certainly qualify for a
home loan to buy that house."
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Debt-to-Income
Ratios and Car Payments
When determining your ability to qualify for a
mortgage, a lender looks at what is called your
"debt-to-income" ratio. A debt-to-income ratio is the
percentage of your gross monthly income (before taxes) that you spend on
debt. This will include your monthly housing costs, including principal,
interest, taxes, insurance, and homeowner’s association fees, if any.
It will also include your monthly consumer debt, including credit cards,
student loans, installment debt, and….
…car payments.
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How Buying a Car
Reduces Your Purchase Price
Suppose you earn $5000 a month and you have a car
payment of $400. At current interest rates (approximately 8% on a
thirty-year fixed rate loan), you would qualify for approximately
$55,000 less than if you did not have the car payment.
Even if you feel you can afford the car payment, mortgage companies
approve your mortgage based on their guidelines, not yours. Do not get
discouraged, however. You should still take the time to get
pre-qualified by a lender.
However, if you have not already bought a car, remember one thing.
Whenever the thought of buying a car enters your mind, think ahead.
Think about buying a home first. Buying a home is a much more important
purchase when considering your future financial well being.
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Recession
and Expansion
There are times when the economy is brisk and
everyone feels confident about his or her prospects for the future. As a
result, they spend money. People eat out more, buy new cars, and….
…they buy new homes.
Then, for one reason or another, the economy slows down. Companies lay
off employees and consumers are more careful about where they spend
money, perhaps saving more than usual. As a result, the economy
decelerates even further. If it slows enough, we have a recession.
During such a time, fewer people are buying homes. Even so, some
homeowners find themselves in a situation where they must sell. Families
grow beyond the capacity of the home, employees get relocated, and some
may even find themselves unable to make their mortgage payment - perhaps
because of a layoff in the family.
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Supply and
Demand
When the supply of available houses is greater than
the supply of buyers, appreciation may slow and prices may even fall, as
happened in the early eighties and the early to mid-nineties.
If you are lucky enough to purchase a home during a slow period, you can
be reasonably certain the economy will begin to show strength again. At
times, real estate values may even surge drastically. In many regions of
the country, this is precisely what occurred in the late eighties and
nineties.
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Should You Try to “Time the
Market”?
One problem with attempting to time your purchase
to the business cycle is that no one can accurately predict the future.
Another challenge is that interest rates are generally higher during a
depressed market and income may not be keeping up. For that reason,
fewer people can qualify for a home purchase than in more prosperous
times.
Why you should not wait …
Plus, this strategy generally works best for first-time buyers. People
who already have a home usually need to sell it in order to buy their
next one. If a "move-up" buyer wants to buy a home during a
depressed market, that means they usually have to sell one during the
slow market, too. If a seller wants to sell his home to take advantage
of a "hot" market when prices are fairly high, they generally
have to buy their next home during that same hot market.
It tends to equal out.
Finally, the business cycle can change over time. Since 1983, we have
had two fairly long expansions with only a slight recession in between
each. You would not want to wait nine years to buy a home, would you?
You could miss out on a substantial amount of appreciation by waiting,
and end up paying much higher prices.
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Comparable Sales and Your Offer
Price
The first step in determining the price you are willing to offer is to
look at the recent sales of similar homes. These are called
"comparable sales." Comparable sales are recent sales of homes
that compare closely to the one you are looking to purchase.
Specifically, you want to compare prices of homes that are similar in
square footage, number of bedrooms and bathrooms, garage space, lot
size, and type of construction.
If the home you are interested in is part of a tract of homes, then you
will most likely find some exact model matches to compare against one
another.
There are three main sources of information on comparable sales, all of
which are easily accessed by a real estate agent. It is somewhat more
difficult for the general public to access this data, and in some cases
impossible. Two of the most obvious information sources are the public
record and the Multiple Listing Service.
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Determining Your
Offer Price
When you prepare an offer to purchase a home, you
already know the seller’s asking price. But what price are you going
to offer and how do you come up with that figure?
Determining your offer price is a three-step process. First, you look at
recent sales of similar properties to come up with a price range. Then,
you analyze additional data, such as the condition of the home,
improvements made to the property, current market conditions, and the
circumstances of the seller. Location is important - corner lots vs.
non-corner lots, is house by a railroad track, etc. This
will help you settle on a price you think would be fair to pay for the
home. Finally, depending on your negotiating style, you adjust your
"fair" price and come up with what you want to put in your
offer.
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Comparable Sales in the Public
Record
The most accessible source of information on
comparable sales is the public record. When someone buys a home the
property is deeded from the seller to the buyer. In most circumstances,
this deed is recorded at the local county recorder’s office. They
combine sales data with information already known about the property so
they can assess property taxes correctly.
Provided there have been no additions to the property, the information
available from the public record is usually correct regarding sales
price, square footage, and numbers of rooms. This makes it easy to use
the public record as a source of data for comparable sale information.
Accessing the data is another matter, at least for the general public.
Realtors can generally look up this information through title insurance
companies. The title companies either compile the data directly from the
county recorder’s office or purchase it from other companies.
One problem with the public record is that it tends to run at least six
to eight weeks behind. Add another four to six weeks for the typical
escrow period and you can see the data is not current. The most current
information is the most valuable.
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Comparable Sales in the Multiple
Listing Service
Most of the public is aware that the Multiple
Listing Service is a private resource where Realtors list properties
available for sale.
Once a property is sold and the transaction has closed, the selling
price is posted to the listing in the Multiple Listing Service. Over
time, it has become a huge database on past sales, containing much more
information on individual homes than can be gleaned from the public
record. This information is only available to real estate agents who are
members of the local Multiple Listing Service.
Donna will provide you with this data to help determine your offer
price.
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Comparable Sales -
Pending Transactions
The most valuable information would be the most
current, of course. A sale last week has more validity in helping you
determine a purchase price than a sale from six months ago. The problem
is that there is no actual record of the sales price until the
transaction is completed. The information is not available in the public
record because no deed has yet been recorded.
Neither is the information available in the Multiple Listing Service.
Once a property is sold, it becomes a "pending sale" and all
pricing information is removed from the listing. Prices are not posted
until it becomes a "closed sale." This protects the seller in
case the transaction falls apart and the property is placed back on the
market. It would give an unfair advantage to future potential buyers if
they already knew what price the seller had been willing to accept in
the past.
However, if a Realtor has a reason to know the sales price, they can
usually find out through professional courtesy. Also, some real estate
brokerages post sales information on a transaction board in their
office.
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Major
Factors Influencing Your Offer Price
Gathering and analyzing information from comparable
sales helps to establish the range of prices you should consider when
making an offer to buy a home. More weight should be given to the most
recent sales, but even so, you need to do a bit more analysis before
setting upon the price you will offer. That is because you also need to
consider the condition of the property, improvements, the current
market, and the circumstances behind the seller’s decision to sell.
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How Property
Condition Affects Your Offer
Since you have toured the property you are
interested in, you should know how it compares to the general
neighborhood. All you have to do is put the home in one of three
categories - average, above average, or below average.
When evaluating a home’s condition, there are a number of things you
should consider. Structural condition is most important - items such as
walls, ceilings, floors, doors and windows. Then paint, carpets, and
floor coverings. Pay special attention to bathrooms and bedrooms and
whether the plumbing and electricity work efficiently. Look at the
fixtures, such as light switches, doorknobs, and drawer handles. The
front and back yards should be in reasonably good shape.
The missing ingredient will be information on the condition of the homes
from your comparable sales list. Provided you chose the right agent to
represent you, they will have actually visited most of those homes and
be able to provide key insights.
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How Home
Improvements Affect Your Offer
Even when comparing exact model matches within a
tract of homes, you should note whether the previous owners have made
any substantial improvements. Cosmetic changes should be largely
ignored, but major improvements should be taken into account. Most
important would be room additions, especially bedrooms and bathrooms.
Other items, like expensive floor tile or swimming pools should be taken
into account, too, but should be discounted. A pool that costs $20,000
to install does not normally add $20,000 in value to the home. Rely on
Donna to give you guidance in this area.
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How Market
Conditions Affect Your Offer
A hot market is a "seller’s market."
During a seller’s market, properties can sell within a few days of
being listed and there are often multiple offers. Sometimes homes even
sell above the asking price. Though most buyer’s want to get a
"deal" on a home, reducing your offer by even a few thousand
dollars could mean that someone else will get the home you desire.
A slow market is a "buyer’s market. During a buyer’s market
properties may languish on the market for some time and offers may be
few and far between. Prices may even decline temporarily. Such a market
would allow you to be more flexible in offering a lower price for the
home. Even if your offered price is too low, the seller is likely to
make some sort of counter-offer and you can begin negotiations in
earnest.
More often than not, the market is simply "steady," or in
transition. When a market is steady, no real rules apply on whether you
should make an offer on the high end of your range or the low end. You
could find yourself in a situation with multiple offers on your desired
house, or where no one has made an offer in weeks.
Transition markets are more difficult to define. If the economy slows
unexpectedly, as it did in the early nineties, people who buy on the
high end of a seller’s market (like the late eighties) could find
their home loses value for several years. So far, no one has proven
reliable in predicting when markets change or how good or bad the real
estate market will become.
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How Seller
Motivation Affects Your Offer
Truthfully, it is rather rare that a seller’s
motivation will dramatically affect the price of a home, but it is often
possible to save a few thousand dollars. The most common "motivated
seller" is someone who has already bought his or her next home or
is relocating to a new area. They will be under the gun to sell the home
quickly or face the prospect of making two mortgage payments at the same
time. Since that can drain a bank account quickly, most sellers want to
avoid such a situation and may be willing to give up a few thousand
dollars to avoid the possibility.
There are also family crises that can motivate a seller to make a quick
deal. However, when you see a real estate ad that mentions
"divorce," "motivated seller,"
"relocation," or something to that affect, beware. Although
the facts may be true, that does not necessarily mean the seller is
motivated to make a quick and costly sale. Most likely, the ad is more
designed to generate phone calls and leads rather than sell the home.
However, there are times when a seller is truly distressed, willing to
make a quick sale and sacrifice thousands of dollars. With the seller’s
permission, the listing agent will post this information along with the
listing in the Multiple Listing Service. They may also inform other
agents during office and association marketing sessions or by flyers
sent to other real estate offices. Provided this information has been
made generally available to Realtors, Donna should know when a seller is
truly motivated and when it is just "puff" designed to illicit
interest in a property.
The exception is when an agent is selling a home they have listed
themselves or selling a home that was listed by another agent from their
own company. In such a situation, the agent may be acting as an agent
for the seller, or as a "dual agent," representing both you
and the seller. In such a situation, they cannot legally provide you
with information that would give you an advantage over the seller.
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The Final Decision
on Your Offer Price
Comparable sales information helps you to determine
a base price range for a particular home. Adding in the various factors
like property condition, improvements, market conditions, and seller
motivation help determine whether a "fair" price would be at
the upper limit of that range or the lower limit. Perhaps you will feel
a fair price is outside of that price range.
The "fair" price should be approximately what you are willing
to agree on at the end of negotiations with the seller. The price you
put in your offer to begin negotiations is totally up to you and depends
on your negotiating style. Most buyers start off somewhat lower than the
price they eventually want to pay.
Although Donna may provide advice and guidance, you are the one who
makes the decision. The price you put in the offer is totally up to you.
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Introduction and
Overview
Once you find the home you want to buy, the next
step is to write an offer - which is not as easy as it sounds. Your
offer is the first step toward negotiating a sales contract with the
seller. Since this is just the beginning of negotiations, you should put
yourself in the seller’s shoes and imagine his or her reaction to
everything you include. Your goal is to get what you want, and imagining
the seller’s reactions will help you attain that goal.
The offer is much more complicated than simply coming up with a price
and saying, "This is what I’ll pay." Because of the large
dollar amounts involved, especially in today’s litigious society, both
you and the seller want to build in protections and contingencies to
protect your investment and limit your risk.
In an offer to purchase real estate, you include not only the price you
are willing to pay, but other details of the purchase as well. This
includes how you intend to finance the home, your down payment, who pays
what closing costs, what inspections are performed, timetables, whether
personal property is included in the purchase, terms of cancellation,
any repairs you want performed, which professional services will be
used, when you get physical possession of the property, and how to
settle disputes should they occur.
It is certainly more involved than buying a car. And more important.
Buying a home is a major event for both the buyer and seller. It will
affect your finances more than any other previous purchase or
investment. The seller makes plans based on your offer that affect his
finances, too. However, it is more important than just money. In the
half-hour it takes to write an offer you are making decisions that
affect how you live for the next several years, if not the rest of your
life. The seller is going to review your offer carefully, because it
also affects how he or she lives the rest of their life.
That sounds dramatic. It sounds like a cliché. Every real estate book
or article you read says the same thing.
They all say it because it is true.
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Contingencies in a
Purchase Offer
In most purchase transactions there may be a slight
challenge or two, but most things will go quite smoothly. However, you
want to anticipate potential problems so that if something does go
wrong, you can cancel the contract without penalty. These are called
"contingencies" and you must be sure to include them when you
offer to buy a home.
For example, some "move-up" buyers often agree to purchase a
home before selling their previous home. Even if the home is already
sold, it is probably a "pending sale" and has not closed.
Therefore, you should make closing your own sale a condition of your
offer. If you do not include this as a contingency, you may find
yourself making two mortgage payments instead of one.
There are other common contingencies you should include in your offer.
Since you probably need a mortgage to buy the home, a condition of your
offer should be that you successfully obtain suitable financing. Another
condition should be that the property appraises for at least what you
agreed to pay for it. During the escrow period you are likely to require
certain inspections, and another contingency should be that it pass
those inspections.
Basically, contingencies protect you in case you cannot perform or
choose not to perform on a promise to buy a home. If you cancel a
contract without having built-in conditions and contingencies, you could
find yourself forfeiting your earnest money deposit.
Or worse.
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Earnest
Money Deposit
After you have come up with an offer price, the
next step is to determine how large a deposit you want to make with your
offer. You want the "earnest money deposit" to be large enough
to show the seller you are serious, but not so large you are placing
significant funds at risk.
One recommendation is to make sure your deposit is less than two percent
of your offered price. The reason for this is that if your deposit is
larger than that, the lender will pay particular attention to how you
came up with the funds. You might have to provide a copy of a canceled
check along with a bank statement showing you had the money to begin
with. Normally, this is not a problem, but if you have a short escrow
period or are barely coming up with your down payment, it could pose an
inconvenience.
Another reason to limit your deposit is "just in case."
Although significant problems are the exception and not the rule, they
do occur. "Just in case" there is a nasty or prolonged dispute
between you and the seller, the less money you have tied up in a
deposit, the fewer funds you have placed at risk.
There are also times when closing can be delayed by weeks, through no
fault of your own. Have back-up plans prepared for such a contingency.
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The Closing Date
It is absolutely essential that you include a
closing date as part of your offer. This way both you and the seller can
make plans for moving, and the seller can make plans for buying his or
her next home. Though most transactions actually do close on the right
date, do not be so inflexible that a delay creates insurmountable
problems.
For example, if you are renting and need to give the landlord notice
that you are moving out, you may want to allow a little flexibility.
Otherwise, if your purchase closes a few days late you could find
yourself staying in a motel with your belongings packed in a moving van
somewhere while you pay storage costs.
There are also times when closing can be delayed by weeks, through no
fault of your own. Have back-up plans prepared for such a contingency.
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Transfer of Possession
A transaction is considered "closed" once
the deeds have been recorded. Then you own the home. However, it is not
always possible for you to occupy it immediately. This can happen for
several reasons, but the most common is that the seller may be
purchasing a home, too. Usually, it is scheduled to close simultaneously
with your purchase of their home.
It is sort of like being at a red light when it turns green. Although
all the cars see the light change at the same time, the guy at the back
of the line doesn’t begin moving until all the cars ahead of him have
started.
As a result, it has become customary to allow the seller up to a maximum
of three days to turn over actual possession and keys to the home. When
transfer of possession actually occurs should be clearly laid out in
your offer to prevent confusion later.
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Disclosures
From the Seller
Although you have toured the property, looked at
the walls and ceiling, turned on the faucets and played with the light
switches, you have not lived in it. The seller has years of knowledge
about his or her home and there may be some things you want to find out
about as quickly as possible. For this reason, you will require certain
disclosures as part of your offer.
Basically, you want the seller to disclose any adverse conditions that
may have a substantial impact on your decision to purchase the home.
This would include any problems with the house, whether the property is
in a flood zone, a noise zone, or any other kind of hazardous area.
If you have an agent representing you, this is almost automatic, but
many states do not require individuals selling their own home to provide
you with this information. Often they do not require banks selling
foreclosed property to provide these disclosures, either. Obtaining
these types of disclosures should always be a part of your offer, and
time is of the essence.
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Inspections You
Should Require
Besides appraisal and the inspection, you should
also have a professional go through the house and seek out potential
problems. Of course, you will have inspected the home, but you are not
used to looking at some things that a professional will find. Even if
they are not things the seller is expected to repair, at least you will
have foreknowledge of any potential problems.
The seller will want this inspection performed quickly, so that you can
approve the results and move forward with the purchase. Once you receive
the inspection, you will want to allow yourself sufficient time to
review and approve the report. If you do not approve the report, you may
negotiate with the sellers on which repairs should be performed and who
should pay for those repairs. Otherwise, you can cancel the purchase
without penalty, provided you have included timetables in your offer.
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Final Walk-Through Inspection
The last thing you want when you assume possession
of your new home is to find it in a total mess. Therefore, you should
make it clear in your offer that certain minimum standards are required.
If you do not, you might find out the seller or neighbors have begun
using the back yard as a trash dump, or something worse - and you would
not be able to do anything about it.
Some of the requirements you might want to include in your offer are
that the roof does not leak, the appliances work, the plumbing does not
leak, that there are no broken or cracked windows, the yard has been
kept up, and any debris has been cleared away.Before closing, you will
want to revisit the property to ensure it is in the condition you have
required in your offer, and to inspect that any required repairs have
been performed. You should do this no sooner than 48 hours before you
intend to close. Make sure this right to do a final inspection is
included in your offer to purchase the home.
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How
Financing Details Affect Your Offer
Most buyers do not have enough cash available to
buy a home, so they need to obtain a mortgage to finance the purchase.
Since you will probably make your purchase contingent upon obtaining a
mortgage, the seller has the right to be informed of your financing
plans in order to evaluate them. That is one of the major reasons that
financing details are included in your offer.
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Down Payment
As part of your offer, you will need to disclose
the size of your down payment. Once again, this allows the seller to
evaluate your likelihood of obtaining a home loan. It is easier to get
approved for a mortgage when you make a larger down payment. The
underwriting guidelines are less strict.
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Interest Rates
Another reason for including financing information
in your offer is to protect yourself. If interest rates suddenly become
volatile and rise quickly, as sometimes happens, you may looking at a
mortgage payment much higher than you anticipated. By putting a maximum
acceptable interest rate in the offer, you are protecting yourself from
such an occurrence.
At the same time, the seller will probably want to see that you have
some flexibility in the financing terms you are willing to accept. If
interest rates are currently at eight percent and you indicate this is
the highest rate you will accept, you would be able to cancel the
contract without penalty if interest rates rose past that point. The
seller would suffer because they have lost valuable marketing time and
may have made their own plans based on successfully closing the
transaction.
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Closing Costs and
Financing Incentives
There may be times when, as part of your offer, you
request the seller to pay all or a portion of your closing costs, or
provide some other financial incentive. One common request is asking the
seller to provide funds to temporarily buy down your interest rate for
the first year or two. Such incentives can be especially effective if a
buyer is tight on money or pushing their qualifying ratios to the limit.
Whenever you ask for incentives such as these, you will probably find
the seller less willing to negotiate on price. After all, what you are
really asking for is to have the seller to give you some money to help
you buy their house. The end result is that, for a little relief in the
beginning, you are willing to pay a little more in the long run.
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Seller
Financing
Another occasional request is to have the seller
"carry back" a second mortgage to help facilitate your
purchase of their home. In cases when the seller does not need all the
proceeds from their sale in order to purchase their next home, this is
an option. The advantage to the buyer is that by combining your down
payment and the second mortgage from the seller, you may be able to
avoid paying mortgage insurance and save yourself some money.
If such a carry-back is part of your offer, you should include the terms
you wish to pay on such a second mortgage. Keep in mind that your first
trust deed lender needs to know this information so they can underwrite
your loan, and they have certain minimum requirements. The minimum term
of the second mortgage can be five years. The minimum payment can be
"interest only." Longer mortgage terms and payments that also
include principle are also acceptable.
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Cash Offers
If you are one of those rare individuals making a
cash offer to buy a home, it makes sense to provide some documentation
with your offer that shows you have the funds available. A bank
statement would be fine. If you have to liquidate stock or some other
asset, your offer should give a timetable on when you will provide proof
you have converted the asset to cash.
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Other
Financing Details in Your Offer
Your offer should also contain information on
whether you are obtaining a fixed rate or an adjustable rate mortgage.
It should also state whether you are obtaining Conventional financing or
obtaining a VA or FHA loan.
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Extra Costs
for the Seller
If you are obtaining a VA or FHA loan in order to
finance your purchase, you must include that information in your offer.
This is because government loans place may put additional financial and
performance obligations on the seller.
Non-Allowable Fees:
First, VA and FHA loans prohibit buyers from paying certain types of
fees that are often charged by lenders, escrow companies, settlement
agents, and title companies. They are called "non-allowable"
fees. They still get charged anyway, but as the buyer, you are "not
allowed" to pay them. The result is that the seller ends up paying
them instead of you.
Most of these "non-allowable" fees come from your lender. By
the time you are making an offer you should have already been
pre-qualified by a loan officer, so you or Donna can ask how much the
lender’s non-allowable fees will be. Experienced agents should also
have an idea of what non-allowable fees will be charged by the escrow or
settlement agent and the title insurance company.
Since these are fees the seller would not pay on an offer with
conventional financing, this information must be included in your offer.
You should also realize that since the seller will be paying these
additional fees, they may be a little less negotiable on the price.
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VA and FHA Appraisals
Home appraisal inspections on FHA and VA loans are
a little more detailed than on conventional loans (and more expensive).
The appraisers are required to perform certain minimum inspections as
well as evaluate the market value of the property. Although these
inspections are not as detailed as a professional home inspection and
should not be considered a substitute, sometimes repairs are required.
These are additional costs the seller would not be obligated to pay for
someone obtaining conventional financing, so your offer should include a
maximum figure for these repairs. Otherwise the seller is signing the
equivalent of a blank check, and they do not want to do that.
At the same time, whatever figure you put in will most likely affect the
seller’s willingness to negotiate on price. If you put $500 as an
estimate, the seller may be $500 less negotiable on their price. If no
repairs are required, you may have been able to get the house for $500
less than what you and the seller agreed on as the price. The solution
is to add a clause to your offer that goes something like this. "If
required repairs cost less than the maximum amount allowed, the excess
will be credited toward buyer’s closing costs."
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You and the
Seller Must Agree
Buying a home does not occur in a vacuum, involving
only you and the seller. There are all kinds of people and services
involved behind the scenes to make it happen. Since some of these
services affect both you and the seller, there will have to be an
agreement on which companies you will use for them. When you make your
offer, you should request your favorites for these services. If you are
unfamiliar with these service providers, you can get recommendations
from Donna.
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Escrow and
Settlement
For example, you are going to need an escrow or
settlement company to act as an "independent third party"
between you and the seller. Without having a third party involved, how
do you know that when you fork over the money, you are going to get the
deed? This is the type of service provided by escrow and settlement.
They will hold your deposit and coordinate much of the activity that
goes on during the escrow period.
Since this third party is very important to both you and the seller and
both of you will pay fees to this company, it is important to agree on
which service to use. Therefore, your choice should be part of the
offer. Since you do not buy a home every other week or so, you are
probably unfamiliar with companies that provide this service. Donna will
make a recommendation. You have the authority to accept this
recommendation and include it in your offer, or make your own choice.
Keep in mind that the seller will also have a preference and this may be
a point of negotiation in a counter-offer. It has become customary that
one side will choose the escrow/settlement agent and one side chooses
the title insurance company. Even so, everything in real estate is
negotiable.
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Title
Insurance
Title insurance is important because, by providing
you with an Owners Policy, they insure that you have clear title to the
property. If there are any problems later, you can always go back to the
title insurance company and have them clear it up.
However, you are going to pay a fee to the title insurance company, too.
This is for the Lender’s Policy. The lender’s policy insures your
mortgage lender that there are no liens or judgments against the
property and that the mortgage will be in first position. In other
words, should you sell the property or refinance it, their mortgage gets
paid first, before any other claims against the property.
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Termite and
Pest Inspection
As part of your offer, if applicable in your area,
you may require a termite and pest inspection. This company not only
inspects for termite damage and pest infestations, but also inspects for
dry rot and water damage, among other things. The company that performs
the inspection is important to you as a buyer, because you want to be
sure they do a good job. It is important to the seller because it is
customary that they pay for the inspection and some types of repairs
that may be required.
You should determine which company you want to perform this inspection
and make it a part of your offer. Otherwise the seller will choose. If
you do not know which company to hire, Donna will make a recommendation.
This is requird by FHA on all their loans
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