NAVIGATING THROUGH THE HOME BUYING PROCESS

A home is a financial asset and more: it is a place to live and raise children; it is a plan for the future, it is an investment! 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. Knowledge opens doors. Our goal is to provide you with detailed information to help you navigate through the entire home buying process and assist you in making an intelligent and informed decision. Remember, if you have any questions about the process, we're only a phone call or email away! One of the most important things you can do is to make a checklist as you search for, find and buy a home. By keeping on top of your game plan at all times you will greatly increase your chances of success.

What Are The Benefits Of Owning Your Own Home
... Verses Renting?

The most significant advantages of renting is being generally free of most maintenance responsibilities. But by renting, you lose the chance to build equity, take advantage of tax benefits, and protect yourself against rent increases each year. Also, you are normally limited on what you can do to improve your home, decorate without permission and you may be at the mercy of the landlord for housing. Owning a home has many benefits. When you make a mortgage payment, you are building equity, which is an investment. As a fairly general rule, homes appreciate about five percent a year, some years more, some less. Owning a home can also qualify you for tax breaks that actually lower your monthly out-of- pocket costs. Also, when you own a home, you can pretty much do 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.

Are You Ready To Buy A Buy A Home?

Start by thinking about your situation. Do you have a steady source of income? Is your current income reliable? Have you been employed on a regular basis for the last 2-3 years? Do you have a good record of paying your bills? Do you have few outstanding long-term debts, like car payments? Do you have money saved for a down payment? Do you have the ability to pay a mortgage every month, plus additional costs? If you can answer ‘yes’ to these questions, you are probably ready to buy your own home.

GETTING STARTED
 

Get Pre-Qualified And Pre-Approved For A Mortgage
BEFORE You Begin Your Search For A Home!

Do you know how much home you can afford? There are simply too many variables-credit history, income, debt, special mortgage programs and variations in qualifying guidelines between different mortgage types - to answer that question. The only sure way of getting the question answered is through pre-qualification followed by a pre-approval.  

Pre-Approval ... it’s as easy as 1-2-3

1.  Financial details are verified (income, employment, etc.)
2.  A home loan credit report is generated by the credit bureau
3.  The loan application is submitted to an automatic underwriting platform, or in some case a manual review by an underwriter
4.  Assuming you are approved, a loan officer issues you a Pre-Approval Letter

3 Key Benefits Of A Home-Loan Pre-Approval

1.  You know exactly how much home you can afford, how much, if any, cash is required and what your monthly payments will be.

2.  You get the best financing (best terms, lowest cost & rates) from the most reliable lenders in the business.

3.  You can make a stronger offer as a result of being pre-approved. Ask for a written commitment from the lender. It will give you “cash-buyer” confidence, a valuable benefit that lets sellers know you’re fully qualified to buy their home.

Look at it from the seller's perspective. If you had 2 offers on the table for your house, one from a fully pre-approved buyer and the other from an "I'll get around to that soon" buyer--to which offer would you devote the most attention? Even if the pre-approved buyer's offer was $1000 less, would you take the chance on the buyer that perhaps may not be qualified? When it comes to a seller evaluating offers, "a bird in the hand..." definitely applies.

What Are The Differences Between
Mortgage Pre-Qualification,
Pre-Approval & Final Loan Approval?

Pre-Qualification is the process where the lender will look at your income and assets along with your debts. The lender will then use the information you supply to determine how much mortgage you can qualify for. None of this information is verified for the pre-qualification. The pre-qualification is generally done as a precursor to the pre-approval and is often done over the phone.

Pre-Approval occurs when credit, employment and assets are verified. This information is run through a computerized underwriting platform or possibly reviewed by an underwriter. It is during this underwriting process that a mortgage is approved, subject to the appraisal of the property you are going to buy. An additional step is completed during this process, choosing a loan program.

Final Loan Approval occurs when the property has been appraised, all documentation is in the hands of the lender and all contingencies have been met.

What To Bring When You Apply For A Home Loan?

Usually you will have to provide original documents of the following (other documentation may be required, ask your loan consultant for details):

INCOME

• W-2s
  Past two year’s for each applicant, one year if salaried
  
• Paycheck Stubs
  Most recent, showing current year to date earnings
  
• Tax Returns
  Past two year’s if self-employed or paid on commission
  
• Other Income
  All supporting documents for additional income to be used for qualifying
  

• Bank Statements
  Two most recent months’ statements with all pages
  
• Investment Statement
  Two most recent months’ statements with all pages
  
• Lease Agreements
  Or past years’ tax returns if you own other real estate (Tax returns required if you own 3 or more properties)
  

Current balances and monthly payment amounts for all revolving or installment accounts (you won’t need this for a pre-approval as your credit report will have all of this information).

• Copy of Sales Contract (Purchase Contract)

The Do’s And Don’ts To Consider
When Applying For A Mortgage

• Avoid changing your job. For most people, changing employers will not really affect their ability to qualify for a mortgage loan, especially if they are going to be earning more money. However, for some people the effects of changing jobs can be disastrous to their loan application. For example, if a substantial portion of your income is derived from commissions, changing jobs would negatively impact your ability to buy a home. It creates an uncertainty about your future earnings from commissions. There is no track record which to produce an average. Even if you are selling the same type of product with essentially the same commission structure, the underwriter (the person who actually approves your loan) cannot be certain that past earnings will accurately reflect future earnings.
  Also, if you are considering a change to self-employment before buying a 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. In addition, self-employed individuals tend to include a lot of expenses on the Schedule C of their tax returns. While this minimizes your tax obligations to the IRS, it also minimizes your income to qualify for a home loan.

• 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 (checking- and saving accounts, money market funds, mutual funds, stock statements, retirement accounts etc. If you have been moving money around during that time, there may be large deposits and withdrawals in some of them and the lender may require a complete paper trail of all that. It just makes it more complicated for the lender to properly document.

• Do not incur any new debt. Many mortgage applications have been stopped in their tracks because the applicants had decided a week before the application that a shiny new car with a big finance or lease payment would look just perfect in the driveway of their new home. When determining your ability to qualify for a mortgage, a lender looks at what is called your “debt-to-income” ratio (the amount you pay out monthly versus the amount you bring in). A newly acquired debt could be enough to throw the ratios off and make the mortgage unobtainable.

• What do you qualify for vs. what do you want to pay? It is important to remember that the amount of mortgage you will qualify for is the maximum. It is the amount that the lender feels you can afford, but it is not necessarily the amount that you want to pay. It sometimes is advantageous to be conservative here. For example, if you qualify for a $200,000 mortgage and you have $15,000 available in cash for down payment and closing costs, you are qualified to buy homes with a maximum selling price of $215,000. So as to not push yourself to the limit, you may want to look at homes that sell in the $200,000 to $210,000 range. Too many buyers simply rush off to the $215,000 level and some find themselves strapped when it comes time to purchase necessary items (for example draperies, additional furniture, lawn and garden tools) or when they forget to factor in increases in monthly expenses (for example utilities, maintenance and repair costs).

CHOOSING THE RIGHT MORTGAGE

Get educated! Securing a mortgage is not all that complicated, but if you approach it blind, mistakes can be very expensive! In all probability, your mortgage will be the largest single expense in your budget. Obviously, getting the best deal here is of ultimate importance. Not comparing could cost you thousands of dollars over the term of the mortgage. There are literally hundreds of different mortgages available, however, they all fall into only a few basic varieties. Some may fit perfectly into your situation, others may be unwise or unattainable. By narrowing your choices, the process of picking the right mortgage becomes much easier.  

What A Mortgage Payment Consists Of

1) Principal: The repayment of the original amount borrowed on a monthly basis.
2) Interest: The cost of borrowing the principal amount, repaid on a monthly basis.
3) Taxes: Real Estate taxes paid to a local government agency.
4) Insurance: Homeowners coverage on the home (Flood, Fire)
The total of these items is known as the PITI (Principal/Interest/Taxes/Insurance) payment.
5) Private Mortgage Insurance: If the first mortgage lender is required to lend more then 80% of the value of the home, they will require Private Mortgage Insurance (PMI). This is a monthly premium, which is paid to protect the mortgage company in case you don’t make your mortgage payments. The lending industry has recently developed loan programs that enable the Mortgage Insurance Premium to be tax deductible. They’ve done this by creating lender paid insurance. The borrower pays this either through higher interest rates or higher points at closing.

Types Of Mortgages

Fixed: A fixed term as well as a fixed interest rate. The interest rate and term are fixed at the start of the mortgage. The monthly amount for the payment of principal and interest remain the same for the life of the loan.

Types of Fixed Rate Mortgages:

15 – year
20 – year
30 – year
40 – year

Adjustable: Often referred to as an ARM (Adjustable Rate Mortgage). The interest rate on your mortgage will be adjusted up or down according to current interest rate levels. The monthly amount for your principal and interest payment will go up or down with these rate changes. These mortgages may include "Interest Only” option.

The Parts of an ARM:

Index: This is an economic indicator that no single entity has the power to influence. Common indexes are the 1-year Treasury, LIBOR, COFI and the MTA. The MTA is considered one of the more stable indexes. It is the 12-month running average of the monthly average of the 1-year Treasury.

Margin: Just think of “Profit Margin” and this will be easy to remember. This is what the lender adds to the index to get the “Fully Indexed Rate”.

Fully Indexed Rate: This is the rate that you will pay once your ARM begins to adjust.

Margin + Index = Rate

Start Rate: This is the “teaser” that you will have for the first fixed period of your ARM loan. This is where the intermediate arm shines. For example; If you plan to sell in 4 years you can do a 5/1 arm. With this loan you will enjoy a fixed rate for 5 years, while you are in the home. Because you are not asking the lender to guarantee the rate for 30 years you will most likely get a lower interest rate than if you had a fixed rate loan.

The Types of an ARM:

1-Year ARM. This loan has a fixed rate for 1-year and then adjusts to market conditions (margin + index = rate). The rate will then be fixed for another year after which it adjusts again. This will continue until the loan is paid off, usually 30 years.

Intermediate ARM. This is a great loan. The rate is fixed for an initial period (3,5,7 or 10 years). After the fixed period these loans will become 1-year arms and amortize over the remaining term of the loan, usually 30 years.

Interest Only Loans. This loan allows you to make an interest only payment. Generally this option is available for a set number of years just like the fixed rate period on an intermediate ARM. An interest only loan will save you approximately 20% on your payments or conversely increase your purchasing power by up to 20% when compared to an amortizing loan at the same rate.

Balloon Mortgage. This type of mortgage has fallen out of favor since the inception of the intermediate ARM. At this time you will have a hard time finding a balloon mortgage. The balloon mortgage offers a low rate for an initial period of time (usually 5, 7, or 10 years); when the fixed time has elapsed, the balance is due in full. Most people would refinance at this time.

Two Step Mortgage. This is a loan that has a temporary buy down. It is a rather confusing concept at first but is actually quite simple. For example; if a 30 year fixed rate is at 6% you could buy the rate down to 4% temporarily. This is done by paying up front the difference between the 6% and the 4% for the first year. The benefit of this is that most lenders will let you qualify at the lower rate. This can increase your purchasing power significantly. There is a catch; the payment will eventually go to what it would have started at without the temporary buy down. You will need to prepare for this higher payment, as it will be your actual payment for the remainder of the 30 years.

What to choose - Fixed Rate or Adjustable?

One of your first decisions should be between a fixed rate (the interest rate remains constant through the life of the mortgage) or an adjustable rate (the interest rate is adjusted - either up or down - at specified times during the mortgage term). Adjustable Rate Mortgages (ARMs) will have an initial fixed period and will then change annually. The classic ARM is the 1-year, which adjust to market conditions after the first year. There are now hybrid arms that remain fixed for up to 10 years. The interest rates are usually lower than fixed rates but will adjust upward (unless rates really fall!). They may be a good choice if you are sure that you will not own the home for an extended period (more than 5-7 years) of time.

Advantages & Disadvantages of Fixed and Adjustable Mortgages

Financing Programs

Residential financing programs can be divided into two main groups: conventional loans and government-sponsored loans (FHA & VA).

Conventional: A "traditional" mortgage is simply any institutional loan that is not directly insured or guaranteed by the Federal Government. Most conventional loans under $275,000 are administered through Fannie Mae or Freddie Mac (private corporations but regulated by the government). Those loans over that amount are designated "jumbo loans" and are funded by the private investment market.

FHA: Insured by (but not funded by) the Federal Housing Administration (FHA) a division of the U.S. Department of Housing and Urban Development (HUD), and designed for, in general, low and middle-income borrowers and many first-time buyers. There are, however, loan amount limits (which vary from county to county). These limits generally fall into the first time buyer’s price range. FHA loans have somewhat more relaxed qualifying standards and ratios than conventional loans. This is what makes them attractive. FHA loans are available as 15 and 30 year fixed as well as 1 year adjustable. Standard down payment is 3% (can be all gift funds).

VA: For those qualified by military service, the Veterans Administration (VA) insures (but does not fund) 15 and 30 year fixed as well as 1-year adjustable mortgages with lower down payment requirements (as low as 0 down) and somewhat more lenient qualifying ratios.

Shopping For Loans

Choose your lender carefully! There is a good deal of variation in the mortgage market, not only from week to week, but from lender to lender. Make comparisons among the lenders that are available to get the specifics of each lender's rate and term, you can contact the bank or mortgage company directly. A lender that has the authority to approve and process your loan locally is preferable, because it will be easier for you to monitor the status of your application and ask questions. Another source is a mortgage broker in your area, who will often represent a number of sources of mortgage funds and can assist you in your choice.
Devise a checklist for the information from each lending institution. Include the type of mortgage, minimum down payment requirements, interest rate and points (see below), closing costs, loan processing time, and whether prepayment is allowed.

Points Or No Points?

Discount points lower your interest rate. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by approximately 0.125%. When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. You can use this information to determine how long it will take you to get your points back. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. They are also tax deductible.

How Much Down Payment?

One of the questions that you might ask is "how much down payment am I going to need?" Unfortunately, there is no standard answer. Down payments will vary from 0% (with a VA - Veteran's Administration loan) to upwards of 25% (with certain "non-conforming" loans). As an average, most homebuyers make down payments in the 5%-15% range, although your own personal situation may dictate more or less down payment. You are better off meeting with a Loan Consultant sooner than later. A good Loan Consultant can give you a plan. This plan will help you achieve home ownership sooner rather than later. You may find that you are much better off than you thought. A good Loan Consultant will meet with you for no charge. When you are factoring money for a down payment, don't forget about closing costs, which will total in the 2-5% range, payable in cash at the time of closing.

Got Credit Problems?

There are options for those who have had credit problems and still want to own a home.

It happens to many of us. Obligations. Debts. Monthly bills. They all can combine to get the best of you and as a result, credit problems arise. In the not too distant past, this often meant having to wait 5 years, 10 years or more before attempting to purchase a home. Now, however, there are sources that can help those who are doing their best to re-establish a solid credit rating.

You need to determine precisely what the problems are. You need to have a clear picture of your current credit status so that you know what to concentrate on. The quickest and easiest way to accomplish this is to run a credit check and begin to analyze it.

There are three major credit reporting companies: Equifax, Experian and Trans Union. Obtaining your credit reports is as easy as calling and requesting one.

• Experian 1-888-397-3742 www.experian.com

• Equifax 1-800-997-2493 www.equifax.com

• Trans Union 1-800-888-4213 www.transunion.com

If your credit needs repair, begin the process at once. Start by getting the problems under control now. Do not incur any new debt. Do your best to begin to live within your means. This will be an advantage now, when you are applying for a loan, as well as later, when you will need to meet your monthly mortgage obligation.

Make a commitment to a program of saving. Even if you have had credit problems, there are options available for mortgages, if you have down payment money available. There is little or no hope if you have both credit problems and no cash.

Concentrate on your needs in housing before your wants. Re-establishing your financial footing is not as difficult as it used to be, but it is impossible if you attempt to buy more house than makes sense. Be conservative!

FINDING YOUR DREAM HOME

There are probably few things in life that are as exciting--or as nerve- racking--as the search for a house. All the good emotions and the bad emotions seem to converge when the house hunting begins. Don't worry, this is a normal reaction, and is found in seasoned homebuyers as well as those who are looking for their first home. One of the first decisions you need to make is whether you want to do your house hunting on your own, or by using an agent. If you decide to do it on your own, you will be able to see (and buy) those houses that are For Sale by Owner (known as FSBO's). Depending on the area and the overall market, this will be around 20% or so of the total homes available (the other 80% are the "listed" properties--being sold through an agent. Those homes you can't buy--or even see – on your own).

Why Search For A Real Estate Agent First?

Do you really need to use an agent to buy a house? No. Should you use an agent to buy a house? Probably, for two reasons. First, in virtually all situations the commissions for the sale of a home is paid for by the seller. So buyers are able to get assistance and information from real estate agents, usually at no cost to them. It is for this reason that the vast majority of homebuyers employ the services of an agent for their purchase. In addition, since most houses are listed by real estate agencies, it gives them the maximum number of available properties to consider. Second, most real estate transactions go fine, but almost every one has a challenge or two. Having an agent on your side as your advocate helps keep things on an even keel. If a challenge develops, you know you can call upon your agent. Without an agent, you may be missing valuable representation of your interests. So, your first step should be to shop for an agent, not to shop for property.

Shop for an agent the way you would shop for a good attorney, accountant, mechanic, plumber, doctor, financial advisor, or other professional.

Not all real estate agents are the same. Picking an agent is one of those critical issues that can cost or save you thousands of dollars.

Don’t Find Your Agent by "Accident"!

When someone decides it is time to sell their home, they interview several real estate agents from different companies to determine which one is best for them. They want someone who will represent them and someone they feel will do an effective job at marketing their home. However, when someone decides to buy a home, they usually end up with their agent through sheer accident.

Why don’t homebuyers search for an agent the same way that homesellers do?

Instead, homebuyers usually end up with an agent as a result of answering an advertisement. The advertisement will give a brief summary of a home available for sale along with the price, but it says nothing at all about the real estate agent.

Any decent agent will ask for an appointment to meet with you to get to know you and your needs and to let you know what he or she will do for you if you decided to use his/her services. Be prepared for the meeting!

  What To Look For In An Agent

• An understanding of your needs

• A willingness to work with you until your needs are fulfilled

• A sense of professionalism

• Someone who is dedicated to their profession

• A familiarity with the area and price range in which you have an interest

• An understanding of the current market

• Does the agent work alone or has the support of a team

• Are there systems in place or does the agent “fly by the seat of his pants”

• Someone with contacts (i.e. Lenders, Insurance Companies, Home Inspector)

• References and/or testimonials from previous buyers

Overall, look for an agent who listens well and understands your needs, and whose judgment you trust. The ideal agent knows the local area well and has resources and contacts to help you in your search. You want to choose an agent who makes you feel comfortable and can provide all the knowledge and services you need.

How Your Real Estate Agent Should Help You

• Protect YOUR interest at all times

• Assist you with financing (refer you to lenders with a variety of loan programs and a good reputation)

• Explain forms and agreements to you

• Advise and/or disclose to you ALL MATTERS even if it means pointing out reasons for you Not To Buy

• Prepare a property value study for you to assure you are not paying too much for the property you want to purchase

• Structure offers that meet YOUR needs at the lowest price with the best terms

• Do the best job of presenting that offer so YOUR interests come first (not the Sellers)

• Negotiate all terms and conditions of the offer (occupancy dates, Buyer credits and costs etc.) as well as any home inspection repairs in YOUR favor

• Do the best job of closing the transaction with the least cost and hassle to YOU

Determine Your Housing Needs
Before You Begin Your Search For A Home

Your home should fit the way you live, with spaces and features that appeal to the whole family. Before you begin looking at homes, make a list of your priorities – such as location and size i.e. minimum bedrooms, bathrooms and square footage. Should the house be close to certain schools? Your job? To public transportation? How large should the house be? What type of lot do you prefer? What kind of amenities are you looking for? Establish a set of minimum requirements and a “wish list”. Minimum requirements are the things that a house must have for you to consider it, while a “wish list” covers things that you would like to have but are not essential.

Is An Older Home A Better Value Than A New One?

There is no definitive answer to this question. You should look at each home for its individual characteristics. Generally, older homes may be located in more established neighborhoods, offer more ambiance, and have lower property tax rates. However, people who buy older homes should be prepared to maintain and repair their homes. Newer homes tend to use more modern architecture and systems, are usually easier to maintain, and may be more energy-efficient.

Home Hunting – The Most Effective Way

Dilemma 1: If you decide to do the house hunting on your own, you most likely rely on resources such as magazines, newspapers, local advertisements, the Internet, perhaps friends or relatives etc. The problem with searching on your own is that by the time you find a home you like and you call to get more information, the home already sold or has a pending sale. Another buyer beat you to it and you got the short end of the stick. The result is, you wasted a lot of time and end up being frustrated and discouraged.

Dilemma 2: You are working with an agent, but did not choose the right one and now you face similar results. Here is how most agents operate: THEY choose a bunch of homes THEY think you will like, drive you from house to house & encourage you to make offers on many of them. The wrong person is deciding which homes you’ll get to see! You’ll feel frustrated because the homes THEY selected are not to your liking and again you wasted a lot of time, looking at homes that you really have no interest in.

Solution: DO YOUR HOMEWORK! Find an agent who uses innovative programs to make home hunting easy, appealing, fun and hassle free. Savvy agents use the newest technology to email you daily updates of all new listings that match YOUR home buying criteria. They can create a search for you with all YOUR requirements and without them being involved, you’ll receive these hot new listings per email whenever there is a new match. Then you go at YOUR leisure to preview the homes you like and if you require more information or perhaps would like to set up a showing, you contact your agent.
This means to you: no more searching through the paper and looking at homes that have already sold or a pending sale, no more wasting your time viewing homes that a real estate agent has picked out and don’t interest you and no more pressure to buy! This puts YOU in control.

You may find an acceptable house on the first day--or the tenth –or it might take a month. The important thing is to get the home that is best for you! So, don’t rush and just buy the first house you see. Buying is a process, not an event. Take the time and find an agent who can help you during the entire process.

What Should I Look For When Walking Through A Home?

In addition to comparing the home to your minimum requirements and wish list, we recommend you consider the following:

• Is there enough room for both the present and the future?

• Are the bedrooms and bathrooms big enough?

• Do you like the floor plan?

• Will your furniture fit in the space?

• Is there enough storage space?

• Is the yard big enough?

• Does anything need to be repaired or replaced?

• What are the potential problems and maintenance issues?

• Do the mechanical systems and appliances work?

• Do you like the neighboring properties?

Determining Your Offer Price

When you decide on a home you would like to purchase, 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 process.

First, you look at recent sales of similar properties in the neighborhood to come up with a price range. There are different sources of information on comparable sales, all of which are easily accessed by your real estate agent. It is somewhat difficult for the general public to access this data, and in some cases impossible.

Then, you analyze additional data, such as the condition of the home, improvements made to the property, current market conditions, how long it’s been on the market and the circumstances behind the seller’s decision to sell. This will help you settle on a price you think would be “fair” to pay for the home. 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 negotiation style. Most buyers start somewhat lower than the price they eventually want to pay. Be prepared for give-and –take negotiations, which is very common when buying a home.

Although your agent may provide advice and guidance, you are the one who makes the final decision. Listen to your real estate agent’s advice, but follow your own instincts on deciding your final price.

Writing An Offer To Purchase Real Estate

Writing an Offer 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 huge 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 including your down payment, the amount of earnest money you are willing to put up, 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.

The purchase and sale agreements used by Realtors have clauses to protect you and your money in a purchase transaction. There is well thought out verbiage that will assist you in putting together a strong offer.

How Does An Inspection Figure In The Purchase Of A Home?

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 the home and most likely you would not see potential problems a professional will find. For this reason, you will require certain disclosures from the seller as part of your offer and you should have an inspection done by a qualified and experienced home inspector. Although the cost of an inspection is the buyer’s responsibility and usually due at the day of inspection, an inspection clause gives you an “out” on buying the house if serious problems are found, or gives you the ability to renegotiate necessary repairs or financially compensation. Remember, inspections are designed to disclose defects in the property that could materially affect its safety, livability, or resale value. They are not designed to disclose cosmetic deficiencies.

If you have an agent representing you, he or she will ask for the seller’s disclosure statement and go over it with you. A good agent will also be able to recommend a certified and established home inspector. We cannot emphasize enough the value and necessity of an extensive home inspection. The $300 to $400 that a professional home inspection costs could be the best money you ever spend on your home. Not only will you sleep much sounder after you have moved into the house, you will also save enormous sums of money repairing items that any good home inspector would have pointed out.

What Does A Home Inspector Do?

An inspector checks the safety of your potential new home. Home inspectors focus especially on the structure, construction, and mechanical systems of the house and will make you aware of any repairs that are needed. Generally an inspector checks: the electrical system, plumbing and waste disposal, the water heater, insulation and ventilation, the HVAC system, water source and quality, the potential presence of pest, the foundation, doors, windows, ceilings, walls, floors, and roof.

It is not required that the buyer is present at the inspection, but it’s a good idea to meet the inspector at the end of the inspection. This way you will have an opportunity to hear an objective opinion on the home you want to purchase and the inspector can point out particular problem areas.

Before closing, you will want to revisit the property to ensure that any requested repairs have been performed.

About Homeowner’s Insurance

What it is: Homeowner’s insurance protects homeowners and lenders against loss or damage to the property.

Do you really need it? Unless you pay cash for your home, one of the requirements that will be made by your lender is proof of a valid homeowners insurance policy, secured before closing. This policy will protect both your investment as well as the lender's (and, in the beginning of the loan, the lenders investment in the total value of the home is much higher!)

What do Policies Protect Against?

Casualty: The most common hazard insured against, of course, is damage due to fire. A homeowners policy may cover losses due to other hazards (for example, wind, earth quake and hail) but it is important that you determine precisely what is - and is not - insured against. If you home is built in a flood-prone area, you must secure a separate flood policy.

Liability: This is to protect you against lawsuits resulting from injuries that occur to visitors or guests in your home. The cost for this coverage, to a large degree, is based on the limits (in dollars) of coverage. Secure as much as possible in order to protect your assets.

Personal Property: While the casualty or hazard insurance covers the rebuilding of the house structure, personal property coverage protects what is inside the home. Coverage here will vary widely, so it is important to be clear on exactly what the limits of the coverage are. Does, for example, it cover replacement cost of an item (its value today) or is the value determined through its original cost (less depreciated value).

Buyers Closing Costs

Keep in mind that you will encounter a number of closing costs when purchasing a home. Closing costs are customary or unique to a certain locality. They also vary depending on the kind of property, type of financing and terms of the contract. However, closing costs are usually made up of the following:

• Escrow Fees: An escrow is like a bank account. All of the monies go into the account (loan, earnest money, deposits, etc.), expenses are paid (commissions, excise tax, loan payoffs etc.) and remaining funds are disbursed. All of this will show on a form prepared by the closing agent called a “HUD Settlement Statement”. The Escrow Fee is typically split between buyer and seller in this market and will vary depending on the dollar value of the transaction.

• Property Taxes (to cover tax period to date)

• Interest (paid from date of closing to 30 days before first monthly payment)

• Loan Origination Fee, Points or Discounts (they are fees based on % of loan amount and paid to provide yourself a lower interest rate, which is optional)

• Recording Fees

• First premium of Mortgage Insurance (if applicable)

• Title Insurance (lender’s coverage)
  Lenders will typically require a rider to the “Owner’s Policy” (which the Seller has to provide to the Buyer at time of closing) called “ALTA coverage” (also known as extended coverage). The premium for this additional coverage is the responsibility of the buyer. This rider protects the insured and the lender against legal encumbrances that were not of public record at the time of closing. The cost will vary by dollar amount of the transaction.

• Impound Payment (prepaid real estate taxes and insurance)

• Pre-paid first years homeowner’s insurance policy (fire and flood insurance if applicable)

• Lender fees; documentation preparation fees, underwriting fees, funding fees, etc.

• Appraisal fees (Lender financing will require an appraisal of the home’s value and condition. The purpose is to satisfy the lender that the subject property has a value equal to the sales price. Costs will vary depending on type of property, overall complexity of report and type of report ordered.

• Credit Report

• Flood certification to verify if you need flood insurance. This is a one time fee for a flood servicing company to verify that the subject property is or is not in a flood plain (and if so, which one). This is a requirement for any loan eligible to be sold on the secondary mortgage market (private investors and government-sponsored agencies i.e. Fannie Mae, Freddie Mac and Ginnie Mae).

If you are one of those rare individuals making a cash offer to buy a home, your closing cost will be very low as most of the fees come from the lender.

If you like most homebuyers have to obtain a mortgage to purchase your home, your closing costs can add up quickly. In order to avoid a big surprise at closing, ask your lender to supply you a good faith estimate, which lists all closing costs you will encounter.

We also recommend that you ask your agent to prepare a Net Sheet for you. This will list the lender fees as well as real estate agent fees, title fees, escrow fees, any mortgage pay offs (as per your statement) etc. An experienced agent should be able to calculate your approximate closing cost and tell you what you will have left in your pocket after all expenses.

Asking For Closing Costs Or Seller Financing

There may be times when, as part of your offer, you request the seller to pay all or a portion of your closing costs. For example, if your are going to buy with zero down, you most likely don’t have money to bring to the closing table. If you are obtaining a government loan (i.e. VA or FHA) in order to finance your purchase, you are prohibited from paying certain types of lender, escrow, title or settlement fees. The result is that the seller ends up paying them for you.

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 private mortgage insurance and save yourself some money.

What Can You Expect On Closing Day?

After all the hard work is done (searching and finding your home, negotiating terms and conditions, applying for a mortgage and getting approved) the focus suddenly turns to the Closing Day.

Closing procedures will vary from locality to locality. The closings in Washington State will take place at a Title or Escrow Company. The closing will be attended by the buyers involved, as well as the Closing Agent, who has reviewed all of the components of the house sale and who is the one who will say "sign here on the dotted line" more times than you have ever heard in your life.

If you are financing your home purchase you will commit in writing to the terms of the mortgage. The homeowner’s insurance on the property is verified and the seller will give you the title to the home in the form of a signed deed and put the keys to the home in your hands.

You will pay all closing costs and in turn receive a settlement statement (HUD-1 Form), which itemizes all services provided and fees charged. The deed and mortgage will then be recorded in the County Court House, and you will be the owner of a new home.

The Closing is your final opportunity to make certain that everything related to the purchase of your home is correct. It is important, therefore, that you do adequate preparation prior to the day of Closing. Although your Agent will most likely review all of the items needed with you, it is a good idea to have the right information in case you need to handle it on your own.

What items will you need?

The following are the most important items that you will need prior to or at closing and some hints regarding them:

• A Closing Cost Estimate: This should first be given to you by your Agent at the time of the contract (we referred earlier to it as the Net Sheet), and then given to you by the Lender in form of a Good Faith Estimate, at time of loan application. This should give you a reasonably close estimate of funds you will need at the time of closing.

• Homeowners' Insurance Policy: This must be secured prior to the date of closing. For more information on coverages (and saving money) see the Homeowner’s Insurance section.

• Settlement Statement: You should have a copy of the Settlement Statement, which is prepared by the closing agent, before the date of Closing. Generally this will not be available until one or two days prior to the actual Closing, but it is important to have it because it gives you the total amount of cash you will need at Closing and also how those various funds will be dispersed. In addition, it gives you and your agent, who should also have a copy for review, an opportunity to iron out any discrepancies prior to sitting down at the Closing table.

• Certified Funds: On the day of Closing you will need certified funds for closing costs and your down payment. This is an important reason for needing a copy of the Settlement Statement a day or two in advance - so you know the amount of funds needed and so that any problems can be handled in advance.
  
  If you are providing funds by a Cashiers Check, the escrow company will have to have the check a minimum of 24 hours prior to closing. If you are wiring the funds to the escrow company it is a good idea to have them there the day before closing but the wire can happen the day of closing (not recommended). Generally personal checks are not recommended and cash will not be accepted.

By making adequate preparations in advance, you will be far less likely to have nasty surprises when everyone (especially you!) is ready for closing.

In general, you will leave the closing and go to your new home as a homeowner. The weeks and months of anticipation are all settled in the short amount of time that you spend at the Closing.

Congratulations! Break out the champagne and celebrate!

If you have a question about a real estate or mortgage term or its definition check out our Real Estate Glossary.

If you require any help to find the Right Home for you and to help you through the entire home buying process, please give us a phone call at 360-738-3900 or fill out the form below.