The Home Buying Process
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FIRST GET PRE-APPROVED FOR A HOME MORTGAGE. Before even starting to look at homes for purchase, I constantly advise homebuyers to get pre-approved for a home mortgage. Mortgage approval is a major hurdle for many homebuyers, especially those with bad credit. If a prospective home buyer can’t or won’t first get pre-approved for a mortgage, why should real estate agents and home sellers waste their time with that prospect? Before leaving the topic of mortgage pre-approval, be sure the letter or certificate of mortgage pre-approval (usually subject to appraisal of the house) comes from the actual lender, not from a mortgage broker. Although mortgage brokers arrange the pre-approval, since they are not the actual lender they cannot obligate the lender to make the loan. If a mortgage broker says "you’re pre-approved," but you don’t receive verification from the actual lender, you have nothing! If you discover you cannot qualify for a mortgage, perhaps because of bad credit, don’t give up buying a home. There are still lots of home finance possibilities – such as seller financing, buying "subject to" an existing mortgage, lease with option to purchase (which gives you time to clean up your credit), and assuming an existing mortgage (lenders are usually more liberal about allowing an existing mortgage to be assumed than they are making a new loan). SECOND, FIND THE HOME YOU WANT TO BUY. Some homebuyers find their home for purchase within a week or two. Others take six months or longer. Working with a sharp buyer’s agent can ease the home buying home buying search because the best buyer’s agents constantly check their MLS (multiple Listing Service) computer for new listings and notify you when a home that meets your requirements when it comes on the market. Since you are pre-approved for a mortgage (you did get pre-approved, didn’t you?), you won’t waste your time or your buyer agent’s time looking at homes which are out of your price range. THIRD, KNOW WHAT SHOULD BE IN YOUR HOME PURCHASE CONTRACT. During the home search, it’s best to also become acquainted with the home purchase contract used in your area. There might be several forms, but they are usually similar. When the beginning the home search, ask your buyer’s agent for a blank copy of the purchase contract don't be afraid to ask questions so you will thoroughly understand the contract you will be asked to sign when making your purchase offer. The Statute of Frauds requires real estate purchase to be in writing to be legally binding. Oral representations and agreements are unenforceable – no matter how many witnesses you have! Yes, I will admit to having bought and sold real estate on a handshake with people I trust. But I never would have been able to enforce those handshake agreements in court if the other party backed out. It is not illegal to buy or sell real estate without a written contract, but that method is not recommended. Of course, if your state requires written disclosures of known defects, even in "handshake sales," those written disclosures are required. How do you start the home search? How do I start the home
search? One way is to review online real estate listings that meet your
criteria. If you decide to work with an agent, make sure they are technology savvy.
In today's real estate market the Realtor must know how to use technology and the internet
to meet their customers expectations. How do appraisers come to their conclusions? Most appraisers determine market value by comparing the subject property with three similar homes in the vicinity that have sold and closed within the past six months. The appraiser adds to the value of the subject property if it has amenities not found in the comparable houses. Value is subtracted if the subject property lacks amenities in comparison to the others homes. How important are open houses? Open houses can be very important. Touring a number of houses in a short period of time is the best way to learn market value and to educate yourself about what is available. But if you limit your home search to only those homes, you may miss out on a house that is right for you. Coming up with enough cash for a down payment and closing costs can be a hurdle for many buyers, particularly first-time home buyers. But, there are ways you can buy a home without much cash on hand. For example, there is a new first-time home buyer 95 percent loan program. It's called the risk-share or 2 percent down program, and it lets you get into a house with only 2 percent cash down. The additional 3 percent cash can be a personal loan from your credit union or a relative. This 3 percent personal loan must be a fully-amortized fixed-interest rate loan with a five-year due date. An amortized loan is paid off in full during the term of the loan (five years in this case). Many first-time buyer programs will only give loans to borrowers whose income is below a certain level. That level is often so low that many first-timers with high incomes can't qualify. One benefit of the 2 percent down program is that it's available to borrowers with annual incomes up to $80,000. A drawback to this, and most low-down first-time buyer mortgage programs, is that the lender requires the borrower to pay Mortgage Insurance (MI). This protects the lender in case the borrower defaults on the loan. The cost of MI varies depending on the MI company and the type of loan, but it can effectively add .5 to 1 percent to the cost of your loan. Most lenders make MI a requirement when the borrowers are taking out a loan for more than 80 percent of the purchase price. In the past, one way around this, if you had less than 20 percent for a down payment, was to do 80-10-10 financing. With 80-10-10 financing, the buyer finances the home purchase with an 80 percent first mortgage and a second mortgage (either from the seller or a conventional lender) for 10 percent of the purchase price. Currently, lenders who sell their loans to Freddie Mac or Fannie Mae, require MI on 80-10-10 financing deals. To avoid MI, the first mortgage can't exceed 75 percent of the purchase price. Few buyers like the idea of paying MI. Should you postpone home buying until you save enough cash so that you won't have to pay MI? Probably not, unless there are other factors influencing your decision. FIRST-TIME TIP: One of the most important factors that should influence whether you buy now or wait to save more cash is what the real estate market is doing. Are home prices in your area rising, falling or are they stable? In markets that are experiencing rapid home price appreciation, you're probably better off buying now than waiting. Suppose you have $20,000 cash to put down on a home. You can qualify for a 90 percent loan, so your down payment will enable you to buy a $200,000 home. If you buy now and home prices appreciate 7 percent this year, your home will be worth $214,000 next year. Your $20,000 earned a 70 percent return for the year ($14,000 divided by your $20,000 investment). If you were to wait to accumulate a 20 percent down payment, you would have to save another $22,800 to purchase the same house. Due to appreciation, the same house will cost $14,000 more next year than it does today. When prices are declining, however, you may be better off waiting, particularly if you don't have enough cash to buy a property that truly suits your housing needs. Finding a home to buy where there is a shortage of homes for sale can be frustrating, to say the least. But there are measures you can take to increase your odds of buying sooner rather than later. First, make sure you get
your finances in order. Then when the right property comes along you'll
be prepared to make a strong offer. When listing inventories are low and
the demand for homes is high, buyers often find themselves competing for
housing. Buyers who are pre-approved for the mortgage they'll need to
complete the purchase Next, find an energetic, trustworthy agent who is tech-savvy so you hear about new listings as soon as they become available. You should work with someone who'll put you on a daily email listing service so you have as much jump on the competition as possible. Use someone who has a web site that allows you to search what's for sale 24 hours a day 7 days a week. Work with someone who is comfortable using email because there is not always time for a phone call. Carefully analyze what you need and want in a home. Prioritize the list, putting the features that are essential at the top. Buying a home requires making compromises. It's unrealistic to expect to find all the features you desire in one property. Usually buyers need to see some of the local housing stock in order to know how to prioritize their housing wants and needs. Make sure that your agent knows what you are looking for. If your priorities change, let your agent know about it. From time-to-time you should reconsider listings that you liked but discarded because they didn't match your criteria. Such a listing might be worthy of another look if your priorities have changed since you last viewed the property. You should hunt for an agency that has web software that allows you to manage and maintain listings you may have visited but they weren't at the top of your list at that time. Again, make sure your agent uses email so you don't need to phone her for the changes. For example, you might have initially wanted a home that you didn't need to renovate. After looking for a while with no success, you might decide to consider a home that only needs a cosmetic redo. In this case, it might be worth reconsidering a cosmetic fixer that you passed on initially if it's still on the market. If you choose an agency with web capabilities have them redo a complete market search and email results the following morning. Have these results automatically stored in your personal home search database maintained by the Realtor. This should be no work on your part. Have the technology do the leg work. And make sure you use an agent that gives you addresses with the daily new listing notification. This allows you to drive by if you have interest or if you just want to get educated. The more flexible you can be in your search criteria, the easier it'll be to find a home. For example, buyers who are open to several architectural styles have more options available to them. If several neighborhoods are acceptable, you'll have more listings to choose from. Buyers who are willing to make cosmetic improvements increase their odds. Be diligent about looking at every listing that might work for you. Don't simply look at the outside. You could be pleasantly surprised by what's inside. Consider foregoing the perfect home this time around. Just make sure you buy a good home that will be easy to resell. In the State of Massachusetts, there is usually a two step process for the purchase of residential real estate. The first step is OFFER TO PURCHASE which is followed by the PURCHASE AND SALE AGREEMENT. Both must be in writing. Verbal offers to purchase property are not binding. This document states what a buyer is willing to pay for a property and the related terms and conditions for such a purchase. Terms typically include mortgage financing, building and other inspections and the dates by which they must be completed, deposits(binders) date of the execution of a subsequent PURCHASE AND SALE AGREEMENT and the proposed closing date. An initial refundable deposit accompanies the offer. The buyer has the opportunity to include in the OFFER TO PURCHASE a contingency clause for a building inspector of his/her choice to inspect the property. Inspections for pest, radon, septic, well, and lead paint problems can also be included. All inspections are at the buyer's expense. Inspections are usually completed within five to seven working days of the signing of the OFFER TO PURCHASE and before the PURCHASE AND SALE AGREEMENT is signed. On property built prior to 1978, the state mandates the right of the buyer to have an inspection for lead paint. After the inspections are completed, any problems which are major enough to affect the terms of the PURCHASE AND SALE AGREEMENT must be communicated in writing to the seller immediately. Within ten business days of the acceptance of the offer by the seller and after the building inspections have been completed, a more complete contract called a PURCHASE AND SALE AGREEMENT is drawn up and signed by both parties. At this time, the remaining deposit is due. All deposit money is held in escrow until the transaction is completed or terminated. The buyer and seller should each consult an attorney to ensure that the PURCHASE AND SALE AGREEMENT includes all the terms and conditions of the sale which have been agreed upon by both parties. At the closing, the lender's attorney represents the lender only, and the lender's legal fees are paid by the buyer as part of the closing costs. Prior to the closing, the buyer has the right to inspect the property to be assured that the property is in the same condition as it was on the day of the OFFER TO PURCHASE and ensure compliance with terms of the PURCHASE AND SALE AGREEMENT. This inspection is usually done with the seller's agent present. The conveyance may take place in the office of the lender's attorney, the Registry of Deeds, or a designated place agreed upon by all parties. Buyers responsibilities at the Settlement Each buyer should plan to be present for the passing of papers (closing) or to be represented by a person to whom he/she has given Power of Attorney. The buyer should make arrangements to transfer all utilities (electric, gas, water, telephone, etc.) into his/ her name by closing day. The telephone company should be contacted several weeks in advance to ensure service and to obtain a telephone number. When the property is heated by oil, an adjustment is made with the seller for the amount of the remaining oil in the tank. This can be paid for at the closing by a personal check from the buyer to the seller or can be handled by the attorneys as part of the funds disbursed at closing. The buyer must bring an insurance policy paid for one year for the insurance on the property being purchased. The insurance coverage must be at least equal to the amount of the mortgage. Contact your insurance agent for advice on this matter. In most cases the bank will escrow 1/12 of the annual policy cost each month to pay for future year's premiums. The buyers should bring to closing a certified check, cashiers check or cash for the purchase price less the deposit and the mortgage amount plus any additional fees. Additional fees may include , but not be limited to, the bank's legal fees, points, title search, lien certificate and tax escrow. Your attorney should be able to tell you the exact amount of the check and to whom it should be made payable. It is customary for real estate taxes and homeowner's insurance payment to be held in escrow by the bank. Therefore, be prepared to pay up to six months taxes at the time of closing. Other possible fees might be advanced interest (up to one month's mortgage payment, depending on when in the month the settlement takes place), assumption fees, Private Mortgage Insurance(PMI). The list of exact costs can be obtained from the conveying attorney just prior to closing. |
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