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ERA Realty Group Buyers Guide for Home Buyers in Maryland. D.C. Virginia.
1st Step:
Choose ERA Realty Group
Choose ERA Realty Group
When you choose ERA Realty Group you are making the best choice you can in the decision process for your new purchase. We have over 150 years combined experience to help you make the best choices ranging from a starter condo, move up town home, single family home purchase, land or downsizing and taking the next step in life.
We work hard everyday to make sure Buyers and Sellers get what they want and know each step it takes to get the deal done.
Thank you for choosing Remax 2000 Realtors and we are happy to help you.
Owning VS. Renting
Buying a home in order to build equity is one of the main financial reasons prospective buyers jump into the market. At least that was a major factor prior to the financial crisis of 2008, when the U.S. housing market suffered widespread losses. Homeowners and prospective homeowners may now look more closely at the costs and benefits of such a large transaction.
Yet while the sobering effects of the housing crisis may have prompted a more cautious approach by buyers who are more realistic about the level of equity they can build in their homes, the drive to be a homeowner remains strong. It's mostly about freedom: The ability to paint the walls whatever color you want, or know that a landlord is not going to raise your rent or ask you to leave.
Here are a few points to consider when deciding whether homeownership or renting makes better sense for you.
Reasons to rent
- Flexibility.Renting allows you to explore an area before making the longer-term commitment to homeownership. Unless you are certain about a specific neighborhood, renting allows time for research and discovery.
- Career uncertainty. If you think you might need to move in the near future, or are mulling job changes that span several areas of town or are located elsewhere in the country, you might want to rent. Buying ties you down to a greater extent.
- Income uncertainty. If you expect a pay hike or cut in the near future, that can change your borrowing ability as well as impact your ability to pay a mortgage.
- Bad credit. Creating a history of on-time rental payments can help you build the sort of credit you'll need to qualify for a mortgage.
- No maintenance expenses. When a pipe leaks, you don't head to the store; you head for the telephone and call the landlord.
- Utilities (sometimes) included. In some instances, the landlord may pay for many utilities such as water, sewer, garbage, and, in some cases, even heat and hot water.
But there is a downside, too: You may have no control over the fluctuation of your rent, a big-budget item that can change often. Long-term budgeting becomes more difficult.
Reasons to buy
- Equity. When you pay rent, you are paying your landlord's mortgage or adding equity to his or her bank account. However, when you have a home mortgage, you increase your degree of ownership in your home with every payment. A general rule is that if you intend to stay in your property for at least five to seven years, the costs of purchasing the home are more likely to be offset by accrued equity and increased housing value. In the event that equity in the home grows to more than a 20-to-80 percent loan-to-value ratio, you will be able to borrow against your equity in the home. This can be cautiously used should you need capital to pay for major purchases. If interest rates drop, you can refinance your mortgage at more favorable rates, or, once you've paid the entire mortgage off, borrow against the equity in your home to fund major purchases such as a second home or your child's education.
- Tax deductions. You can deduct mortgage interest as well as your property taxes. Uncle Sam doesn't give renters this bonus. Not only that, but if you meet certain requirements the IRS won't apply a "capital gains" tax on your profits from the sale of your home. You can keep the first $250,000 in profit you make when selling the home if you're single, or the first $500,000 if married. In addition, those who work from home may be eligible to take deductions for their home office and portions of utilities.
- Creative control. You like dozens of pictures on the wall? Well, hammer away — they are your walls now. Go ahead and paint them mango! Wish you had another room? Go ahead and add one.
- Maintenance choices. If you live in a house, you can decide how to approach maintenance, either doing it yourself or picking your own contractor. If you live in a condominium or homeowners' association, you may pay a monthly fee to have maintenance work covered by the association's contractors.
While a home is a good investment — and let's face it, you have to live somewhere — many financial experts caution against purchasing a home simply as an investment. Historically, real estate market increases have been slow and steady, not the meteoric spikes seen between 1998 and 2008, when the economy buckled. Some experts like to point out that while housing prices and declines are cyclical, the stock market, on the other hand, had generated average annual returns of between 8 and 10 percent pretty steadily for decades. While those stock market gains may be less secure now, even conservative money planners try to deliver 5 to 7 percent returns, which is better than home value increases in many U.S. housing markets.
Can you afford to buy?
Buying a home is exciting, and it's often the biggest financial transaction many people will ever make in their entire lives. That's why when it's time to consider purchasing your own home, the best first step is to take some of the emotion out of the equation. And speaking of equations, when it comes to figuring things out, the best place to start is with the numbers.
How much money do I need to purchase a home?
It depends on the cost of the home, the type of loan you get and the amount of your down payment. From the moment you write an offer on a house and it is accepted by the seller, you will need something called earnest money. This is the first check a buyer will need to write to accompany the offer to buy a home. Then there's the cash needed to pay for a home inspection as well as upfront fees for credit reports and an appraisal.
Next comes the down payment, which is the amount of cash required by the lending institution securing your loan. Based on your credit score, debt-to-income ratio and available cash, lenders will advise which loan products, if any, are available and whether a down payment will be necessary. A down payment is separate from earnest money, and depending on the lender, it can be money gifted from parents or other sources.
In some instances, if you qualify as a first-time home buyer, you can receive down payment assistance and closing cost monies from the county you choose to live in. You can also qualify for below market value fixed interest rate loans.
The next consideration when buying is closing costs. These fees are not part of the financed amount of a purchase and can add 3-5 percent on top of the sale price of the home. While there are Veterans Affairs loans and some conventional loan products that offer "100 percent financing," closing costs are still additional costs that can't be completely wrapped up in the loan. (Note: Some fees, such as the VA funding fee, may be wrapped up in the loan.)
In some instances, closing costs can be part of the home purchase negotiations. Depending on market conditions, some sellers may consider paying for a buyer's closing costs out of their proceeds. In fact, buyers can discuss with their real estate agents or whoever is representing them in the transaction whether to ask the sellers to cover the cost of a home warranty, HOA fees or other expenditures.
Are there any reasons why I should NOT buy a home?
Yes, there are many reasons why you should not buy a home:
- You can't afford it.
- It makes more financial sense to rent.
- You can only afford it with a risky type of loan (e.g., adjustable-rate, negative-amortization loan).
- You plan on living in the house for fewer than 5 years.
- The market is rapidly declining.
- You have too much debt.
What is your Credit Rating? How to Fix It!
When it comes to obtaining a mortgage at the best interest rate, your credit rating, also known as credit score, may be the single-most important piece of financial information. In fact, your credit rating goes a long way toward determining what interest rate you qualify for from your lender.
Your credit rating is a number that is determined from information in your credit report. Credit ratings range from 300 to 850, depending on the credit scoring agency. The higher the number, the better your credit rating. So, before you start house hunting and getting pre-approved for a home loan, it's a great idea to first check your credit report and get your credit rating.
FICO vs. credit report
What is a credit report? What is a FICO score? Is a credit report the same as a FICO score? No – they are two different things, but they are related.
Your credit report is exactly as it sounds – it's a report of your credit history. It contains all kinds of personal financial information such as your credit accounts (mortgage, auto, department store, etc.), listing when they were opened, their current balances, credit limit and whether they were paid on time; any outstanding taxes or liens against you; late civil or child support payments; court judgments (parking tickets, etc.) and any city, county, state and federal liens for unpaid taxes and bankruptcies.
Three major reporting bureaus (Equifax, TransUnion, and Experian) who furnish credit reports and they also furnish your credit rating or credit score. This rating or score can also be referred to as your FICO score. FICO stands for Fair Isaac Corporation, a company that was the first to create a credit score in the 1980s. Now simply known as FICO score, it is a number derived from your credit reports and is considered the standard. About 70 to 80 percent of mortgage lenders use the FICO score. Since there are three credit-reporting bureaus, you have three FICO scores.
Here's what a FICO score is based on:
- Payment history (35% of score): Have you paid your bills on time?
- Amounts owed (30%): What is your overall debt?
- Length of credit history (15%): How long have you been borrowing money? Lenders like to see a long credit history.
- New credit (10%): Have you applied for new credit?
- Types of credit used (10%): Lenders like to see all kinds of credit types — bank cards, car loans, student loans and more.
What qualifies as a high score?
The FICO scores range from 350 to 850, with an 850 as the Holy Grail of credit scores and 723 serving the median score in the U.S. You can expect good mortgage interest rates starting at the 720 level.
While you may not know your exact FICO score before you request it, you may have an idea where you stand. For instance, you're probably in good credit standing if you're receiving a lot of zero- percent credit card offers, or if you are being offered lines of credit for zero or very low interest rates.
Not everyone has to have reached the Holy Grail! Home buyers who pursue an FHA loan, one of the most common loan types for first-time purchasers, can usually secure a loan if their credit is 630 or higher.
If you are applying for a no-income-verification loan, whereby you forgo providing income documents to the lender because your income is not consistent or you are in a crunch for time, the lender will be looking for a minimum FICO score of 680 or higher. Banks don't like to assume all the risk, so your good credit history is key, although other types of lenders may have more flexibility in determining your mortgage interest rate. In any case, credit reports are critical in these kinds of transactions, as lenders have tightened their standards since 2008.
Free Reports
The Federal Regulation
The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies — Equifax, Experian and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months. The Federal Trade Commission (FTC), the nation's consumer protection agency, has prepared a brochure, Your Access to Free Credit Reports, explaining your rights under the FCRA and how to order a free annual credit report.
Fixing Your Credit
If your credit reports or FICO score make you want to hide under the covers, resist! You can take concrete steps to turn things around. Many financial experts suggest the same common sense strategies to turn your credit report around:
- Always pay your minimum balance on time: Let's face it, credit card companies make handsome profits when their customers maintain a balance. Just make sure you send them their due each month.
- Try to reduce balances: Even throwing in an extra $20 to $50 each month will help reduce the overall debt, and paying extra looks good on your credit report.
- Don't run up the entire balance: Having $100 left on a $10,000 line of credit doesn't look so hot. Lenders look at the dollar amount of credit available to you and, from there, what percentage of that credit you have used. In other words, if you have a card with a $1,000 limit and you've spent $900 on that card, you've used 90 percent of your available credit; this looks a lot worse than having a balance of, say, $200 on the card.
- Throw away new credit card offers: Don't apply for new cards and lines of credit right before you go home shopping. Banks will not turn a blind eye to numerous inquiries for new credit.
If bad credit continues to dog you, the FHA loan programs may be your ideal option. New lending standards instituted by the Federal Housing Administration in 2012 for its loan programs require new borrowers to have a minimum FICO score of 580 to qualify for the FHA's 3.5 percent down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10 percent.
Down Payment and where it comes from.
2nd Step:
Get Financing
Get Financing: Basic Mortgage Questions and Answers
Mortgages are probably the most crucial piece to buying, selling, or just plain owning a home. And, honestly, they are not as hard to understand as you might think. You can benefit from the experience of others who have mortgages (which is just about everybody you know), and with a little homework, you can make the best financial decisions.
1.) What is a mortgage?
It's pretty simple: A mortgage is a loan, with your house and land used as security; if you don't pay back the loan, the lender forecloses on your home. The loan is secured by a lien (the "mortgage") against the property (your house and land). The lender doesn't own the house, you do. They just have the lien with your house as their collateral (i.e., the security).
When you are looking for a first mortgage, there are two things to think about: what you can actually afford, and what you can borrow. Why are they different? Because the lender is not going to look at how much you spend in a month on gourmet wine or movies, or how comfortable you'll be with a big payment. They may be willing to loan you much more than you think you can spend on your mortgage. Only you know how much flexibility or not that your lifestyle has, which determines how much you can afford in a home.
A lender looks at your income (and income potential) vs. your debt, as well as your savings and credit history. Then they determine how big a risk you'd be for the lender to take on. They're also going to look at the value of the house you want to buy, and the interest rate of the loan you'll be getting. And then they arrive at a loan amount their firm can live with. In a perfect world it will match (or exceed) what you need to bridge the gap between your down payment and the price of the house you want.
2.) Why are there so many kinds of mortgages! How will I ever figure it out?
When it comes to looking at mortgage types, ask yourself one giant question: What is your goal? Will you be in this new home when the grandkids come to play, or is this a starter home that you'll trade up in the next five years? The answer to that question will help narrow your mortgage choices.
3.) Why does my length of time in the house matter?
It matters for two reasons: It will determine which type of loan is better for you, and it will dictate whether you look hardest at interest rates or at points.
If you are going to stay in your house and plan to pay off your mortgage over its lifetime, you can get a fixed rate loan where the payments will not change. (Of course, taxes and insurance are usually included in this type of loan and they might change.) The interest is a little higher than with an Adjustable Rate Mortgage but you have the security of knowing what your loan payments will be.
But if you know you won't be in the house long, you can get a lower interest rate on an ARM. If rates take a big jump in a few years, it won't matter because you're planning on selling then anyway. You'll also have the option of a hybrid ARM that is fixed for, say, five years, and then adjusts annually.
The lender may charge points (each point is equal to 1% of your home loan amount), and required third parties charge for their services, which increases the cost of the loan. If you sell your home in a few years and have paid points to get a better interest rate, you may not recoup the cost of those fees. And your equity in the house will be minimal, but you are betting the home will appreciate enough to cover the fees, or that the money you save in interest will balance out the additional cost of the loan. (If you stay in the house longer than you expect, you take the risk that you can't afford the higher payments as the interest rates adjust, or you risk not being able to refinance.)
There's no free lunch: You can choose between higher rates with no points or lower points, or lower rates with higher points. The key is to compare different types of loans to see what works for your needs.
Tip: In general, you should never pay more than 1 to 1-1/2 points to a lender, depending on the loan. (In certain circumstances, you might pay 2 percent, but only if there is a good reason (e.g., bad credit, complex loan, or you are buying a great interest rate.) You should discuss with an independent mortgage professional the effect discount point have on your rate.
4.) Where can I find today's rates?
First, check Zillow Mortgage Marketplace, which offers rate quotes for free, and anonymously. Also, lenders and your local bank will have the latest rates for each type of loan. The most important thing is to shop around for rates in your city to see who is offering the best deal locally. Looking at the advertised rates will not tell you which loan you qualify for and often times the lowest rates ("teaser rates") can be misleading, so you should investigate several lenders.
5.) Why are some rates shown as a percentage and as an APR too?
The Annual Percentage Rate is what you will actually end up paying in addition to the principal. It wraps up the interest, points and fees in an effective annual rate. (When a lender quotes you a rate, it will be for interest only, so ask to see the APR.) As above, when you are using the APR to compare loans, make sure you are comparing apples to apples. You need the same loan from different lenders to make the comparison work.
Tip: Compare the APR on two identical loans and choose the one with the lesser rate.
6.) What is amortization?
It is a true measure of what you are paying per year against your loan. A loan has a life — whether it's 15, 30, or even 50 years. You pay in installments, and the principal decreases until the loan is paid off by the end of the term. The payments are evenly spread over the life of the loan, with the interest payments making up the majority of the payment at the beginning, and then principal paid off toward the end of the term. Pay attention to the amortization schedule, which shows the payments for the life of the loan including interest.
Tip: Pay half your house payment every two weeks instead of one monthly payment. This results in 26 payments per year, one more payment annually than if you just paid monthly. The re-amortized loan will eventually result in more of the payment paid on principal and less on interest. The extra payments go to pay down the principal on the loan.
7.) What else should I watch out for?
Prepayment penalties. Think it's a good thing to pay off a loan? Well, it might be, but certain lenders charge a penalty if you do. Penalties apply for a specific period of time, usually 1, 2, or 3 years after the loan is originated. How much is the penalty? Could be six months of interest or 2 percent of the principal remaining on the loan, but it varies.
You might think that it's stupid to get a loan with a prepayment penalty, but some lenders offer very low (and therefore tempting) interest rates in exchange. Also, some borrowers agree to loans with penalties if they have bad credit and it's the only way they can get the loan. Mostly, a prepayment penalty is a financial decision. There are situations where accepting a prepayment penalty on a loan can save you thousands of dollars in interest.
8.) What's mortgage insurance? Do I need it?
If you are making a down payment on our home of less than 20 percent, you will most likely have to get Private Mortgage Insurance (or PMI). It ensures that the lender is guaranteed, by the mortgage insurer, 80 percent of the loan if you default. The insurance premium amount varies by the loan to value of the house and type of loan.
Government loan programs, such as FHA or VA loans, are backed by the government rather than PMI. There is no monthly mortgage insurance on VA loans, however you will have monthly mortgage insurance on a new FHA loan.
Types of Mortgages: What is right for you?
Fixed-Rate Mortgage
Interest is fixed for an amount of time; e.g., 10, 15, 20, 30, or even 40 or 50 years, at which point the amortized principal is paid in full.
Pros: Security. You know what your payments will be. You can refinance if rates drop significantly.
Cons: If rates go down, you'll still be paying the initial rate unless you refinance.
Watch out: This is a long-term prospect; if you are keeping your home for 15 or even 30 years, it's a conservative way to go. But you can end up paying more short-term than if you had an ARM.
Adjustable-Rate Mortgages (ARMs)
The interest rate fluctuates with an indexed rate plus a set margin; adjustment intervals are predetermined. Minimum and maximum rate caps limit the size of the adjustment.
Pros: Initial rates are lower than fixed. Popular with those who aren't expecting to stay in a home for long, or in a hot market where houses appreciate quickly, or for those expecting to refinance. You can qualify for a higher loan amount with an ARM (due to the lower initial interest rate). Annual ARMs have historically outperformed fixed rate loans.
Cons: Always assume that the rates will increase after the adjustment period on an ARM. You are betting that you'll save enough initially to offset the future rate increase.
Watch out: Check out the frequency of the adjustments. The more often, the lower the starting rate, but the more uncertainty. The less often, the higher the rate, but a little more security. Check the payments at the upper limit of your cap (your rate can increase by as much as 6 percent!); you can get burned if you can't afford the highest possible rate. And planning that a refinance will bail you out is risky; what if you can't afford (or can't qualify) when the time comes?
1-yr. Treasury ARM
The rate is fixed for one year, then becomes adjustable every year. The new rate is determined by the treasury average index plus the loan margin (usually 2.25-2.5%). 30-yr. term.
Pros: Lower rates than a fixed mortgage. When rates go down, you benefit.
Cons: Watch the margin; the margin is added to the index to come up with the new rate after the adjustment period. When rates are going up, you could end up paying more interest than with a fixed.
Watch out: If you are a gambler and think the rates won't increase, this might work for you. But if you are into it for the long or even intermediate run, fluctuating interest rates can mean higher payments over time.
Intermediate ARM
With an intermediate or hybrid ARM, the rate is fixed for a period of time, then adjusts on a predetermined schedule. This is shown by the number of years the loan is fixed, and the adjustment interval (.e.g., 3/1 ARM is 3 year fixed, and 1 adjustable annually). The new rate is determined by an economic index (usually treasury or treasury average index) plus the loan margin (usually 2.25-2.5%). 30-yr. term.
Pros: Lower rates than a fixed mortgage. When interest rates rise, you see more ARMs because they are easier to qualify for.
Cons: When rates are going up, you could end up paying more interest than a fixed-rate mortgage after the initial period.
Watch out: If you aren't planning to keep your house for long this might work for you because you will receive lower rates initially. Be sure to check the rate caps so you know exactly how high your payments can go. Fluctuating interest rates can mean higher payments over time.
Flexible Payment Option ARM
The borrower chooses from an assortment of payment methods every month. There is a "change cap" limiting how much payments can vary in a year.
Pros: Frees up cash when you need it. Good for buyers with variable incomes (e.g., salespeople who work on commission).
Cons: Some options won't cover your interest. With lower payments, your balance increases each month, and eventually your payments will increase substantially. This could lead to negative amortization.
Watch out: Eventually you will be required to pay down the principal and your payments will increase drastically. If you can't make them, you lose the house. Most experts say, "Don't do it."
Interest-only ARM
For a period of time, you pay only interest, and do not pay down the principal. This loan type was discontinued by Freddie Mac in 2010 and is offered by very few lenders.
Pros: If you don't plan to stay in a home long, you can buy something you ordinarily couldn't afford. If you are in a hot market, or a hot neighborhood, you'll have low payments while your house appreciates in value. You can always pay more on the principal while enjoying the low payments. One other great thing about an interest only mortgage is that payments made to the principal reduce your monthly payment. So, if you have a job that has a heavy non-scheduled bonus or commission based compensation plan, you can pay the interest every month and when you get your bonuses pay down the principle to reduce your monthly payment.
Cons: The day will come when you need to pay down the principal. If your home value has fallen, or your income decreased, you could have trouble making the new payments. One strategy is to invest the difference between an interest-only loan and a fixed-rate loan to build up cash reserves.
Watch out: If you can't pay interest and principal at the same time, chances are you can't afford the house. You can only put off the inevitable for so long: the principal has to be paid down. If you can't make payments, you could lose the house. If you plan to sell your house and can't sell it for what you owe, you are in trouble.
Convertible ARM
An ARM that can be converted to fixed rate after a period of time.
Pros: Saves on refinance costs, assuming you would have been switching anyway.
Cons:You will have a higher rate for the fixed with a convertible loan. You can't look around for a better deal, which you can with a refi.
Watch out: Saving the cost of the loan and the hassle of shopping loans are a plus, but you might be crying if the refinance rates are lower than your new fixed. Experts say, "Just refinance."
Jumbo Loans
Above Freddie Mac and Fannie Mae conforming guidelines, therefore the big secondary lenders will not secure jumbo loans. 2013 maximum amount for a conforming loan: $417,000.
Pros: When the market is out of sight, the jumbo loans make a purchase possible.
Cons: Higher down payments, and higher interest rates.
Watch out: If you can afford the higher payments, then go for it. But make sure you can afford them.
Assumable Mortgage
An adjustable-rate loan, the balance of which can be assumed by a home buyer.
Pros: Sellers can offer a low interest rate to entice buyers.
Cons: This is almost never a fixed rate mortgage, so the savings might not be all that great.
Watch out: These are rare today. If the buyer who assumes the loan defaults, the bank will go after the original borrower.
FYI – FHA loans are assumable, but are fully-assumable and are not always ARMS.
Balloon Conforming Mortgage
Interest rate is fixed for a period of time, but the principal is not completely amortized. For the remainder of the term, it adjusts to a new fixed rate determined by the Fannie Mae net yield index plus the margin. 30-yr. term.
Pros: Lower monthly payments initially. If your career (and salary) has a good future, or you are in a hot market and plan to sell before the balloon comes due, you can save money.
Cons: Who knows what that new rate will be? There's a looming debt in your future.
Watch out: You can refinance when the balloon comes due, but you are gambling that you can afford the refi loan.
Balloon Mortgage
The rate is fixed for a period of time, but the principal is not completely amortized during the period. The entire balance of the principal is due as a balloon payment at the end of that period.
Pros: Lower monthly payments, with the idea you can always refi or sell before the balloon.
Cons: A big elephant waiting in the wings
Watch out: It's easy to procrastinate, or your life changes, and then your balloon pops. Refinancing costs might offset any savings you made.
VA Home Loans
A zero-down loan offered to veterans only; the VA guarantees the loan for lenders.
Pros: Nothing down, and no mortgage insurance. The loan is assumable.
Cons: The rate might be higher than conventional loans or FHA loans.
Watch out: Shop around first. Lenders are paid a 2 percent service fee by the government, so your points should reflect a discount when compared to similar rate loans.
Federal Housing Administration Loans (FHA)
Government-subsidized loan with low down payment (i.e., 3.5 % of the sales price) and closing fees included; the government guarantees the loan.
Pros: Low rates for those who can't come up with the down payment or have less-than-perfect credit; great for first-time home-buyers. The loan is assumable.
Cons: If you can afford 5 percent down, you might find better rates with conventional loans
Watch out: Shop around first. Lenders are paid a 2 percent service fee by the government, so your points should reflect a discount when compared to similar rate loans.
Get Prequalified and Pre-approved with a Lender
What is a pre-approval?
A pre-approval is a commitment in writing from a lender that a borrower would qualify for a particular loan amount based on income and credit information. Most pre-approval letters are good for 60 to 90 days.
Why you should get pre-approved?
There are many reasons why you should get pre-approved. The most important reason you should get pre-approved early in the process of purchasing a home is that you will get an accurate idea of how much you can afford. This will ensure that you only look at houses that are truly in your price range. A pre-approval letter is also essential in a competitive real estate market. If you make an offer on a house without a pre-approval, your offer will not be taken as seriously as an offer from another person with a pre-approval and you could lose out on purchasing the house of your dreams. Additionally most bank-owned homes will require a pre-approval letter from a lender before accepting an offer.
What is involved with getting pre-approved?
In order to obtain a pre-approval letter you will need to contact a lender. You will typically be approved in 24 to 48 hours if you provide the lender with all the necessary paperwork.
Click here to calculate how much you can get pre-approved for and to get connected with a trusted lender today.
Documents you'll need to provide to get a true pre-approval
- Your W2 from the past two years
- Your paystubs for the past three months
- Your tax returns from the past two years
- Your checking or savings bank statements for the past three months (this will likely have your down payment funds in them as well)
- Your statements for all your other assets (stocks, bonds, retirement accounts) for the last two months
- The name and phone number of your landlord (if you are renting) or your current mortgage documents
- Your divorcee decree, if applicable
- If you are self-employed: Your business tax returns for the past two years in addition to your year-to-date profit and loss statement and year-to-date balance sheet
Credit Report and Credit Score
The lender will also pull your credit report and score for you and your co-borrower (if you have one.) Most lenders charge an upfront fee of around $30 to do this.
The lender will analyze your credit report for any red flags such as late or missed payments or charged off debt. Your credit score will affect your ability to qualify for a loan and determine how low of a rate you can get. Generally a score above 720 will get you the most favorable mortgage rates. Your overall debt (minimum credit card payments, student loan payments, car payments, etc.) will be analyzed to calculate your overall debt-to-income ratio. You will also need to provide any alimony or child support payments you are required to pay.
What if I can't get pre-approved?
There are three areas you will likely need to work on if you are not able to get pre-approved from a lender:
- Correcting any errors on your credit report and raising your credit score
- Decreasing your overall debt and improving your debt-to-income ratio
- Increasing your down payment amount in order to qualify for the price of the house you want
Be sure to ask your lender for tips on how you can improve your chances for qualifying for a loan.
Types of Lenders
Lenders are the ones who give you the money — either directly or through a third-party — to fund your loan. Lenders have various names based on how they acquire their clients and what they do with your loan after it is funded.
Retail vs. Wholesale vs. Correspondent Lenders (How Customers Are Acquired)
- Retail lenders reach out directly to consumers. For example, Wells Fargo has loan officers in local branches who perform all loan origination functions. Retail lenders are sometimes referred to as "Direct Lenders." Retail lending can be done face-to-face in a bank branch, online or on the phone.
- Wholesale lenders fund mortgages acquired through brokers who work outside of their company. The brokers find customers and take loan applications and then sell the loan applications to wholesale lenders to fund.
- Correspondent lenders are a mix between brokers and retail lenders. They technically fund loans with their own borrowed money but typically lock in rates with other lenders at the same time. This mitigates their risk because they can quickly turn around and sell the loan.
Mortgage Bankers vs. Portfolio Lenders (What Happens to Your Loan)
- Mortgage bankers fund loans but typically turn around and sell them in the secondary market to investors or agencies such as Fannie Mae and Freddie Mac. Mortgage bankers borrow money from banks to fund the loans and then repay the money when the loans are sold. Most large lenders such as Wells Fargo Mortgage are mortgage banks.
- Portfolio lenders include many community banks, credit unions, and savings and loans companies. Portfolio lenders use money from their customers' bank deposits to fund loans so they can hold onto the loans and keep them in their portfolios.
Mortgage Brokers
Mortgage brokers are like a matchmaking service: They match you, the borrower, with a lender. They review your personal financial information and look over an array of lenders and try to match you with one who will give you the best rate and terms. The advantage is choice because the broker will have lots of lenders to match you with; the disadvantage is that once the match is made, the broker out of the picture, so you may have difficulty staying in close touch with the person who is underwriting and funding your loan.
Loan Officers
Loan officers find new clients, counsel borrowers on how to choose the best mortgage and fill out loan applications. They typically make their money through commissions on the loans. Loan officers can also be mortgage brokers if they also process and broker loans. Loan officers are sometimes called mortgage consultants, mortgage loan originators, home loan consultants, and mortgage planners.
Qualifying for a Mortgage
You need to get your paperwork in order before you find a lender, but first you should understand the basic facts.
- Down payment. Traditionally, lenders like a down payment that is 20 percent of the value of the home. However, there are many types of mortgages that require less. Beware, though: If you are putting less down, your lender will scrutinize you even more. Why? Because the less you have invested in the home, the less you have to lose by just walking away from the loan. If you cannot put 20 percent down, your lender will require private mortgage insurance (PMI) to protect himself from losses. (However, if you can only afford, for example, 5 percent down, but have good credit, you can still get a loan, and even avoid paying PMI.
- LTV. Lenders look at the Loan to Value (LTV) when underwriting the loan. Divide your loan amount by the home's appraised value to come up with the LTV. For example, if your loan is $70,000, and the home you are buying is appraised at $100,000, your LTV is 70%. The 30 percent down payment makes that a fairly low LTV. But even if your LTV is 95 percent you can still get a loan, most likely for a higher interest rate.
- Debt ratios. There are two debt-to-income ratios that you need to consider. First, look at your housing ratio (sometimes called the "front-end ratio"); this is your anticipated monthly house payment plus other costs of home ownership (e.g., condo fees, etc.). Divide that amount by your gross monthly income. That gives you one part of what you need. The other is the debt ratio (or "back-end ratio"). Take all your monthly installment or revolving debt (e.g., credit cards, student loans, alimony, child support) in addition to your housing expenses. Divide that by your gross income as well. Now you have your debt ratios: Generally, it should be no more than 28 percent of your gross monthly income for the front ratio, and 36 percent for the back, but the guidelines vary widely. A high income borrower might be able to have ratios closer to 40 percent and 50 percent.
- Credit report A lender will run a credit report on you; this record of your credit history will result in a score. Your lender will probably look at three credit scoring models, they will use the median score of the three for qualifying purposes. The higher the score, the better the chance the borrower will pay off the loan. What's a good score? Well, FICO (acronym for Fair Isaac Corporation, the company that invented the model) is usually the standard; scores range from 350-850. FICO's median score is 723, and 680 and over is generally the minimum score for getting "A" credit loans. Lenders treat the scores in different ways, but in general the higher the score, the better interest rate you'll be offered.
- Automated Underwriting System. The days when a lender would sit down with you to go over your loan are over. Today you can find out if you qualify for a loan quickly via an automated underwriting system, a software program that looks at things like your credit score and debt ratios. Most lenders use an AUS to pre-approve a borrower. You still need to provide some information, but the system takes your word for most of it. Later on, you'll have to provide more proof that what you gave the AUS is correct.
3rd Step:
Find a Home
Choosing a Neighborhood: Where should I buy a home?
Now that you've figured out what you can afford and how much you're going to have to budget for those monthly mortgage payments, you ask yourself, "Where should I live?"
Obviously, you want to find the right home, but before you do, you need to find the right neighborhood – the one that fits your needs.
Choosing a neighborhood
Before looking for the home that fits your taste and budget, it's important to get the facts on neighborhoods. In the end, you're not just buying a house, you're also buying into a larger community. What happens outside your door has great impact on the value of your home. That makes a difference especially in terms of resale value, should you ever choose to sell the house.
In addition to the financial impact that a neighborhood has on home values, there's an emotional component, too. That's why it's important to make a good choice for value and resale as well as a good choice for where you feel comfortable, whether it's a cozy cottage on a suburban cul-de-sac or a classy condo in a downtown high-rise.
How do you know whether a neighborhood is right for you? First, consider your lifestyle and interests. Where do you work, how do you get there and how much time are you willing to spend on your commute? One thing to keep in mind: Psychology experts who have studied happiness argue that you're more likely to be happy if you buy a smaller house with a shorter commute than a bigger house with a longer commute.
When it's time to relax, do you like to walk the dog, browse the shops or hit the clubs and cafes? Are there good services, amenities and schools? When you start to prioritize your preferences, you'll likely find your choices can quickly shrink to just a few neighborhoods that fit the bill.
When you've narrowed down your choices, then it's time to see how the neighborhoods stack up. Walk around and ask the people you meet about local parks and traffic patterns. Get online and research real estate data about the neighborhoods you're interested in. See the median home value for neighborhoods, median list and sale prices and much more.
Of course, few neighborhoods will meet all your criteria — and even fewer at prices most of us can afford — so don't be surprised if you have to make some compromises. (Everybody does.)
Predicting the future
Here's a situation you don't want to see: When Marcie bought her first home several years ago, she loved the fact that most of her neighbors had lived there for decades. They all knew each other, they'd watched each others' kids grow up and many even worked at the same company on the other side of town.
At least, that is, until the company closed, property values plummeted and for-sale signs began to sprout like mushrooms. Like many people, Marcie had bought her home for both its livability and its potential for long-term appreciation; now neither looked too promising.
Clearly, most home buyers purchase a home because they believe they'll enjoy living in it, but smart home buyers also buy for the future; i.e., as an investment that will appreciate over time and produce a profit when it's time to sell. And while it's hard to think about selling your home when you haven't even bought it yet, remember that an American typically moves 11 to 12 times in his or her lifetime. You probably will, too.
So, think about it: When you're ready to move on or move up, and potential buyers come to look at your home, would you rather they drove past junk cars and boarded-up storefronts or well-kept homes and vibrant businesses? Predicting the future of anything is tricky, but when it comes to neighborhoods, there are definitely clues.
Signs of the times
Many "macro-economic" factors can influence whether home values go up or down. Among the things to consider:
- Constant construction. A new urban-village-style mall a few blocks away can increase your home's worth by tens of thousands of dollars; a six-lane highway through the former pasture next door, not so much. Check with the local planning commission, or just ask around.
- Business decisions. If a factory shuts down, a whole town can be at risk, along with the local housing market.
- Too many for-sale signs. Are people selling because of a change in lifestyle (a new job, kids in college, changing interests) or because the neighborhood has taken a turn for the worse? There's no harm in asking.
- Too many rentals. Even the neatest, nicest renters rarely treat their living quarters as if they owned them, and absentee landlords are often no better. And make no mistake: Neighborhood deterioration is a contagious condition.
In the end, neighborhoods are always changing, and house values change right along with them. So when you're house shopping, look for one that you'll consider a comfortable home today and a smart investment tomorrow.
Buyer location checklist
- Area amenities. Are there nearby parks and open spaces or chic shops and trendy restaurants? How about libraries, grocery stores, and fitness centers (or a community center with all of the above)? The best way to find out is to get out of the car, walk around, and ask the locals what they like and don't like about the area.
- Local schools. Even if you don't have children, this may be the single-most important marker of a good neighborhood. That's because many homeowners do have kids, which means they're concerned about low crime, safe streets, good schools and the other amenities that help good neighborhoods stay that way. Find out about test scores, class sizes, and school ratings and reviews on Zillow. This information is furnished by schools rating site GreatSchools.org and is included on any home you see on Zillow – whether it's for sale or not.
- Community services. Go to city hall and inquire about taxes, traffic, and major construction projects. Reading the local paper is also a good way to get a sense of the community and its current affairs.
- Local transportation. If you're going to be car-free, check out the local transit system. See how close the stops are to the neighborhood or whether you'll need to drive to a transit parking lot. Check how often the transit system runs throughout the day and into the night.
- Commute times. – If you'll use a car, determine whether you will you be driving residential streets or busy arterials. Drive around at all times of the day and not just on the weekend while you're looking at houses. Drive your route during rush hour. Few things in life are more frustrating than finding out that a 15-mile commute to work takes an hour, each way, five days a week. Drive it a few times and for a true test, nothing beats 5 p.m. commute home on a rainy or snowy Friday evening.
- Proximity to frequented locations. Get a map of the city and put a dot on the places you will frequent: Work, shopping, schools, etc. You may be able to purchase a home outside of the city or farther away for less, but gas prices are not going to be getting any cheaper. Maybe that more expensive house closer-in could be a better deal after all.
- Economic stability. Generally speaking, a healthy mix of residential neighborhoods (property taxes) and businesses (sales and payroll taxes) sets the stage for vibrant, well-funded communities. Conversely, boarded-up storefronts, a major employer with an uncertain future, and/or forests of for-sale signs are all warning signs of a community in decline. Cities with colleges and government services are most likely to remain stable.
- Crime rates. Love the house, like the local amenities, but would you feel safe walking around at night? The federal government and most state and local governments keep statistics on the full range of illicit activities. If you're in the area, stop by the police station; if not, there are plenty of resources online.
Brokers and Agents, What is the difference?
What is a real estate broker? What is a real estate agent? What is a Realtor®, or a salesperson?
These titles can get confusing, so let's look at the differences between these terms and the role these professionals can play in a real estate transaction.
- Real estate agents are people who help you buy or sell your property. They hold licenses issued by a state. Agents can only sell real estate under the supervision of a broker and must collect the commission from the sponsoring broker. The broker is legally responsible for the actions of the agent.
- Brokers are licensed by the state to collect fees and oversee negotiations for a purchase. The broker has earned a higher-level license and may or may not have more experience than an agent. Brokers can manage a real estate office, work on their own or work in an office under another broker.
- Realtors are brokers and agents who belong to the National Association of Realtors (NAR), usually via a local board. NAR has trademarked the word, which is why it's capitalized. Members abide by a code of ethics over and above the requirements of state law.
None of these licenses and designations by themselves can guarantee that any particular real estate professional is the right person to do the job for you. Many other factors weigh in: personal chemistry, location and experience, for example.
Who's on your side?
If you want your real estate agent to work for you, then it is important to understand their incentives and conventions, and the rules and laws under which they work. Some of these are universal, but real estate laws vary by state. Additionally, agents are individuals who can maintain various perspectives on their profession. If you want to be clear on the relationship you will have with your agent and the role they will play for you, ask them to clarify their position and which considerations they will take into account during the buying or selling process.
The "Law of Agency" says that the agent or broker's fiduciary responsibility is to the client. In legal terms, the client may be the person who pays the commission, or in states with assumed buyer's agency, the buyer may be the client. That means the agent you think is working for you, the buyer, may have a primary responsibility to the seller.
In that case, the agent must put the interests of the seller above yours, and even above the agent's own self-interest. This can restrict the flow of vital information, such as how eager a seller is to sell, from reaching you.
One way to avoid this is to hire a buyer's broker. In states with assumed buyer's agency, you must consent to this relationship, or the seller may yet become the client. An exclusive buyer's agent may be your best chance at 100 percent loyalty.
In the real world, there are also incentives, and a real estate agent has some competing incentives. In the short term, any sale sooner rather than later means a commission sooner rather than later for the agent. Yet in the long term, referrals are where most agents get their leads. In other words, they want to make sure their clients are happy with the price, house and service, so they recommend the agent and build their reputation in a community. And in any case the agent only makes a commission when the deal closes, so there is incentive to get the two parties to agree.
The buyer has influence over which incentives an agent responds to. Find your agent through referrals and recommendations. Once you have picked your agent, commit to them for a time, be honest about your expectations and give feedback about the search progress. If your agent knows that you will eventually buy a house using them in the process, then your agent will invest attention, time, effort, knowledge and money.
Dual agency
Dual agency exists when one agent represents both the buyer and the seller. It can also exist when the listing and buyer's agents work in the same office. This is tricky because the buyer's agent's allegiance is torn between the buyer and the brokerage.
In the case of one agent representing both parties, the agent can provide information about the property to the buyer, disclose all defects in the property, disclose the financial qualifications of the buyer to the seller, explain costs and procedures, compare financing alternatives and provide comps to both parties.
What the agent cannot disclose to clients under dual agency is more complicated. The agent cannot disclose confidential information about the clients without permission. Nor can the agent recommend to the buyer the price the seller will take other than the listing price. Conversely, the agent cannot recommend to the seller a price to accept or counter.
Some states prohibit dual agency. Many states require a written disclosure in the case of dual agency. The only upside to this setup is that because the agent is earning on "both sides" of the deal it's possible they will take a lower total commission, which could benefit the buyer in terms of the overall price paid. But don't ignore the issue: Pay attention to whose side the agent is representing. It may not be yours.
The buyer's agent
Some agents specialize in representing buyers and are not primarily obligated to the seller. Note the word "specialize." These agents could end up as dual agents; however, if the company they work for listed a home you are interested in buying, a buyer's agent's fiduciary responsibility is to you, not the seller. Unlike traditional ways of doing business, you may or may not sign an exclusive contract, and the agreement may state you are liable to pay a commission to the agent even if you find a home through other channels. Read contracts carefully to see if you have to pay the agent a commission if you find a FSBO (for sale by owner home) or other house by yourself. A buyer's agent can be paid by either the buyer or the seller.
Exclusive buyer's agents
Exclusive buyer's agents work for real estate companies that never represent sellers or list properties for sale. By utilizing the services of an exclusive buyer's agent, you can avoid conflicts of interest that may arise if a buyer client becomes interested in a property that is also listed for sale by a traditional buyer's agent or a property listed for sale by the company that traditional agent works for.
Fee-for-service brokers have a smorgasbord of services to pick and choose from. Just pay for the services you want to use. (This can get confusing at times because services seem to overlap when you aren't familiar with how real estate transactions work.)
House auctions are popular in some areas. Properties are posted on auction sites, and agents can bid, then negotiate commissions or fees in the event the bid is accepted.
All of these services can save you money, if you live in the right state. In some states, these kinds of services are curtailed or banned entirely.
A quick guide to agents and brokers
Real estate broker: Licensed by each state to act as an agent for principals in real estate transactions. A broker can be an individual or a large company or franchise.
Associate broker: Individual who has a broker's license but works under another broker.
Real estate agent: Licensed by the state to act as an agent for buyers or sellers but must work under broker supervision.
Dual agent: Represents both the buyer and the seller in the same transaction. Dual agency must be disclosed upfront to both parties in order to be legal. It is not allowed in some states.
Buyer's agent or buyer's broker: Represents the buyer in a transaction. A buyer's agent, under an agreement with the buyer, acts solely on behalf of the buyer. Buyer's agents will disclose to the buyer known information about the seller that may be used to benefit the buyer. Buyer's agents have duties of loyalty, confidentiality and obedience to their buyer clients. By law, buyer's agents must represent, advise, negotiate and advocate on behalf of their buyer clients.
Exclusive buyer's agent: Represents only the buyer in all transactions and works for a company that never represents sellers or lists property for sale.
Seller's agent or listing agent: Represents the seller in a transaction. A seller's agent, under a listing agreement with the seller, acts solely on behalf of the seller. A seller can authorize a seller's agent to work with subagents and/or buyer's agents. Seller's agents will disclose to the seller known information about the buyer that may be used to the benefit of the seller. Seller's agents have duties of loyalty, confidentiality and obedience to their seller clients. By law, seller's agents must represent, advise, negotiate and advocate on behalf of their seller clients.
Subagent: An agent who writes an offer for the buyer but who is not the buyer's agent. The subagent owes allegiance to the seller.
Transaction broker: A mediator who has no allegiance to either party and is hired to help the buyer and seller reach an agreement.
Single agent: Represents either the buyer or the seller in a transaction, but never both.
Realtor®: A member of the National Association of Realtors (NAR), the national trade association of Realtors that sets standards and ethics. A real estate agent does not have to be a Realtor.
Realtor–Associate: Some boards of Realtors™ use this term for salespersons or agents affiliated with member brokers.
GRI, CRS, CRB: Advanced designations earned by agents who have met certain continuing education and performance requirements. The acronyms stand for Graduate REALTOR Institute, Council of Residential Specialists, and Council of Real Estate Brokerage, respectively. There are many, many designations agents can earn; these are just a few.
Types of Homes and Ownership
There are many different types of homes, but the vast majority fit into one of several broad categories. Depending on your particular situation, it may be best to focus on one of the following:
Single-family detached
This can be anything from a 100-year-old handyman's special to a designer home in the most posh planned community in town. Whether it's a starter home or a starter castle, it is, by definition, a single house on its own parcel of land.
As the owner of a single-family detached home, you get to make all decisions (within reason) regarding exterior style, yard improvements and household rules (parking, pets, late-night noise, etc.). The flip side, of course, is that you also get to pay for all repairs and routine maintenance.
Condos, too, take many shapes and forms attached townhouses, warehouse lofts, high-rise apartments, etc., but all adhere to two basic principles:
- Each owner owns the interior of their unit — "from the paint in," as they say — and a portion of everything else from the roof and exterior walls to any communal facilities
- All owners pay dues to fund a homeowner's association that handles maintenance, common-area repairs, insurance and unpleasant surprises.
For some buyers, a condo can be an excellent choice. They tend to be more affordable (lower construction costs, shared expenses), require less maintenance (someone else cleans the gutters and mows the lawn) and often have amenities (a pool or fitness center). The downside? More density, which can lead to greater noise, less privacy and potentially, less appreciation when you're ready to sell.
It's short for cooperative apartment, and although they're not common (except in high-cost, high-density areas such as New York City), they are an option. They typically resemble condominiums, but instead of owning their own unit, co-op owners become shareholders in the corporation that owns the entire property. The corporation (through a board of directors) assesses monthly dues, manages the property and pays the mortgage and other bills.
More to the point, perhaps, shareholders get to vote on all major decisions, including who gets to live in the co-op. In other words, your fellow owners can turn down prospective buyers based on everything from financial concerns to perceived reputation (although, by law, they can't discriminate). In other words, getting out (i.e., selling) can be just as difficult as getting in.
Town houses
The term "town house" or "town home" isn't a legal one, but rather a decorative one. Simply put, it refers to homes that are individually owned (along with the land beneath them) but that also share common walls with one or more neighboring homes. From inner-city row houses (think "Rocky") to downtown duplexes to golf-course villas, they occupy a sort of middle ground between condominiums and single-family detached homes.
Are they a good idea? It depends on your tastes and interests. Like detached homes, most provide a yard (although usually quite small); like condos, they often provide communal amenities (e.g., a swimming pool, tennis courts) but with the same noise, privacy and stylistic issues. And, assuming you'll sell someday, it is wise to be aware that, all things being equal, town houses generally appreciate more than condos, but less than detached homes. However, they are usually cheaper than a detached home.
Many areas in the D.C. Metro are developments that are managed by home owners association so please tell your agent or broker if you are interested in a home that is either in or out of a managed area.
Buying Old Homes VS. New Construction
Picture the home you'd like to live in. Chances are it bears a passing resemblance to the one you grew up in. A traditional "Leave It to Beaver" colonial or, perhaps, a brownstone townhouse straight out of "The Cosby Show." Then again, maybe that is not what you are looking for. Maybe you'd prefer something newer, something with contemporary style, the latest amenities and a lot less maintenance. Or maybe you're not ready for that whole "3 bedrooms, 2 bathrooms and 1.5 kids" thing at all, and a condominium or co-op fits the bill. When it comes to home buying, one size does not fit all. But it does pay to understand the differences when it comes to options between an older house and a new construction.
New House, New You?
Unless you are looking at a custom-built house on an individual lot, most new homes are built in developments with a unified style. These developments can be as small as a cul-de-sac, or as massive as a former farm field filled with dozens, if not hundreds of homes. Built to the latest codes and standards, they tend to be contemporary styled, energy efficient and often are more expensive than resale homes of a similar size. Sometimes, these types of developments can represent a savings over established developments with existing homes. Either way, the decision about whether to forgo an establish community is worth taking time to consider. Specific details vary, of course, but consider the pros and cons.
Pros and Cons of New Construction
- Contemporary style
- Some flexibility on design during construction phase
- Cheaper to maintain (new appliances = fewer repairs)
- Cheaper to operate (energy-efficient construction)
- Extended warranties
- Cohesive neighborhood (consistent layout, common areas)
- Frequently have a homeowners association (helps protect resale value)
- It's brand-new!
- Cookie-cutter design
- Limited negotiating room on price
- Potential for homeowners association dues
- Frequently less character, or homogenous design
- Frequently have a homeowners association (can put limits on how you use your property)
Of course, one home buyer's pro ("No one has lived in it before us, so we won't inherit any problems.") can be another's con ("No one has lived in it before us, so we have no way of knowing about any problems."). Fortunately, there are ways to make sure the house you're buying is really the house you want:
- Check the builder's track record. What else has the company built? Were previous projects completed on time, on budget and without bad blood between the builder and buyers?
- Walk the streets. If you live nearby and previous stages of the development are occupied, ask the residents if the builder did quality work and lived up to contractual commitments.
- Picture your home, not the model home. You can certainly have the granite counters, surround-sound home theater and jetted tub you saw in the model home, but they're not included in the base price. You will pay extra for them.
- Bring your own agent. If the builder has a real estate agent on site, the agent will be more than happy to help you. But, on-site agents work for the builders who hire them. Their best interests will be for the builder, not you.
Finally, consider the intangibles. Similarly styled homes attract like-minded buyers, and most developments are built with families in mind. Depending on your point of view, the consistency, conformity and kids playing in the street can be a blessing or a curse.
Existing /Resale Homes
With new developments springing up seemingly overnight, it's obvious that new construction is popular. And yet, most people buy a resale home; i.e., a home that someone else has lived in but is now on the market again. Call them used if you must — existing home sounds better — but they're the kind of houses that many people would like to call home.
Of course, there are pros and cons with existing homes, too. (That darling farmhouse with the big windows? It can be mighty drafty come winter.) Generally speaking, resale homes tend to be more available and less expensive than new homes, but they are also full of surprises.
The Pros and Cons of Resale Homes
- Availability: More choices, more styles to choose from
- Price may be more negotiable
- Track record: Known issues will be revealed in disclosure documents
- Established neighborhood
- Could contain more charm and character
- More maintenance: Things break or wear out
- Less energy-efficient: More costly to operate
- Dated design, older appliances and amenities
- It's been lived in!
As with new construction, there are ways to make buying a resale home less scary:
- Have the home inspected. You do not want to find out the foundation is cracked or the roof needs to be replaced after you move in.
- Consider a counter-offer. If the inspection reveals fixable flaws, propose the seller do the repairs or lower the price.
- Expect the unexpected. Pipes leak, electrical work becomes outdated and furnaces fail — get used to it.
- Be honest with yourself. If major repairs are required, you'll either have to do them yourself or bring in the professionals. Some people can handle the disruption; others can't.
The bottom line on resale homes is this: Don't buy someone else's problems unless you can tackle the solutions. Find a house you like, consider its pros and cons — objectively, as well as emotionally — and think about the compromises you're willing to make. The more logically you approach buying the house, the more you're going to love living in it.
Buying Foreclosures, Short Sales and Fixer Uppers
Things to consider when making an offer: Purchase Agreement
Purchase offers are known by different names in different parts of the country, including:
- Purchase agreement
- Offer to purchase and contract
- Deposit receipt
- Earnest money agreement
The documents themselves vary according to the provisions and requirements of state and local jurisdictions. These days they usually are quite long.
In some states, only attorneys are allowed to prepare real estate contracts. In others, real estate agents may prepare such contracts using state-approved, pre-printed real estate forms. If this is the case where you are, your agent will have the printed forms that are standard in your area.
Do not skip this step
Most buyers are working with a real estate agent who supplies forms for entering into a real estate purchase agreement with a seller. The terms of the contract involve many significant points in addition to the purchase price, including financing, contingencies, title work and closing date. Due to the detail and liabilities associated with this transaction, it is important to consider enlisting the services of your own attorney to review the contract. The so-called "standard" contract may contain clauses that are not in your best interest. Real estate attorneys will often review or consult on a purchase agreement for a nominal fee, which is well worth paying.
As with any business transaction, each party has certain responsibilities. In real estate, the script goes something like this:
- You and your real estate agent fill out the purchase offer form, and you and your attorney may review it before you sign. If your attorney drafts the purchase contract instead, you will need your agent's help in gathering all the necessary information.
- The document specifies the amount of your offer, and a date and time after which the offer expires. Depending on the custom in your area (and how hot the housing market is), this may be anywhere from a few hours to a few days. A typical expiration time frame is one or two days.
- The document will also spell out the terms of your offer — how you propose to finance the purchase, when you wish to close, how you wish to handle the findings of the professional home inspection, and any other conditions that must be satisfied for your offer to hold.
- Usually, your agent presents your offer to the seller's agent, who then presents it to the seller along with a check or money order that is your good faith "earnest money" deposit. Although in some states you don't legally need to make a deposit with your offer, most sellers won't take the offer seriously without it.
- If the seller accepts the offer as written, signs it and gets the document back to you within the specified time limit, you are now legally bound by its terms.
- If the seller does not accept the offer as written, he may reject it entirely or modify a number of clauses, sign it and send it back as a counteroffer.
- You then have three options: accept and sign the counteroffer as written; reject the counteroffer and walk away; or modify it and send it back as a counter-counteroffer.
- Each counter is technically (and legally) a rejection of the prior offer and constitutes a new offer in itself, with its own time frame for acceptance.
- You and the seller may go back and forth several times until you reach agreement or one of you calls it quits.
- Once you and the seller have come to an agreement — having both initialed all the changes, signed and dated the document — you each will have tasks to carry out in order to bring the transaction to closing.
- The seller, for example, now has a certain number of days within which to make a full disclosure of anything he knows to be defective on the property. Upon receipt of this disclosure form, you will have a certain number of days to review it and to modify or rescind your offer if you wish. As with everything else, this rescission must be in writing and presented to the seller or the seller's agent. If this happens in a timely manner, you will get your earnest money deposit back.
- Your responsibilities include instructing your mortgage lender to begin processing your loan, which in turn involves having the property appraised.
- You are also responsible for getting the home inspected within the allotted time period and arranging to have the home insured to satisfy your mortgage lender.
- A few days before the scheduled closing, you will do a final walk-through of the house, to check that any requested repairs were made and that everything is in the condition agreed to in the purchase contract.
How to decide what price you will offer
To prevent worry on your part about your offer price, ask your real estate agent to prepare a CMA, or comparative market analysis. A CMA report will compile information from the comps you should already have seen — individual descriptions of similar properties that are or have recently been on the market.
The report will include the list and sales prices for properties that have recently sold as well as list prices for pending sales, meaning the seller has agreed to sell the house to a buyer, but the transaction hasn't closed yet. (A property in this situation is sometimes described as "in escrow.") The CMA can also include active listings and expired listings — houses that didn't sell and were taken off the market.
Typically, the CMA report is designed to let you quickly compare elements such as square footage, age of the home, number of bedrooms and baths, size of major rooms and amenities such as fireplaces and swimming pools. It may also list property taxes and school districts, and it should also tell you how long each property has been or was on the market.
Using all this information, you and your agent can add or subtract dollars for the plusses and minuses of the other homes to come up with a probable market value for the home you're interested in. (And be sure to check Zillow.com for the latest market values for your target house and others in its neighborhood.)
Factors to consider
- How the house and the asking price stack up compared to other recent sales in the same area.
- Is your home in a strong buyers' or sellers' market, or is more or less neutral? In a buyers' market or a neutral market, you may have more leeway on some of the elements of your offer (price being just one). In a sellers' market, where houses can become the objects of bidding wars and end up selling well above their asking price, your options may be rather more limited.
- Seller's motivation. If you know something about the seller's circumstances, you may be able to improve your chances by making an offer that accommodates his or her needs. The seller's agent is not likely to volunteer information that would put his or her client at a bargaining disadvantage, but you or your agent may be able to glean some bits of useful intelligence.
- Length of time on the market. If the home has just been listed, and the market is modestly in the seller's favor, he may refuse your below-asking price offer in hopes of getting the full price from the next person. If a prior deal has fallen through, however, and your financial situation looks strong, the seller may well find your low offer quite attractive.
4th Step:
Buy Your Home
Buy a Home: Negotiation Strategies
Negotiation strategy is different from negotiation style. From pit bull to diplomat, each of us has a personal style. But the strategy for negotiating the purchase of a home is based on facts: the real estate market at the moment of your attempt to purchase, the seller's requirements and the property itself (condition, amenities and comparative value in relation to other sold or listed properties).
The best real estate agents have tremendous expertise when it comes to market value in particular areas. In many instances, the most experienced agents have seen just about all the homes that have come on the market over the years. They also work with other agents and speak the same language. For buyers, that is the primary reason to work with an agent: They have the information and background to engage knowledgably in what can be a very intense, fast process.
Now, does that mean you can't undertake your own negotiation? Absolutely not. In fact, many buyers do. It means:
- Doing intensive research about the market, the property you want to buy and the seller's situation.
- Figuring out an appropriate negotiating strategy and style based on that information.
Tips for staying sane
- Do your homework.
- Ask questions constantly.
- Share the details of your budget, emotions and mental state only with your advocates (this does not always include your agent).
- Find an agent with whom you feel comfortable from the start (this will save you headaches later in the process).
Setting strategy
The local market's condition is the single-most important factor in negotiation strategy. And just like the weather, the landscape is a crazy quilt of micro-climates. Markets vary from place to place and neighborhood to neighborhood. The first thing you need to know is what kind of market you are in: a buyer's market; a seller's market, a balanced market or a market where red-hot bidding wars ensue.
Negotiating in a buyer's market
You have more leverage in a buyers' market than any other market type because there are more homes for sale than buyers to make offers. For sellers, especially those who have to move for whatever reason, this is the most nerve-wracking market. Properties take longer to sell, so sellers are less likely to allow potential buyers to slip their grasp. They may hate your demands, but they need to sell, so you can assume control of the negotiation.
Buyer's market strategy: Ask for the moon
- Negotiate the home price. Make an offer at least 10 percent under the price you want to end up paying.
- Ask for seller-financed closing costs and a closing time convenient for you.
- You want all the appliances and the entertainment center? Ask for them.
- You'd really like the gas grill and flower pots on the deck? Go for it.
Buyer's tip: You're most likely to win concessions and personal property in a buyers' market.
Negotiating in a seller's market
Pit bulls beware. In a sellers' market, buyers don't have much clout, and style matters. If the seller has a desirable home and doesn't like your offer, he won't invest time in negotiating with you. In a sellers' market, a good strategy is to make a straightforward, "clean" offer.
Buyers cannot procrastinate once they've found a home they want. Any agent worth his commission will urge you to make a quick decision, perhaps drawing up an offer the same day you tour the property.
Sellers' market strategy: Keep it simple
- Getting pre-approved for a loan is an essential first step in any market.
- Offer the asking price or close to it.
- Ask only for the standard contingencies — financing, appraisal and inspection — to protect yourself.
- Expect the seller to set the closing date to his advantage.
- Don't expect to receive the personal property you want. (But if the seller is planning a garage sale, you may be able to work a deal ahead of time.)
Buyer's tip:Forget the wrangling and go for the house. You'll feel lucky to get it.
Negotiating in a balanced market
A balanced market feels less like a pressure cooker because there is a more equal supply of homes and buyers. Because neither side is feeling market urgency, personal priorities reign. Expect the back-and-forth counteroffer phase to take longer than it does in either a buyers' or sellers' market. After several rounds of paperwork, buyer and seller might agree to do a 50-50 split of their differences on price, terms and personal property.
Balanced market strategy: Split your differences
- Offer less than the asking price.
- Include the standard financing and inspection contingencies.
- Offer terms beneficial to you.
- Ask for whatever personal property you want
Buyer's tip: Both buyer and seller are likely to feel good about the transaction. They will each gain and give up something in the spirit of compromise during the negotiation.
Do what your Agent or Broker tells you to do. Be firm, friendly and do not take things personally. This is a transaction and try your best to get everything you ask for.
Contingencies are your Best Friend
A significant portion of the purchase contract consists of clauses relating to conditions, or contingencies. These are items that must be satisfied within certain time frames in order for the sale to go through.
Think of contingencies as the legal loopholes that allow you to back out of the contract under certain circumstances. They serve as protection and apply a practical brake to the emotional rush that often drives a home purchase.
Keeping track of due dates
A useful tool during the weeks leading up to closing is a calendar or schedule that reminds you of dates by which certain tasks must be completed. Contingency clauses also specify when and how notice of cancellation must be given and received. Your real estate agent and the escrow company handling the transaction should be staying on top of this schedule, but it will help if you keep an eye on it as well. The others are juggling many schedules; this one isyour baby.
Contingencies are a double-edged sword. Some of them are designed to protect you from major disaster, letting you cancel the contract without penalty. By the same token, of course, the seller is allowed to rescind the contract if you don't meet your obligations.
Disclosure requirements
Many states now require sellers to give buyers a completed disclosure form within a few days of both parties having signed the purchase contract. Often the form contains a statement that the seller knows that the buyer is relying on the form's contents. Some real estate companies require seller disclosures, and agents can be held legally responsible for not disclosing defects to buyers.
Even where disclosure is voluntary and even if the sale is deemed "as-is," sellers must disclose all material problems and defects that would affect the value of the home and the buyer's decision to purchase.
The disclosure statement covers everything from roofs, appliances, plumbing and termites to environmental hazards (abandoned oil or septic tanks, for example) and zoning changes or assessments that might affect the cost of living. If the property is in an earthquake hazard zone, flood zone or other area where government regulations apply special building restrictions or requirements, that must be disclosed as well.
The seller must declare whether he or she has knowledge of any of these problems or others such as past water or fire damage, even if repaired.
If you have not received a disclosure form by the deadline, you have the right to cancel the contract and get your deposit back. Once you receive the disclosure form, you have a limited time to decide what you want to do, including rescinding your offer.
The financing contingency
Perhaps the most essential contingency clause for most buyers is financing. This makes the offer conditional upon your getting a mortgage for the amount and at the terms you specified in the offer, including the interest rate, whether the rate is fixed or adjustable, the duration of the loan and the amount of the monthly mortgage payment. If you're assuming the seller's existing mortgage or the seller is "carrying back" a second deed of trust, those terms would be spelled out as well.
Having your financing pre-approved before you make an offer gives you an enormous step up, but other necessary items in the loan process — appraisal and homeowner's insurance — can cause the deal to fall apart.
How appraisals affect you
Your mortgage lender will require an appraisal of the property before issuing the loan. Most lenders require that the loan-to-value ratio be no greater than 80 percent. That is, the bank usually will not lend more than 80 percent of the appraised value. If the appraisal comes in lower than the purchase price you've agreed to, you may suddenly find yourself several thousand dollars short of needed cash at closing.
If the purchase price is in line with CMA (comparative market analysis) numbers, you could ask the mortgage lender to have another appraisal done or to override the appraisal value and issue the original amount you requested. If that doesn't work, a properly written appraisal contingency clause would allow you to renegotiate the purchase price so that it matches the appraisal, or to cancel the offer and get your deposit back.
Homeowner's insurance
To protect their investment, lenders require you to carry fire and hazard insurance. If you don't have insurance in place before closing, the lender won't come through with your loan. If you don't purchase your own policy, you will have to pay for the more expensive one the lender will take out for you. Failure to pay insurance premiums will result in foreclosure.
In certain parts of the country, lenders will require additional coverage for events — hurricane, flood, earthquake — excluded from ordinary policies. If your house is in a labeled flood zone, you will need to take out special flood insurance. This is sometimes available from the federal government's National Flood Insurance Program. Earthquake insurance is sometimes difficult to come by, so if you need it and can't find it, contact your state insurance commission.
To avoid last-minute problems, apply for homeowner's insurance as soon as the purchase contract is signed. Get price quotes from at least three companies and have the policy delivered to the escrow company or closing agent a few days before the scheduled close.
Make the purchase contingent upon a satisfactory Comprehensive Loss Underwriting Exchange (CLUE) report, or upon your being able to obtain affordable insurance. Your agent may need to attach a rider or an addendum to the purchase contract.
Don't be CLUE-less
Insurance companies have lately been running the equivalent of credit reports on properties to see how often these homes have been involved in insurance claims. If the home you wish to buy is deemed a bad insurance risk, you may be unable to get insurance at all or have to pay much higher rates.
One way to guard against this situation is to ask the seller for a CLUE home seller's disclosure report. CLUE, or Comprehensive Loss Underwriting Exchange, is a national database containing more than 40 million personal property insurance claims. The CLUE report for the house you wish to purchase will show all claims reported over a five-year period. This will show the date, type of loss and amount paid for claims such as water damage, mold and fires.
Only the homeowner or the insurance company can request the CLUE report, so you need to request it from the seller.
Sale of buyer's property
This is a contingency some buyers might feel safe in waiving if they've got a buyer for their other property. However, if you need the proceeds from this sale in order to close on your new home and the other sale has not yet closed, you'd be wise to leave the contingency in place. Otherwise, you could lose your deposit if your other deal falls through and you can't close on the new house. But recognize that this makes your offer much weaker to the seller.
Satisfactory survey
A clause making the purchase contingent on a satisfactory survey ensures that you know whether any structures of your new home encroach on your neighbor's property or vice versa. Your mortgage lender may want a valid survey as well. The question of who pays for it may be negotiated between you and the seller. If you're thinking of installing a major improvement such as a swimming pool or replacing a chain link fence with a beautiful rock wall, you will definitely want to know precisely where your property lines are. You will also want the seller to obtain written statements from any neighbors with whom there are encroachments that have previously been accepted.
Clear title and other claims
The title insurance company is charged with researching the title on your property to determine that you will have clear ownership and that there are no outstanding claims against the property. The most common type of lien against real estate is a mortgage, but liens for unpaid work performed on the property also occur. If you are purchasing a home from an estate, make sure that the estate has paid all estate taxes. If the estate defaults, the IRS can and will come after the new owner (that would be you) for delinquent estate taxes; the estate tax lien lasts 10 years. However, if you have title insurance, the insurance company will have to foot that bill.
Buyer's tip: Pay attention to the "exclusions" in your title insurance policy. They might make you wonder what the title insurance policy does cover. In general, it covers anything that is legally recorded and excludes anything that is "on the ground" (e.g., a fence that crosses the property boundary). It's the latter that could get you in trouble later on. If you see anything that makes you wonder about the property lines, ask for a survey paid for by the seller.
Condominium Documents
If you're buying a condo, you will at some point be handed a thick packet of documents from the condo association detailing the condo rules and regulations, covenants and financial documents. Your purchase can be contingent on your approval of these documents.
Review contingency
You can include a clause specifying that the purchase contract be subject to the review and approval of your attorney or subject to the approval of your spouse after he or she has had a chance to see the house in person. Review contingencies are often used to give you an "out" if you suddenly realize you've made a mistake. In some cases, you can also include a "neighborhood review" as a contingency, meaning that you have a certain amount of time to review the neighborhood to make certain it's where you want to live. However, given that most sellers are looking for the "cleanest" contracts, it's probably wise to thoroughly research a neighborhood prior to making an offer on a home.
Do I need a Home Warranty?
Do I need a Home Inspection?
Making an offer on a Home
In most areas, you will not be presenting your offer directly to the seller in person. Your goal when your agent presents your offer is to give the seller few reasons to say "No" and many to say "Yes."
One effective technique, called "loading," involves sending a separate statement with your offer that concisely recaps information gleaned from your comparative market analysis. This is especially important if your offer is below asking price; accepting a lower offer can be emotionally unpleasant for some sellers, and your letter should help ease them through that process.
Sample Letter to Seller
Dear Mr. and Mrs. Thomas,
Your property is listed for $489,000. To arrive at our offer of $478,500 we performed the following analysis.
The five homes below are comparable properties that have sold within the past six months. Since no two homes are identical, we have noted the unique amenities each offers.
[Addresses of five comps, each with the sale price and two or three amenities, such as a renovated kitchen, walk-in closets, a pool, a cabana, professional landscaping, new paint, new carpet or a three-car garage. Sale prices of most of the comps cluster around the buyers' lower offer price; the one or two properties whose sale price is at or near the sellers' higher asking price each has several of the more expensive amenities.]
The following five homes are also comparable to yours and are currently for sale in your area. Again, we have noted the amenities of each home:
[Addresses of five active listings and their asking prices, again with two or three amenities that the sellers' home does not have. Similar clustering of prices around the buyers' offer price.]
Among all these choices, we have decided that we wish very much to make your property our new home, and we are willing to pay a fair price for it. We are also committed to seeing that the closing process goes smoothly and quickly. To that end:
- We have a pre-approval certificate from our mortgage lender.
- We have no contingencies involving the sale of another property.
- We have not asked you to make any major changes or improvements.
- We are willing to coordinate closing on this sale with the closing schedule of the new property you are purchasing.
Thank you for your consideration, and we are hopeful you will accept our offer.
Bill and Barbara Gnall
Why should you need such a letter? To make sure the seller has all the facts. When your agent presents your offer to the seller's agent, he or she may or may not review the CMA with the seller's agent to bolster the case that your offer is a fair price. The seller's agent in turn may or may not present that analysis to the seller. In short, there's a high likelihood the seller never hears the supporting case for your offer.
However, both agents are required to convey all written documents to the seller, so putting it in writing and attaching it to the written offer ensures the information gets through.
If your offer is substantially below the asking price, a larger earnest money deposit may tip the scales in your favor. Or you could add a provision to increase the deposit to 5 percent of the purchase price upon removal of the mortgage financing or home inspection contingencies.
The other critical piece of presenting your offer is to give the seller a limited amount of time to respond. There is very little reason sellers shouldn't be able to make a decision within 24 hours, even if, for example, one spouse is out of town. The more time the seller has to respond to your offer, the more opportunity for other offers to be presented.
And don't underestimate the power of a message that appeals to the seller's emotional attachment to the house. Sometimes sellers will take a lower price just to be sure the house is going to someone who will treat it well.
To waive or not to waive?
Because each contingency in your purchase offer represents a chance for the deal to fall apart, sellers may be leery of offers with a number of contingencies. This is especially true in markets where several buyers are competing for the same house.
Buyers who have lost a couple of bids may be tempted to waive all contingencies. If you find yourself considering this step, think long and hard. Most real estate professionals counsel strongly against it.
One solution is to retain the necessary contingencies but shorten the compliance time. Rather than 15 days to respond to the seller's disclosure form, for example, you might specify giving your response in four days. Or you might specify having the home inspection performed within a week instead of 10 to 14 days.
By reducing the amount of time needed to work through all the contingencies, you are demonstrating your commitment to the purchase. This strategy also acknowledges the seller's desire not to have the property tied up overly long by a contract that might fall through.
Be realistic! What is your best and last? Be prepared for multiple offers!
In a perfect world, your offer price will be based on facts, so that even if it's significantly lower than the asking price, the seller should be rational and recognize its validity. However, the seller's response is beyond your control.
If the seller rejects your offer without making a counteroffer, all you can do is move on.
At the same time, if you hear from your agent or the seller's agent that the seller has accepted or has countered with a purchase price you're willing accept, keep your elation in check. Don't do anything drastic like give notice to your landlord. Sellers have been known to tell their agent one thing on the phone and change their minds later.
5th Step:
Close the Deal
Closing on a Home for the Buyer
There is closing and there is "the closing," the ultimate moment when you finally and legally become the owner of your new home. As with all things real estate, how the real estate closing is handled and by whom depends on where you live and local custom. But everywhere, when the deed is recorded, the title passes from seller to buyer.
This is called "closing" or "settlement" or "close of escrow." It sounds so simple, as if a single piece of paper could be handed from one person to another along with the keys to the front door! To that we say: Dream on. During the closing phase of your transaction, there are lots of folks involved in everything from making sure the seller really has the right to sell you the house to recording documents at the proper county office.
Who's Who?
Let's begin by explaining who handles the closing and what happens leading up to "closing day."
When you and the seller signed the purchase and sales agreement, you kicked off the closing phase. In fact, you even agreed on who would handle your closing in the contract. Often that's an escrow or title company recommended by one of your real estate agents. In some parts of the country an attorney handles closing. The point is that an impartial third party, the closing agent, will take care of things from now on. The closing agent handles all the paperwork, money and instructions.
Things will move along several tracks toward closing day, which is typically four to six weeks after you and the seller sign the contract. So what's happening during those weeks?
- The closing agent, among many other tasks, is talking with the seller's lenders to get loan payoff amounts, receiving instructions from your lender, prorating the property taxes and preparing instructions for you and the seller.
- The title company is researching the ownership of the property, which is to say doing a comprehensive title search for the final title report.
- The lender is preparing your loan documents and sending them to the escrow company.
- The seller is attending to repairs, pest control or whatever you agreed needed to be done so the inspection contingencies can be removed, and calling utilities with a final billing date.
- You, the buyer, are completing your loan application, buying a homeowner's insurance policy and calling the utilities to get service set up in your name as of the closing date.
- The real estate agents are supreme coordinators, making sure the closing agent has the essentials and the buyer and seller are in the loop so everybody knows when to show up, what to bring and what needs to be completed before then.
- When the closing agent has all the documents prepared, you will be told how much money you need to bring to settlement in a cashier's or certified check.
- If your contract calls for a final walk-through of the house within 24 hours of closing, your agent should go with you and help mitigate anything that's not right. You may discover the air conditioner has quit or the gas stove won't light. Did the seller leave all the items specified in the contract? Problems at this point could delay closing or mean having the escrow agent hold back money due the seller until repairs are made.
The Closing, The Settlement, The Consummation of the Real Estate Contract
When the closing agent is satisfied that everything is in order and all the instructions are prepared and distributed, it's time for "the closing."
The closing meeting structure varies by region. In many places the buyer and seller never see each other. You and your agent or attorney may meet with the closing officer, or just you and the escrow officer may take care of closing.
If you live where an attorney handles closing, all parties may be gathered around the same table.
Or you may be buying a house across the country and your closing is being handled by a branch office of a title company.
Because the federal government allows electronic signatures, it is now possible to conduct a paperless, online closing. Some experts are predicting a revolution in how real estate transactions are done in the near future; others see this day farther out because original signatures are the preferred method of document preparation so as to ensure that every interested party involved in the closing was able to read and verify all the documents. Closings usually take from one to two hours.
What to bring to closing
- A certified or cashier's check. Federal law requires that you be told the amount you need to bring to closing at least one day before settlement. You will have to pay the down payment, plus the closing costs, which are 3 to 5 percent of your home purchase price minus your earnest money deposit. The closing agent will tell you whether you need one check or two and to whom they should be payable. Do not bring personal checks or cash.
- Proof of insurance. Your lender requires you to buy a homeowner's, also called hazard, insurance policy. The closing agent needs to see proof that you have the insurance in effect on closing day and a receipt showing you've paid the policy for a year.
- Photo ID. The escrow agent needs to confirm who you say you are. A driver's license or current passport will do.
- Your agent or attorney. Especially if you are a first-time buyer, you should have someone with you who understands the process and represents your interest.
- Purchase and sales contract. Just in case you need to double-check a detail against closing costs.
The documents
As the buyer, you actually have two closings: The closing on your loan AND the closing on your real estate transaction. Again, the documents you sign vary by where you live and the specifics of your transaction. Some may have different titles than those used here.
Documents related to closing your mortgage
You could have up to 24 different documents to read and sign related to closing your loan. Usually the number is smaller. Here is a description of a handful of them.
- CD or Closing Disclosure
- Promissory Note: When you sign this paper, you are promising to pay back the sum you're borrowing. This is important. Be sure to check it over before using that pen.
- Loan Application: You will sign a complete loan application again at closing so ensure that all of the information on the final documents are correct.
- Mortgage or Deed of Trust: This is another big step. When you sign this document you are putting your new home up as security for the debt you now owe. Technically, the lender puts a lien on the property.
- Monthly Payment Letter: This paperwork breaks down your monthly mortgage payment showing how much goes to principal, interest, taxes, insurance and anything else you are paying as part of the payment.
Documents related to your real estate closing
Now that you've signed for the money you have borrowed to buy the house, it's time to sign the documents that make the house legally yours. Again, there may be a dozen different documents that need your signature.
- Closing Disclosure: This multi-page form is the granddaddy settlement statement of fees. It itemizes the buyer's and seller's closing costs separately. This is the form you reviewed a day or two before your closing meeting. But, to err is human. Look it over carefully again. If you are closing electronically on a house in another part of the country, there is a chance you won't see the settlement statement in advance. Review everything carefully before signing.
- Warranty Deed or Title: This piece of paper transfers the title from the seller to the buyer. It also contains the legal description of the property.
- Proration Papers: These agreements explain how the buyer and seller are dividing up the property taxes, interest and perhaps homeowner association dues for the month in which the transaction is taking place. Buyer and seller might also sign an agreement stating how current utility bills are being split.
- Statement of Information: This document may be called a statement of identity. The title company uses this personal information to eliminate any confusion between you and anyone with a similar name. No deadbeats allowed.
- Declaration of Reports: An acknowledgment that the buyer has seen, and signed off on, all the inspection and survey reports done on the property.
- Abstract of Title: The abstract lists all recorded documents affecting title to the property.
- Certificate of Occupancy: A legal document issued by the building department that allows buyers of new construction to move in.
Buyer's tips for "the closing day"
- Allow plenty of time. This is not a lunch-hour errand. Plan on at least two hours.
- Take your real estate agent or attorney with you, especially if you are a first-time buyer.
- Read every piece of paperwork before you sign it. Don't feel intimidated if the other people there watch you read in silence. Take your time. This is serious stuff.
- Go celebrate the purchase of your home!
Buyers Closing Costs Breakdown
At closing you will be given a stack of paperwork that shows line-by-line the cost of completing your real estate transaction. (These costs are in addition to your down payment, minus escrow money, that you also bring to closing.) It will be a staggering amount — totaling 3 to 5 percent of your purchase price.
Called 'closing costs' or 'settlement costs,' these fees mean you need to bring a certified check or personal check to your closing ceremony whether it takes place at a title company, a bank, or an attorney's office. The final costs to you may be quite different from your lender's original 'good faith estimate,' especially in the categories involving attorney or title fees.
The fees below are what is generally required, but every buyer will not pay every fee listed. Maybe you worked a deal with the seller to pick up part of the closing costs. And there are many geographic differences. Finally, all lenders do not charge every fee shown.
How much: Traditionally 6% split between buyer and seller agents; usually 3% to buyer's agent, 3% to seller's agent
Description: Payment for the work agents have done. All real estate agent/broker sales commissions are paid at closing.
Who pays: Seller pays unless local custom dictates otherwise, or a deal to split commissions was negotiated and written into the sales and purchase contract.
Note: These costs are not included in your lender's 'good faith estimate.'
General Loan Fees
Loan Origination Fee
How much: Usually at least 1 percent of the total loan amount. This fee is also called 'point' or 'points.' One point equals 1 percent of the loan.
Description: Lenders cover their administrative costs by taking this fee up front.
Who pays: Buyer
Note: In some areas seller pays half. Also, there are loans with no origination fee.
Loan Discount (Points)
How much: Discount on interest
Description: This fee refers to a one-time charge imposed by the lender or mortgage broker to lower the interest rate and therefore the monthly mortgage payment. The more points paid up front, the lower the interest rate. The loan discount is also called 'point' or 'discount point.' Note that the interest rate does not drop by one percent per point.
Who pays: The buyer pays unless the seller agreed to help in some way.
Application Fee
How much: Average is under $300, though some experts report charges up to $500.
Description: Most lenders charge an application or 'lender's processing' fee.
Who pays: Buyer
Appraisal Fee
How much: Expect about $300. It can be higher or lower, depending on the size of the property and appraisal fees in your area.
Description: The bank hires an independent appraiser to determine whether the property is worth the sales price you've offered for it.
Who pays: Buyer
Credit Report Fee
How much: This fee, also called a 'credit check fee,' averages about $25 per credit report checked, although some borrowers have paid three times more.
Description: The lender analyzes your credit history by scrutinizing credit scores and reports — a critical step toward deciding whether to loan you money and how much.
Who pays: Buyer
Lender's Inspection Fee
How much: Under $100
Description: If you are building a new home or buying a home that's under construction, the lender may charge an inspection fee.
Who pays: Buyer
Mortgage Insurance Application Fee
How much: Varies
Description: When the down payment is less than 20 percent of the purchase price, you are required to carry Private Mortgage Insurance (PMI), to protect the lender should you default on your loan.
Who pays: The buyer pays monthly payments for PMI until equity reaches 20 percent.
Note: Some lenders charge a fee for processing the application paperwork.
Assumption Fee
How much: Varies
Description: Buyers sometimes take over (assume) the seller's existing mortgage. If so, the lender may charge a fee.
Who pays: Buyer
Lender's Attorney Fee
How much: About $400
Description: If the lender involves an attorney in the loan transaction, the buyer can expect to be charged.
Who pays: Some buyers have balked successfully. Their lenders have dropped this fee.
Advance Loan Fees
How much: Varies
Description: The buyer may be required to make these payments at closing.
How much: Can range from one to 30 days' worth of interest
Description: Most lenders require the buyer to pay the interest that will accrue on their loan from the date of settlement to the first monthly mortgage payment due date.
Who pays: Buyer
Mortgage Insurance Premium
How much: Varies
Description: Some lenders require borrowers to pay their first year's mortgage insurance premium up front. Other lenders ask for a lump sum insurance premium payment at closing that covers the life of the loan.
Who pays: Buyer
Hazard Insurance Premium
How much: A full-year hazard (homeowner's) insurance policy premium payment
Description: This policy protects the lender against loss from fire, wind, or other natural disasters.
Who pays: Buyer
When a Buyer Closing could go wrong
Real estate transactions can close in as little as a half hour, although most take longer. Some closings take hours, even days, longer than planned. It's a little like getting out a map and estimating cross-state driving time without knowing about a major construction project that has tied up traffic for miles.
Like the driver who asks about potential delays, the buyer who spends time researching potential problems in advance is the buyer most likely to reach the destination on time. Just remember that real life interferes with even the best-laid plans. There is no guarantee you will close on time.
Some of the delays in closing could be errors in documents, money arriving late or in the wrong amount and discoveries made during the buyer's final walk-through.
Common problems
Here are some common problems and solutions:
Problem: Errors in documents
Document problems can be as simple as a name misspelled or a transposed number in an address, or as serious as incorrect loan amounts or missing pages. All of these glitches can cause delays of hours or even days because everything has to be in order before closing.
Solution: Communicate and review
Ask to see every piece of paperwork as far in advance as you can. Pay particular attention to loan documents. Double-check loan and down payment amounts, interest rates, spellings and all personal information. Question anything you don't understand or that seems odd.
Problem: Money, money, money
You could have guessed that a number of potential problems have to do with money. Here's what happens:
You go to the bank the day before closing and arrange to have your down payment transferred directly to the closing agent. Sounds simple. But your transaction falls through some inexplicable crack at the bank, and either the money doesn't arrive by your appointment time, or it arrives short of the amount you need.
If it arrives short, you have the option of making up the difference, but personal checks are not accepted, so you'll have to go somewhere to buy a certified or cashier's check. Your closing is probably going to be rescheduled.
There are two ways to avoid this problem. One is for you to bring the down payment to closing yourself in the form of a certified or cashier's check. The other is to arrange the wire or bank transfer of funds so it reaches the closing agent a couple of days early. If you don't yet know the exact amount needed at closing, have more than enough money transferred. You'll get a refund later.
Problem: Where are the loan documents?
Let's say your loan package is being delivered to the closing agent by overnight express service. You arrive for the closing appointment to find that "pony express" is a better description. Is it lost? Misplaced? Will it arrive an hour from now? All you and the seller know is that closing has come to a screeching halt.
Solution: Your closing agent as best resource
Talk to your closing agent well ahead of your appointment – at least a few days. If you are working through a mortgage broker, they are often more than eager to assist you and your agent in expediting paperwork and guaranteeing its completion and arrival to the closing appointment. But you can assist in this process! Ask if everyone on all ends has everything they need. Between bank statements, tax returns and other documents, there are ample opportunities for items to go missing. On the morning of closing, if your agent and or lender is not in charge of corralling all parties and documents, you can make a call to verify that the file for your transaction is complete, and the documents are ready to sign.
Problem: It's a cloudy day in title land
Let's say the title company discovers that the seller never paid the contractor for the backyard fence, so there is a lien on the property, or that her estranged brother filed a suit claiming mom and dad left the house to him. The bottom line is that you, the buyer, have a problem. You need to insist on a clear, unclouded, problem-free title before closing. Your lender will insist on it, too.
Solution: Do your homework
You've heard it before and now again. Advance homework is your best defense against last-minute title surprises. You need to study the preliminary title report completed shortly after escrow opened. In fact, you need to read it as soon as you can get a copy. Often, the report goes directly to the lender. Arrange to receive your own copy.
At closing you'll buy title insurance to protect yourself in case the title company missed anything in its search, but that policy is only effective from the day of closing forward.
Problem: Last-minute requests
Lenders are cited by the experts as sometimes asking for more information at the last minute – copies of a rental agreement, a canceled deposit check, the original hazard insurance payment. Last-minute requests make for delays at closing.
Solution: Stay in touch
Talk to your loan officer in advance. Is there anything else you can supply to complete the file? Another idea is to bring every piece of paper you can think of to closing.
Problem: Oh, dear – discoveries during the final walk-through
You are one day from closing, and during the final walk-through in what is almost your home you find that the seller left piles of trash in every room, ripped the basin off the bathroom wall and gouged a fist-sized hole in the family room wall when removing the television set.
Solution: Jump on it right now
Your agent should work with the seller's agent to solve the problems. First of all, figure out what's acceptable, how much it might cost and how to make the seller pay. One way would be to negotiate a credit on your closing fees, meaning the seller pays more at closing. Another would be to have the appropriate amount from the seller's proceeds placed in escrow until the problems are fixed.
The point is, don't wait until closing to bring up any issues. Get them resolved beforehand. If you can't, postpone the closing while you work it out.
Buyer's tips
- Both buyer and seller must agree to any changes in the closing instructions. Amendments describing changes must be written up, signed by both parties and attached to the instructions.
- Review every document before signing your name. Once you sign, you've agreed.
- Avoid unnecessary delays. Your lender's loan commitment has an expiration date, as does the day by which the escrow must be closed.
- One of the very best things you can do is make sure you, and everyone else involved in closing, arrives on time. (Your spouse/partner needs to be there, too!)
- If a sale fails to close, the fate of the buyer's earnest money is dictated by the wording of the sales contract or the reasons for the failure. You may need to consult an attorney.
- Double-check information on the final closing disclosure that the closing agent will mail to you after the deal is done. It's an important document. You want it right.
Title Insurance: Lenders Policy and Owners Policy
The title is what gives you ownership of a property. As a buyer you want a clear or clean title — one that doesn't have liens for unpaid taxes against it, or claims of ownership by a faraway aunt or uncle, or a surprise easement through the backyard to reach power lines or a cell phone tower.
As for your lender, he wants to know that the loan is going to a legitimate transaction — the seller really does own the property and therefore can sell it to you.
The Title Search
In other words, nobody wants an unpleasant surprise after the settlement. So a couple of things happen. First, a title search is conducted. Public records are examined manually or by computer or both. It depends on how pertinent records are kept in your area. The searcher looks at deeds, wills, and trusts, tracing the history of the property back many, many years. Among the important questions is whether all past mortgages and liens have been paid. Does anyone hold an easement? Are there any pending legal actions?
But what if the title search misses something and it comes back to bite after you've moved in? This could happen. Buyers have even been known to lose their houses because of clouded ownership — some past problem that wasn't discovered.
Title Insurance
The way to avoid losing everything is to buy title insurance, which is available from title insurance companies, title agents, or, in some states, attorneys.
Title insurance is a one-time, up-front investment with rates based on the purchase price of your home and the type of policy you buy. Some are more comprehensive than others.
The policy protects you by making the insurance company liable for most claims against your ownership. If a critical document was overlooked during the title search and you actually lose the house, you'll likely receive damages — but only if you bought an owner's title insurance policy at closing. You can see why experts advise you to do this.
Make sure you understand the policy you're buying — what it covers and what's excluded. The owner's policy should cover your full sales price. If you want a policy that covers the value of your home as it increases, ask about adding an inflation rider.
Your lender wants a policy, too. He or she won't even loan you money unless you buy a separate lender's title insurance policy to cover the bank's interest in your property. The lender's policy should be for the amount of the mortgage.
Shopping for Title Insurance
The only time you can purchase insurance is at closing. Whether buyer, seller, or both pay for the coverage varies according to local custom. In some areas the seller buys the owner's policy and the buyer pays for the lender's policy. Both policies take effect on closing day.
A congressional subcommittee hearing on title insurance in early 2006 looked into why consumers were paying so much for title insurance. They found the industry rife with joint ventures between title insurance companies, real estate brokers, and lenders and heard that these deals are a factor contributing to rates higher than they should be.
The Federal Citizen Information Center website offers advice on title coverage and cost savings from the Department of Housing and Urban Development.
Buyer's Tip: You need a clear title on closing day and two title insurance policies — one to cover the owner, the other the lender.
How to Take Title
Many home buyers, especially first-time buyers, are at the closing ceremony signing the mysterious documents when the closing agent asks how they want to take title to the property — sole owner, joint tenancy, tenants-in-common … Oops! Another new subject that sounds like a foreign language. Will this never be over?
Don't let your eyes glaze over. This really is important. There are tax and estate considerations to ponder prior to deciding. And you also need to ask whether you need to protect your home from, say, a lawsuit against your business or a malpractice suit against a partner or spouse.
Here are three of numerous ways to take title:
- Sole owner – An unmarried person buying a house alone has the easiest task. Title is taken as a sole owner in the individual's name.
- Joint tenancy – When a married or unmarried couple buy a house together, things get more complicated. If they choose to take title with joint tenancy, each has the right of survivorship. If the spouse or partner dies, full ownership goes to the survivor. There are tax advantages for the survivor as well, regardless of marital status.
- Tenants-in-common – When two or more individuals buy a home together as tenants-in-common, they are partners who may own unequal shares and who can sell their shares of ownership independently.
- Tenants by the Entirety – Married couples in this area usually take title in this manner. If one spouse passes, their undivided interest transfers on death to the other spouse.
Buyer's Tip: Decide before you attend the closing how you wish to take title to the property. Consult an accountant, real estate attorney, or estate planner to learn the advantages and disadvantages of each type of ownership.
Recording the Deed
When you have title to your property, you own it. But the deed is the written document used to transfer the title from seller to buyer. It is only when the deed is recorded at the appropriate county office that your ownership is official.
Here's what happens. On the day of closing, buyer and seller sign numerous documents and the closing agent disburses the money. Then, depending on the time of day and practices in your area, someone from the title company takes the deed and other documents that must be recorded to the county office. This is usually done first thing in the morning or at the end of the business day. A recording fee is paid.
The county recorder assigns each document a number and records the time of entry to the minute. A copy is made for the county file. Your real estate transaction is now part of the public record.
The Keys, Please
Your sales and purchase contract spells out when you can take possession of your new home. But ask your real estate or closing agent whether you'll get the keys to the house at your closing ceremony or after the deed is recorded.
If you live where all parties gather with a closing attorney to sign documents, you might leave the meeting with keys. But if your seller is signing paperwork after you, it might be later in the day or even the next day before you get the keys, garage door opener, and security alarm codes.
Homeowner's Insurance for the Buyer
Ready to buy a home? One of the lender's conditions for loaning you money is that you buy a homeowner's insurance policy, also called hazard insurance. You must bring proof to closing that you have insurance in effect and that it's paid for 12 months, or your loan won't close.
What is proof? Your policy's declarations page, which shows the date your insurance went into effect, the policy period and the cost for 12 months. So bring either your whole policy or just the declarations page to closing. In addition, you'll need a receipt or letter from the insurance company to prove you've paid the bill.
It's just protection
The reason lenders require insurance is to protect their interest if catastrophe strikes. For example, if your home is destroyed by fire, the lender knows the mortgage will be repaid from the insurance proceeds.
But even if you don't have a lender, you should insure your home. It's a major investment that contains all your worldly possessions. Just imagine what it would cost to replace them.
You also need to protect yourself against lawsuits if someone is injured on your property. Let's say you hire a neighborhood kid to help you clean debris from your roof after a windstorm, and he falls and breaks an arm and ankle. If his parents are the type to file a lawsuit, you could find yourself needing an attorney and fighting for your very house and retirement savings.
Securing coverage
So how do you find the insurance to protect yourself and all you own? Many companies offer homeowner's insurance, so research and follow through on it prior to closing.
- Ask family, friends and co-workers for insurance company references. Also ask what their experience has been. We've all heard stories about someone making a claim against a policy only to later find their rates shoot up or the policy canceled.
- Contact your state insurance office, which may have helpful consumer materials including information on consumer complaints.
- Explore online sources describing ways to save on your homeowner's policy. Discounts are given for many reasons, including having smoke and burglar alarms and having more than one policy with the same company — auto insurance, for example.
- Know which types of coverage you need. The experts agree on these basics:
1. Your best bet is guaranteed replacement cost coverage, not an actual cash valuereplacement policy. An actual cash value policy covers the value at a depreciated rate.
2. Ask about and understand the personal property protection offered. You may be able to get a personal property replacement guarantee as part of your basic policy. If not, ask whether the company offers that feature as an add-on, called a rider. Again, the value of your used possessions is less than the cost of replacing them.
3. The amount of liability coverage you need depends on your personal worth and circumstances. The more you're worth, which is to say the deeper your pockets, the more you have to lose if you're sued. Some experts say you need coverage equal to double your assets. There are excess-liability policies available for those who need the protection.
4. Some possessions may need to be insured on separate riders. Say, for example, that you inherited a collection of antique tea cups that appraise at $50,000. They need a separate rider.
5. Standard homeowner's policies do not insure against floods, earthquakes, hurricanes or wildfires, among other things. If your house is in a flood zone, your lender will require flood insurance. Otherwise, specific hazard insurance is up to you and will require riders separate from your basic policy.
Buyer's tip: You need to research and buy homeowner's insurance far enough in advance that it is in effect by closing day and you have proof in hand.
Enjoy your Home!
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