You are about to embark on one of the most important and exciting decisions in your lifetime, the selection and purchase of a home. It is a decision that will bring you years of comfort and joy. Yet, the idea of spending your free time evaluating homes and neighborhoods, figuring your down payment and monthly costs, applying for a loan, and finalizing the purchase can be an overwhelming process. For some buyers the process is tedious and confusing. This is why consulting a professional Realtor is a smart decision.
A licensed real estate agent can help you find a house, efficiently and quickly. Discuss with your agent the type of home you believe will be right for your needs. Is your family growing? Do you entertain a lot? Garden? Barbeque? Work at home? Are you a chef? A wardrobe buff? Are you a fixer-upper or a total couch potato?
Your Realtor’s expertise and experience will be crucial in helping you find the right home of your dreams. He/she has access to the Multiple Listing Services (MLS), which provides information on virtually every home for sale in the market. This is a useful tool because it provides the most current comparative information available for more informed shopping.
In addition, your agent will show you homes that you can comfortably afford. He/she will have the resources to help you understand how much a lender will let you borrow and on what basis it is calculated. Once you have calculated a price range, your Realtor will work with you to establish criteria that will lead you to the right home.
When you are ready to make an offer, your realtor can assist you. He/she cannot suggest a lower price than what is listed, but he/she can tell you what comparable homes are selling for in the same neighbor-hood. Your Realtor will act as the intermediary between you and the seller who is likely to also be represented by an agent. If there are negotiations over price, closing dates, contingencies, and items – such as appliances – to be left or taken, your Realtor will be your representative.
Once your offer is accepted, you will have a lot to do in a short period of time. Your realtor will direct you to a lender, inspection and insurance professionals, and Fidelity National Title for your escrow and title needs. He/she will keep you on track and organized.
Shop Smarter…Not Harder
Fine tune those dreams of your next home by working on the answers to two questions:
How much house can you afford?
What are your needs and preferences in a home?
How Much House Can You Afford?
Though you may be willing to spend until it hurts, the name of the game is how much a lender calculates you can afford. Your Realtor will put you in touch with a lender that he/she trusts to help you through the financial process of pre-qualifying (targeting the amount that a financial institution will lend you.)
In general, lenders allow your total monthly housing costs to go as high as but not more than 30 percent of your gross monthly income. The second requirement is that not more than 36% of your gross monthly income can be tied up in total monthly house payment and payments on outstanding long term debt.
Lenders use slightly different formulas for arriving at “total monthly house payment”. These costs gener-ally include your mortgage principal and interest payment, property taxes as a monthly figure, and hazard insurance as a monthly figure. These four items are referred to as PITI, principal, interest, taxes, & insurance. If you’re required to pay private mortgage insurance (PMI) because your down payment is less than 20%, those premium payments will also be included. If you decide to buy a condominium or town house, the monthly homeowner’s association fees will be included. Keep in mind, these formulas aren’t cut and dry and things change from lender to lender, so your best bet is to consult.
WHAT TYPE OF HOUSE DO YOU WANT?
Perhaps you know exactly what you want…2,200 square foot ranch style home on a wooded lot. Of so, your realtor can look immediately for only that type of house. On the other hand, if you don’t know what you want, but “you’ll know when you see it”, you need to complete the Home Shopping-Needs and Wants checklist at the back of this section. It will help your realtor considerably when searching for the right homes to show you. When you look at homes, bring your checklist with you and pick up flyers at each home, so you’ll remember which home offered what.
GET YOUR FINANCING IN ORDER
You can get together with a lender to get your loan application completed and the financing process started. Be prepared to provide the lender with copies of any important and necessary information.
MAKING YOUR PURCHASE
Once you have found the perfect house, your realtor will take you through the purchasing process:
Submit your offer to buy the house. The seller may accept your first offer, or you may go through one or several counter-offers before you and the seller agree on the terms of the sale. Once you both agree, you have a contract of sale which spells out the details and Responsibilities of all parties involved in the transaction.
MAKING DECISIONS ABOUT YOUR PURCHASE
How much Should You Offer To Pay?
Should you offer to pay the seller’s asking price or a lower one? Consider such factors as: How long has the house been on the market? Is its price reasonable? Your realtor can show you comparable home sales (comps) for similar properties in the neighborhood to help you. How competitive is the area’s home buying market? If the seller is offering an assumable mortgage or financing, how much is it worth to you?
What Happens To The Earnest Money?
A “deposit” is made, in part, to show the seller your seriousness about buying. Your realtor will inform you of the amount that is usually given in your area. The seller doesn’t actually receive the earnest money. A third party will hold the amount in a special trust – or escrow account until the sale is closed or the contract is broken.
If you go through with the sale, the money is applied to your down payment or other closing costs. If you fail to buy the house, the seller has the right to keep the earnest money. However, you can get your money back until the point at which you are notified that the seller has accepted your offer. And if the seller fails to fulfill his/her obligations, the money is yours.
How Does The Seller Prove The “Title” Is Clear?
A “title” spells out who has the right to ownership of a property. It is said to be “clear” if there are no substantial claims or liens (such as a mortgage) against it. A standard contract asks you, in essence, how you want the seller to show you that he or she owns the property and that the “title” has no claims against it that would prevent transfer to you.
A “title search” is done by Fidelity National Title and an Owner’s Policy of Title Insurance is issued. In order to issue this insurance policy, which protects you against losses that come from claims against the title, Fidelity National Title first searches the title. Because you are insured (usually for the sale price), the owner’s insurance provides the most protection.
An Abstract of Title (Title Report) is prepared showing a brief history of the ownership and any legal documents that affect its title.
What Conditions Do You Want To Place On Your Buying The House?
When you commit to buy the house through your offer, you may make that commitment contingent upon certain things happening, such as you securing financing for the home. In a similar vein, you may make the purchase contingent upon the sale of your present home by a certain time and under certain terms.
You will also want to make sure the house is in good shape. You may make the contract subject to your being satisfied with a building inspector’s report and/or an inspection for termites. The purchase should also be subject to your being satisfied with your own inspection of the house just prior to closing.
What Are You Buying?
The contract should spell out everything that is part of the purchase that may not be clearly part of the real estate. Common items that could cause questions include appliances, light fixtures (such as the chandelier in the dining room), shades, blinds, curtains and rods, screens and storm windows, shelving or cabinets, potted flowers, shrubs and trees, or perhaps a swing set that is cemented down.
What Special Provisions Should Be Included?
Most contracts for sale include some standard provisions, such as one for property taxes, insurance costs, utility bills, and special assessments to be prorated at closing between buyer and seller. Others outline particulars about what happens if the property is damaged before closing or if the seller or buyer fails to go through with the sale. You may want to add your own special provisions. For example, you may want a new home builder to provide you with home warranty insurance at no cost to you.
When Should Closing Occur And When Do You Take Possession?
The contract will have a place for you to write in the time when you would like to take physical possession of the house. If you can’t go through with the purchase because the closing doesn’t take place by a certain time, the contract should say “time is of the essence”. This statement binds you too, so be sure you can fulfill your part of the contract by the stated date.
The Settlement Process
All the pieces are starting to come together. Your lender has approved your loan. Except for the seller’s paying off the existing mortgage, the title is clear. The property inspector you hired has submitted a report and finds no major structural or mechanical flaws in the house. You, your realtor, and the seller’s agent have completed a “walk-through”, a final inspection of the property. (The walk-through inspection assures you that no damage has occurred since the property inspector looked over your house or that work you specified in the contract was completed. With new homes, you’ll often find details that aren’t completed when you made the offer, so they were listed in the contract to be completed before closing.)
What Are All Those Closing Costs?
Either the day you applied for your loan or within three days afterward, you should have received from your lender a “good faith estimate” of the fees charged for closing. The good faith estimate includes fees charged not only by the lender, but all parties involved. The uniform settlement sheet you receive at closing will be divided into categories so that it’s easier to see what the charges are related to. For example, some of the categories are: payments connected with loan, the title, money that must be placed in escrow, money that must be paid in advance to the lender, the broker’s commission, recording fees, and document preparation fees.
In your contract, you and the seller agree who will pay what and although it’s likely you won’t by paying all the closing costs, here’s a general rundown on what some of those costs include:
Charges Related To The Loan
The loan origination fee covers the lender’s administrative costs. The loan discount, referred to as points (each being equal to 1 percent of the loan amount), is extra interest paid to the lender to make up the difference between market interest and the interest of the loan.
Why Do Lenders Charge Points?
Whenever governmental regulation, state usury laws and/or competitive practices prohibit the lender from charging a rate of interest which would make the real estate loan competitive with other fields of investments, the lender must seek some other method of increasing the yield for the investors. By charging “points”, the lender can bring the real estate loan up to those other investments.
Are “Points” Called By Different Names?
Yes. Commitment Fee, discount Fee, Warehousing Fee, Funding Fee, etc.
Who Must Pay The Points?
FHA: The buyer is usually charged with the Loan Origination Fee. The Discount Fee can be paid by the buyer or seller.
VA: The buyer is usually charged with the Loan Origination Fee and The Funding Fee. Discount Fee may be paid by seller, buyer or split.
Conventional: Points can be paid by the buyer, the seller, or split between the two. State on Contract of Sale!
City/County/State government sponsored loans: As published by them.
Do The Number of Points Charged Fluctuate?
Yes. If rates on mortgage loans are lower than other investments (such as stocks, bonds, etc.) then funds will be drawn away from the mortgage market. Also, when there is a heavy demand upon the money market because of business needs, military requirements or other government borrowing, the result is that money for home mortgages becomes scarce and more expensive. When this occurs, more points can be charged. Points balance the market. Points are not set by government regulation but by each lender individually.
Is FHA Or VHA Financing Unfair To Sellers?
No. Homes can sell faster because more buyers can qualify with the lower down payment requirement, lower interest rate, or long term loans with lower monthly payments. The purpose of these loans is to provide purchasers the opportunity to buy homes with minimal cash investment thus providing a bigger market for sellers.
Are Points Deductible For Income Tax Purposes?
Points on a home are deductible if they are generally charged in the geographical area where the loan is made. If you are in doubt about points being deductible you should contact your tax return preparer.
Other charges will most likely include an appraisal fee (to make sure the house is worth what you’re paying for thereby assuring the lender that the house has enough value to cover the loan amount), and a credit report. If you are required to pay PMI (Private Mortgage Insurance for less than 20% down), a charge will be included since the lender obtains the insurance for you. If you are assuming the seller’s mortgage rather than getting a new loan, an assumption fee will be listed.
Items Paid In Advance To The Lender
Items paid in advance generally include mortgage interest (from the closing date and the date your first payment is due), the first year’s hazard insurance, and, if required, the first year’s PMI premium.
Deposits Or Reserves With The Lender
Extra amounts (usually 2 months) for hazard insurance, property taxes (this depends on the time of year you close the transaction), and PMI (if required). If you are buying a condominium or townhouse, you may also have to pay some portion of the homeowner’s association fees.
Title charges include fees for the title search and fees for preparing the documents for closing and transfer of title. There will be a one time fee/premium for the owner’s title insurance and a one time fee/premium for the lender’s title insurance. For more information, please refer to the title and escrow section.
Recording And Transfer Charges
These fees are for recording the Deed of Trust )mortgage) and the grant deed. There may also be transfer taxes which are fees for transferring property, and notary fees.
Before closing, any issues (such as problems you found during the walk through) should be resolved. The closing becomes a formality in which your escrow officer will explain the documents and will ask you to review and sign them.
As a buyer, you’ll sign a note in which you agree to pay back the mortgage loan and pledge the house as security until it is paid off. You’ll also sign a number of other documents that are required by the government and acknowledgments that you have received all the information you should have about the loan and the transaction. Don’t be surprised if some of the documents seem repetitive.
What Is Title Insurance?
Title insurance is a contract of indemnity which guarantees that the title to the property is as reported. It its not as reported, the buyers will be reimbursed for actual loss or damage under the condition specified in the policy. The title policy covers the insured for their loss up to the amount of the policy.
Title insurance assures owners that they are acquiring marketable title. Title insurance is designed to eliminate risk or loss caused by defects in title from the past. Title insurance provides coverage only for title problems which were already in existence at the time the policy was issued.
Fidelity National Title works to eliminate risks by performing a search of the public records or through their own plant. The search consists of public records, laws and court decisions pertaining to the property to determine the current recorded ownership, any recorded liens or encumbrances or any other matters of record which could affect the title to the property. When a title search is complete, Fidelity National Title issues a preliminary title report detailing the current status of title.
A preliminary report contains vital information which can affect the close of escrow: ownership of the subject property, how the current owners hold title, matters of record that specifically affect the subject property or the owners of the property, a legal description of the property and an informational plat map.
What Does A Title Policy Cover?
Not all risks can be determined by a title search, since certain things such as forgeries, identity of persons, incompetency, failure to comply with the law, or incapacity cannot be disclosed by an examination of the public records. The preliminary title report is an offer to insure under certain situations, the title policy is a contract that gives coverage against such problems. The California Land Title Association (CLTA) is the standard policy of title insurance in California.
What Does CLTA Cover?
A forged signature on the deed.
Impersonation of the real owner.
Mistakes in the interpretation of wills or other legal documents.
Errors in copying or indexing.
Falsification of records.
Deeds delivered without the consent of the grantor.
Undisclosed or missing heirs.
Deeds and mortgages signed by persons not of sound mind, but minors or by someone listed as single but in fact, married.
With regard to lenders coverage it covers:
The priority of the insured mortgage
The validity or unenforceability of the insured assignment
The validity or unenforceability of the lien of the insured mortgage on the title.