Mortgage Lowdown

- By Mini Singh

Not long ago, home buyers were competing with one another and bidding way over the asking price to snatch up homes on the market. Just a few months and a bubble burst later, it is officially now a “buyer’s market.”

A few quick figures:

• The number of completed home sales dropped 12.7% from the same period a year before.
• The median price paid for a home dropped 1.2%, the first drop in home prices in many years.

All this means that people who were earlier closed out of the home buying market because of inflated prices driven by speculative investing (you didn’t think all those “house flippers” were bringing the price of homes DOWN did you?) can now afford to buy their own home.  But because so many new homebuyers have no previous experience in homebuying, we have compiled this list of 43 essential tips and resources for new home buyers:

YOUR PLAN OF ACTION

1. First things first — You need a budget if you ever hope to save for that home you want to own

The media, along with the illusion of abundance created by our credit cards have led to a culture where impulsive spending has become the norm. We don’t think twice about picking up that fancy outfit or those cool shades. And of course we have to have those latest CDs and DVDs. And we end up losing out on the opportunity to save for things that are really important — such as saving for that home we want to own.
Read this step-by-step article about budgeting basics.
And here’s a free Homebuyer Online Education Course.

2. Educate Yourself — Knowledge is Power

Use resources such as the U.S. Dept. of Housing and Urban Development’s (HUD) first time home buyer programs. “These programs are designed to help first time home buyers weigh the benefits of renting vs. buying. The programs teach first time home buyers about the different mortgage programs that are available, the value of a home inspection, and what to expect at closing, including calculating your closing costs.”

3. Know Your Rights

As a home buyer, and as a mortgage borrower, you have certain rights — don’t let anyone intimidate you into believing otherwise.  “You have the RIGHT to know the reason if your loan was turned down.” Read the complete list.

4. What Information must the Seller Provide Me With?

In most states, it is mandatory for the seller to provide you with the Real Estate Transfer Disclosure Statement. This is a pre-printed form that lists many features or conditions about the home, the land, and the area where the home is located.

After I had fallen in love with a house, my spouse enquired about any legal complications, and the seller promptly told us about the building violations that would definitely complicate the deal. He did not volunteer this information earlier, but did not withhold it once we asked. So ask questions anyway.

5. When is a Good Time to Buy? OR Should I Wait to Buy in a Down Market?

If you think you should wait for the market to go down before you buy that home, then you need to remember that it’s impossible to time the real estate market. It is wiser to make your home buying decision on factors other than your predictions of how the market will move. (American Home Guides)

Suppose you decide to wait - among other things, look at interest rates when taking the decision about waiting. “If interest rates are near an all-time low and beginning to inch upwards, waiting could cost you more than you would think. You might not be able to afford to buy a home at any price.”

BUDGET BASICS

6. How much can I borrow?

“Using traditional income multiples, this can amount to around 3.5 x a single salary (or can be less), or — if you are buying with someone else — up to 2.75 x joint salaries.” (First Rung Now)

Though some specialist mortgages allow you to borrow more than this, the question you need to ask yourself is, will it stretch your finances too far if you borrow more?

7. How much can I REALLY afford?

Though we believe we are the best judges of how much we can afford to pay back to the mortgage lender every month, an alarmingly large number of people end up biting off more than they can chew. As a result, they end up with unpleasant results such as foreclosures. Some guidelines — when figuring out how much you can afford; take into account your monthly income, monthly debts, down payment amount, loan closing costs, and your credit history. Here are some HomeLoanCenter calculators and hud calculators that may help.

8. What ELSE will I have to Pay For?

Besides the amount you pay to the seller, you will have to budget for other expenses once you become the owner of the new home. “For example, in addition to the monthly principal and interest payments that you will have to finance the purchase of your home, you will need to budget for utility bills, property taxes, insurance, and maintenance costs. If you buy a home that has a homeowner’s association, you will also have to pay association fees.”

9. Special Assessments

“Some homes have special assessments in addition to the regular property taxes. Make sure that you ask the seller for copies of the past years” bills for these services, and that you inquire as to whether there are any assessments scheduled to be placed on the property in the future.” (CalBar)

LOANS AND INSURANCE

10. Shop for a loan OR Don’t Marry the First Person that Proposes

Just as you’re not obliged to marry the first person who shows an interest in you, you don’t have to stick with the first lender that you approached/that approached you. Find out who’s best in terms of meeting your needs, before you take the leap — it may save you a lot of heartache and hassle later on. “You have the RIGHT to shop for the best loan for you and compare the charges of different mortgage brokers and lenders.” (HUD)

11. What Are the Types of Loans Available?

Broadly speaking, you have the fixed and adjustable loans to choose from. A fixed rate loan offers a set interest rate, so that your monthly payment does not change. An adjustable rate mortgage loan (ARM), is a mortgage loan which provides for adjustment of its interest rate as the market interest rates change. The ARM’s interest rate is tied to an index that reflects changes in the market rates of interest. Ask about special types of loans for your community/group — such as senior citizens or veterans’ loans.

Whether you choose a fixed loan or an adjustable one should depend on several factors such as your current financial situation, predictions about the way the market is moving etc. Give considerable thought to the type of loan you choose.

12. Clueless about insurance?

You can’t afford to be, if you’re planning to buy a home. It is important to know the implications of the insurance plan that we purchase. Gillian Markson says, “When purchasing a home, title insurance is extremely important. Even so, we still see a large number of homeowners that have no idea what it is or the protection it offers.”
Recommended free resources:
The ‘Homeowner Basics‘ section of the iii website.
New Homeowner Insurance Basics

THE REAL ESTATE AGENT

13. What Can I Expect from the Buyer’s Agent?

Your real estate agent should assist you in negotiating the price, learning about the community, obtaining a loan, inspecting the home, and in closing the escrow.

“Good real estate agents will listen to your wants and needs and arrange to show only those homes that fit your particular parameters. Your agent should preview homes before showing them to you as well.” (About Home Buying)

14. Who is your agent REALLY representing?

It’s alarming, but true — your “buyer” agent may be the wolf in sheep clothing — actually representing the seller. Stefan Scholl elaborates, “Recent data released by the National Association of Realtors indicates that real estate agents are failing to disclose whom they represent in transactions at an alarming rate, even where state laws (such as Michigan’s agency disclosure law) require them to do so in writing at their first substantive meeting with a potential client.”

Also read Kenneth Harney’s ‘Agents Falling Short On Disclosure‘

15. How Much, If At All, Should I Pay the Buyer’s Agent?

Usually you will not have to pay your agent a fee for his/her assistance in finding the house and closing the sale. The buyer’s agent’s fee should be paid by the seller on completion of the transaction.

16. Do I want Dual Agency?

Dual Agency is when a real estate agent represents both the buyer and the seller. This must be disclosed to you before you make an offer. However, ideally you want an exclusive buyer’s agent who will protect your best interests as the buyer.

17. The role of an Attorney

If you unsure about your rights and responsibilities, it is advisable to see an attorney who is experienced in the purchase of residential real estate. Your attorney should be able to help you with legal and tax questions that come up during the purchase of the home. S/he can also assist you in reviewing all of the documents and reports that will be provided to you.

HOUSE HUNTING — THE FUN PART

18. Which one was which again? — Using Photographs

Remembering which broker, homeowner and home belong together after seeing multiple properties can seem like putting together pieces of a jigsaw puzzle. In her article ‘Before You Buy Your First Home - Tips for First-time Home Buyers,’ Elizabeth Weintraub says, “Bring a digital camera and begin each series of photos with a close-up of the house number to identify where each group of home photos start and end.”

19. Defining Search Parameters

Once you have decided that you wish to buy a home (and you have adequate moolah to do so), your first task should be to define your search parameters. What is important for you and your family? Do you have small kids, or will you have kids in the future? If yes, then your criteria may include children’s parks and good schools in the neighborhood — not to mention lots of families with children around.

Elizabeth Weintraub’s advice, “Almost 80% of all home searches today begin on the Internet. With just a few clicks of the mouse, home buyers can search through hundreds of online listings, view virtual tours, and sort through dozens of photographs and aerial shots of neighborhoods and homes. You’ve probably defined your goals and have a pretty good idea of the type of home and neighborhood you want.”

20. Read HUD’s ‘ 100 Questions & Answers About Buying A New Home‘ as part of your research BEFORE you even begin to lay down your criteria for the new home.

Also read ‘Making Pre-Purchase Decisions‘

21. Some Questions to Ask Yourself about Location, Location, Location!

Either before you start seeing properties, or after you see have seen something you like, these are the questions you need to ask yourself about the location:

• How far will I have to commute?
• What is the traffic scene on the routes I will use frequently?
• How does the neighborhood look?
• What are the services available around?
• How good are the local schools?
• Will this area meet my and my family’s entertainment needs?
• Are there parks around?
• Will I be able to get my children into them?
• What is the crime rate in this area, and what types of crimes have occurred in the past couple of years?
• What are the surrounding neighborhoods like? (Kids tend to overflow into surrounding neighborhoods.)

22. Times of Day

Though you cannot assess what the house will be like during different seasons of the year, you CAN visit it at different times of the day. This will help you see if any rooms / corners remain dark most of the day.

23. What Should I Eat?!

Since people prefer to cover as many homes as possible when they set out to see the homes, it is important to remember that your diet plays a role in memory retention. And if you want to remember details that will help your final decision, eat wisely before you set out house hunting. Weintraub says, “Studies show that the your memory dramatically improves after consumption of carbs and slows upon consuming sugar. So, layoff the soft drinks and have a hearty meal of carbs before venturing out to tour homes.”

24. How Many Homes Should I See On a Given Day?

Though it is physically possible to see 20 or 30 homes within a single day, it’s not the smartest thing to do, says Weintraub. “The average number of homes that I show to a buyer in one day is seven. Any more than that, and the brain is on overload. Therefore, don’t expect to see 20 or 30 homes; although it’s physically possible to do so, you probably will not remember specific details about any of them.”

25. Rate the Houses and create a shortlist

When you get home, immediately rate all the houses that you saw on that day, on a 1 to 10 scale, with 10 being most desirable. You may be exhausted and dying to rest, but this will take only a few minutes, and your retention of details will decline dramatically the next morning. So spend a few minutes on the same day, rating the homes and writing down any comments/concerns that you have and may want to discuss with your broker later on.

After seeing homes for a few days, you will have a shortlist of your favorite homes, based on your daily notes and ratings. There is probably one that is your absolute favorite. Ask to see your shortlisted homes again. You will see them with different eyes this time around, and notice elements that were overlooked the first go-around. 

26. When Temptation Strikes — Don’t think with your heart

When in love, follow your heart; when buying a home, use your gray matter. How many of us have stretched ourselves too far, knowing that we cannot afford the house, only to regret it later when foreclosure happens?

“? (A) buyer purchased a home that cost him about $100,000 more than he was comfortable spending. But he fell in love with the Victorian character: the high ceilings, sparkling chandeliers and wide-planked floors. A year later, he could no longer afford to make his mortgage payment. The house was too expensive for him to maintain. He would have been better off buying a smaller home in a more modest neighborhood. But he let his soaring emotions cloud his good judgment. Since his purchase, the market softened and he could not sell. He lost his home to foreclosure.”  (Three Major Home Buying Mistakes - How to Avoid Home Buying Mistakes - Elizabeth Weintraub)

So please, PLEASE don’t emotion get the better of common sense when you are tempted to exceed your budget — will save you a lot of tears.

CREDIT REPORT DO’S AND DON’TS

27. Your Credit Report

This is an all-important aspect in determining the rate-of-interest on your mortgage. Information such as your name, social security number, current and previous addresses, employment history; public records from the court system including bankruptcy, foreclosures, or accounts in collection; late payments; credit history; and credit inquiries are all included in your credit report. “Pull a copy of your credit report and correct any errors you find on it. Pay down debts, pay bills on time, don’t close any old accounts and seek advice on how to improve your score. You might even consider moving the target date for purchasing your new home to give yourself time to get your credit into pristine condition,” advises Victoria Stankard of the ‘New Home & Real Estate Buyers Guide’ blog.

28. No New Loans or Major Credit Card Purchases Until You Close

“When I bought my first home,” says Weintraub, “I easily qualified because I had no car payment nor revolving debt. A week before closing, I bought a new car and financed the purchase. New ratios meant I no longer qualified. A frantic phone call to my mother, begging her to lend me the money to pay off my car loan (and threatening to show up on her doorstep with luggage in tow and a cat under each arm), was the only tactic that saved me from losing the house.”

Weintraub suggests that you avoid buying anything major on credit or with a credit card once you have completed a loan application — or you may be in for a nasty shock. The new purchase may change the underwriter’s decision about whether or not you qualify. Major purchases include automobiles, washers, dryers, refrigerators, lawnmowers or garden equipment, expensive electronics or computers, and furniture for your new home.

THE OFFER GAME

29. Making an Offer

If the property in question is a new construction home or condominium, the process is pretty simple - you pay what the builder asks. However, if you are purchasing the property from a private owner, the process becomes more complex. In her article ‘Making An Offer And Negotiating The Price,’ Leona K. Hawks, Professor, and Extension Housing Specialist says, “Your first offer should be well below your limit. (If there is a broker involved, he or she should tell you if your offer is way out of line)?  The seller should respond within a short period of time (two or three days). This prevents the seller from keeping you in suspense while waiting for a better offer.”

Of course, there’s the counter point of view that you are not haggling over a used car, and must therefore make a reasonably attractive offer. At any rate, take the advice of your broker, and look at the individual situation before you decide how much to offer.

30. The Counter Offer

However, the seller does not always accept your offer outright. Several times the seller counters your offer — meaning, the seller rejects your offer, but is not closed to the deal. In fact, s/he wants a renegotiation, and “counters” your offer with an offer of his own — that consists of new figures. This means that the negotiation process begins all over again.

31. While the property is “out on counter”

Suppose you have zeroed down on a house, and then find out that the owner of the house has a “counter out” (has made a counter offer to another buyer) — what are the implications for you? Should you back out and hope you find another property that you like as much as this one? Not really — if you are very sure that this is the home you want; then this is, in fact, the best time to move in for the kill. Weintraub says, “Some agents would feel discouraged at that news. But I’ve snatched homes out from under the noses of competing buyers by immediately submitting an offer from my buyer while the counter “was out.” What commonly happens in these situations is the seller accepts the second buyer’s offer and then simply withdraws her counter offer from consideration, kicking the first buyer out of the game.”

32. Contingencies

A contingency is an offer with a set of specifications or requirements attached. Essentially, the deal will be honored subject to certain conditions being met. You, as a buyer can include contingencies in the offer document. Some examples — I will purchase the house IF my loan is approved / IF you repair the staircase / IF you change the wallpaper? But the most important contingency of all?

“Make your offer contingent on a home inspection. An inspection will tell you about the condition of the home, and can help you avoid buying a home that needs major repairs.” (HUD) 

Sometimes the seller too may put forward contingencies with the counter offer.

INSIDE THE HOUSE

33. Insulation Information (How Design Affects Insulation Decisions)

Find out the insulation details of the home before you purchase it. “The Federal Trade Commission (FTC) home insulation rule requires the seller of a new home to provide information on the type, thickness, and R-value of the insulation that will be installed in each part of the house in every sales contract.” (Insulation Fact Sheet)

It is important to understand how different materials affect insulation. If the new house has metal frames instead of wood, remember that much more heat flows through metal studs and joists than through pieces of wood. Due to this difference, placing insulation between the wall studs, or between attic or floor joists, doesn’t work as well for metal-framed houses as it does for wood-framed houses. So if the walls have metal frames, check for effective insulation that should involve a continuous insulative sheathing over the outside of the wall frame, between the metal framing pieces and the exterior siding.

34. Gadgets and Appliances for my new home — Make Smart Investments

Invest in high quality (even if initially expensive) smart equipment/gadgets — like programmable thermostats or “smart cabinets” - that will let you save money for years to come.

35. Find Out What Comes With the House

Don’t assume that appliances such as the fridge, the oven and other items such as window coverings are automatically included in the deal. CLARIFY with the seller about these issues and know for sure what is included, and what is not. Also, check the condition of the appliances and the fixed / movable furniture that is included in the deal.

36. Condition of the House

Check the condition of the house, and find out about any leaks or other problems by asking around and doing some independent research. The inspector should be in a position to help you here; but also take some initiative on your own. Neighbors are a good source of information.

37. Choosing the right inspector

“Real estate brokers regularly refer house inspectors to clients, but it’s best to ask a non-partial broker for references. Often the best sources for good house inspectors are friends who’ve recently bought houses and believe that their inspectors were honest, thorough, and highly professional.” (American Home Guides)

38. Consider purchasing a Home Warranty

“For a minimum fee, the home warranty company will ensure that the house and the appliances are in working condition. Many companies will provide coverage for washers, dryers, pools and pool equipment, air conditioning, and some roof repairs. Your agent or escrow holder can provide you with information on these policies.” (CalBar)

TIME TO CLOSE

39. What Happens when I “close” on a home?

“As the closing date approaches, you’ll need to arrange for the transfer of any remaining funds that are necessary to close the sale. Many buyers wire closing funds to the closing agent. This may be an escrow office or an attorney depending on where you’re buying.” (American Home Guides)

40. How should title to the home be held?

There are several options for the title of the home - you can hold title to the home by yourself, as separate property, with your spouse, as community property, or with your spouse or a third party, as joint tenants or tenants in common. You can also hold title to the property in a family trust. Each of these will impact you differently. That is why it is important to discuss your options with a tax specialist and your agent before you make your selection.

41. What If I Change My Mind?

Suppose, for whatever reason, you feel compelled to withdraw your offer? You can revoke your offer — in writing - before it is accepted by the seller. If, however, your offer has already been accepted by the seller, you can still terminate or revise your offer IF the results of the inspections are unsatisfactory.

However, the liquidated damages provision can cost you most if not all of your deposit (up to 3 percent of the contract price) in the event you elect not to complete the purchase price, and your election is without good cause.

42. Record Your Deed

What happens if you don’t record your deed? Zarmina Azadozy failed to record the deed of the home she purchased in 1996. Later on, when the county tax collector sold the property for unpaid property taxes, Azadozy was not able to claim the surplus proceeds exceeding the amount of property taxes owed, simply because she was not the legal titleholder at the time of the tax sale. So, record your deed.

PARTING SHOT

43. I am environment conscious, but aren’t eco-homes too ugly?

For those among us who genuinely wish to be eco-friendly, yet feel that eco-houses are ugly, take a look at this pretty one.

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