Before you begin looking to buy a home, you need to ask yourself two questions. The first question is "am I ready to buy?" The second question is "am I in position to buy?" Some folks believe that they are ready for the responsibility of home ownership. Then there are those who are not. You should have a budget so that you will be able to pay your mortgage in a timely manner as well as your other bills. You should also be ready to maintain your home which is one of the conditions of your getting a mortgage.
Buying a home is a big investment, and for most families it will be the largest single investment they will ever make. Buying a home is not like going to the store to buy clothing or furniture and deciding the following week that you do not want it! It has been estimated that it will take you about five years to recoup the monies that you have put out for this property. Therefore, you want to make sure that you are making a good investment and will not later suffer from "buyer's remorse." "Buyer's remorse" takes place when a buyer is saddened or regrets a purchase that was made. The buyer(s) feel as though they should have waited or that they could have gotten a better deal, especially when one rushes in and soon find a house one likes even better after a purchase.
One of the main reasons someone decides to purchase is because they are tired of renting. Renters put out money month after month after month, but what do they have to show for it? True, they have a comfortable house or apartment. However, they don't own it and is also realizing that they may be paying off someone else's mortgage. It is then that it is decided that it is time to put that money out for themselves's. Another reason for deciding to purchase may be because of the need for additional space. Either the family has outgrown the apartment, or a family is being planned. Also, you may feel that you are ready because you realize the advantages of home ownership. Some of these advantages are:
1. Home equity: over time as you are paying off your mortgage you accumulate equity.
Equity is the difference between what is owed on your home (mortgage) and the value
of your property. Many people take advantage of this equity to borrow money when they
are short on cash. Generally, the interest that is paid on this loan is tax deductible
(consult your tax advisor).
2. Investment: housing generally increases in value over time, thereby increasing your
equity as well.
3. Stable Monthly Payment: your mortgage payments should remain the same throughout
the life of your mortgage. That is of course, if you have a fixed rate mortgage. This
means that the principle and interest portion of your mortgage should remain the same
(discussed later). The only way that your mortgage would increase would be because of
an increase in the insurance premium or taxes. Renters, on the other hand, are likely to
face rental increases year after year .
4. Taxes/Interest: interest and taxes paid on a home mortgage are usually deductible.
These breaks are not generally available to renters.
The answer to the second question depends on money and your creditworthiness. Do you have enough money to buy a house? Lenders do not want you to spend your last dollar to buy a house. Lenders would love for you to put at least 5% down of the purchase price (others may accept a lower %). When you are ready to close at settlement, you may still need another 6-8% of the purchase price. What about your credit history? If you have less than perfect credit, you may have a problem obtaining a mortgage. So, are you ready to buy?
BUDGETING
How much month do you have after your paycheck? Do you window-shop? That is, are you looking for what you could buy if you had the money? Many people find themselves in that position. Why? Because many people spend money without regard to the value of the item purchased. They just buy! Many of us have fast paced lives, and therefore we are accustomed to "buying" rather than "shopping." This buying mode has made many of us impulsive spenders. How many of you have gone out and purchased an item simply because it was on sale? When we develop this type of spending pattern, we are less likely to save money. We live from paycheck to paycheck. If you are living from paycheck to paycheck, your desire to buy a house may not be reached. You probably won't have the money for the down payment and closing costs. You should watch your spending. Although when we find ourselves living in a tight economy, we do tend to cut back on spending to save more. We are afraid to spend, because of hard times, or if the economy is in shambles and we are uncertain of the future.
So, what is a "budget?" A budget is simply a plan for spending and saving money. It is a written schedule of how money is spent. It allows you to see your total income and where it is going. Setting goals and prioritizing them is a very good place to begin in the budgeting process. A goal is an objective that one is trying to reach. You cannot decide how to get somewhere if you don't know where you are going. It is always recommended that you put your goals in writing. This makes it real. You can make a list and attach it to your refrigerator. It can then be constant reminder of what you want to accomplish!
STEPS TO CREATING A BUDGET
1. Gather your bank statements, utility bills and other information regarding your source of income
and your expenses.
2. You now need to list your income regardless whether you are self employed or receiving
regular paychecks. You will want to list your NET INCOME (take home pay) vs. gross pay. We
don't spend gross income. Usually taxes are deducted from your gross income leaving you
with "net income."
3. Next, you'll want to list your expenses that you incur over the course of the month. Some
examples would be your mortgage or rent, car payment, auto insurance, credit card debt
utilities, groceries, etc.
4. You should now break your expenses into two categories which are fixed and variable. Fixed
expenses are expenses that usually remain the same each month. Variable expenses
change from month to month, such a gasoline, groceries and entertainment, just to name
a few. That is where the adjustments are usually made.
5. Next, total your monthly income and expenses. If you have more income than expenses, then
you are doing great! However, if your expenses are more than your income, then adjustments
would have to be made ( to variable expenses). For those of you whose income is higher than
expenses, you need to make good use of this excess. This means putting more money aside
for savings and or more money toward your debt to try to eliminate that debt (credit card-loans)
6. Review your budget periodically to make sure you are staying within your means.
There are two types of goals: short and long term. A short term goal covers a short period of time (food, rent, transportation). A long term goal covers a longer period of time (buying a house, car, education). TThere is an old saying that "if you fail to plan, then you plan to fail." Therefore, to achieve your goals, you need a plan (budget) to go along with your income. Also, to accomplish your long term goals, you need a savings account as a vehicle to accumulate the monies needed. Therefore, the savings account must be in line with your budget. Sometimes situations do come up. You should review your budget from time to time to see what adjustments may be needed.
AM I MORTGAGEABLE?
You are now familiar with the budgeting process. What you need to learn now is how the lenders determine if you can get a mortgage. I hope you are aware that it is your income that determines how much of a house you can afford (housing affordability). The general rule has been that you should be able to purchase a house valued at two to two and one half times your yearly salary. This however does not take into account your debts, a large down payment, or other factors which can detract from or add to the amount you can afford. However, the lender will be looking over at least five issues to reach a decision. They are as follows:
1. CREDIT HISTORY: Before I give you information on the banks and your credit, I want to
discuss some of your rights concerning credit. You have rights under the Federal Credit
Reporting Act (FCRA). These rights concerns the gathering and selling of information
about how you handle your credit obligations. The FCRA was designed to promote
accuracy, fairness, and privacy of the information in your file. What follows is a brief
summary of your rights:
*You can request the information that is in your file and a list of everyone who has recently
requested information. If you have been denied credit because of the information in your
file, you can get a free report if it is requested within 60 days of the denial.
*Anyone who uses the information in your file against you must give you the name, address
and phone number of the credit bureau that provided the report.
*If you find inaccurate information in your file, you can dispute it. Once disputed, the credit
bureau must investigate the item(s) within 30 days. It will present any evidence you may
have to the creditor for review. The creditor must then report its findings to the credit bureau.
If the investigation results in any change, the credit bureau must give you a written report of
the investigation and a copy of the report. If the investigation does not resolve the dispute,
then you can add a brief statement to your file.
* The credit bureau is not required to remove accurate data from your file unless it is outdated
or cannot be verified. However, it must remove or correct inaccurate or unverified information
from its files. This is done usually within 30 days after you have disputed it. If an item has
been removed from your file because of a dispute, it cannot be reinserted without your being
notified. The notification must include the name, address, and phone number of the
information source. This generally happens when the information source has verified the
accuracy of the disputed item(s).
*A credit bureau may not report negative information that is more than seven years old or ten
years old for bankrupticies.
Let's now talk about "credit." What is credit? Essentially credit is your giving your word to someone that if they loan you money, you will pay them back. If you don't pay them back, then your word is "no good!" The lender is looking for someone who will be true to their word in paying them back in a timely manner. Credit history is the first thing that a lender will want to review in considering you for a mortgage. Therefore, the first thing you should do is pull your credit report for review. You've heard, I'm sure that "location, location, location" is one of the main ingredients for a successful business. Well, "good credit, good credit, good credit" is one of the main ingredients for a successful mortgage application. Your credit does not have to be excellent, but you should have a good credit history in order to receive a favorable mortgage. You should pull your credit first to confirm the accuracy of the report. You'd be terribly upset if you find your "dream house" but cannot purchase because of the blemishes in the report. This is especially so if it is a creditor that you've never dealt with or an account oustanding that you know you've paid, dispute it! The credit bureau will investigate and give you an answer to your dispute within 30 days. As pointed out earlier, if the information is not accurate, it must be deleted. You can still apply for a mortgage while the information in your report is being corrected. However, it is best to wait until all the information in your report has been corrected before applying, If the blemishes in your report are accurate, it would be in your best interest to resolve them..Doing so will better your chances of getting a favorable mortgage.
With the lending institutions, one hand washes the other. Before they lend to you, they want to make sure that you are fulfilling your obligations with the other creditors. If your credit history shows a number of blemishes, the lender may be reluctant to give you a mortgage. They will not want their names added to your list of creditors who are not getting paid! The credit report is a measure of your character. It shows whether or not you are a responsible person. So then, you should pay off those bad debts or make payment arrangements to pay them off. If you have an account in collection, you may be surprised to know that these agencies are actually willing to work with you. Give them a call and let them know that you want to settle your account. Often you will find that they are willing to accept a percentage of what is owed and still clear your account! The lender will want to verify that you have either paid off the debt, or that you have made payment arrangements and over time have stayed with those arrangements by paying in a timely and consistent manner. Because it may take time for the creditor to report new information to the bureau, you should ask the creditor for a letter as proof of fulfilling your obligations.
Lenders are usually interested in the last twelve to twenty four months of your credit history. You may have a good credit history now but what about three or four years ago? If you have had problems in the past, the lender will want some answers. You may be asked to write what is called a "letter of explanation." In this letter, the lender is asking you to explain the past blemishes.
Even though you may have a little or nT credit, the lender can still work with you. The lender can look at what is called "non-traditional" credit history. This is information that does not normally appear on a credit report, such as utility payments and rental payments. However, when the economy is down, you may find lenders shying away from this practice..
CREDIT SCORING: A consumer credit score is a number ranging from about 300-900. The number is calculated by using a person's past credit history information. The score is used by lenders to predict the likely future performance of a person's loan. The lower a number, the greater the possibility of default (not paying the bill). The higher your credit score, the less risk of future default you represent to the lender..This is a strong indication that you have successfully managed credit in the past and are likely to be eligible for the best credit card and loan offers, including terms and conditions.
Good Score vs. Bad Score: In the past, I used to tell my clients that if you had a score of 620 or better, you would be "good to go" with the lender. I also stated that some lenders would be willing to work with you with a score as low as 580. However, you will be thoroughly scrutinized. Times have changed! Because of credit leniency by lenders, mortgage defaults and bank failures, lenders have now raised their requirements. In November '09, I read that lenders would now be looking at a score of 660 vs. 620 for consideration for a mortgage. Then there are stories about people with good credit history and income that are having problems getting a mortgage. Why? Lenders are now trying to dot the I's and cross the T's to make up for past mistakes. Here is a breakdown of scoring categories that one may fall into:
Under 580: will be required to provide tp provide a substantial down payment/collateral and /or pay
a higher interest rate. Under FHA's new guidelines, borrowers with credit scores of less than
580 will need to make a 10 percent down payments on homes-up from3.5%. Also, seller
concessions will be cut to 3% of a transaction price from 6 %. The other change is that the
mortgage-insurance fee at closing will increase from 1.75% to 2.26 % of the difference
between the down payment and the standard 20 % down.
580-620: will be scrutinized and may need compensating factors for most loans.
620-680: now fall under the new standard rules, not as flexible as in the past * for some 620-
659 is considered FAIR
680-720: average score considered GOOD * for some, 660-749 is considered GOOD
720 and Up: considered EXCELLENT- has a good chance of obtaining loans at the best interest
rates-less documentation and less or no down payment * for some 750 and up is
considered EXCELLENT
The following is a list of variables that help determine the FICO score along with its percentage breakdown:
1. Previous performance-Payment History-35%
2. Current level of indebtedness-Debt Ratio-30%
3. Amount of time credit has been in use-Length of Credit History-15%
4. Pursuit of new credit-Credit Inquiries-10%
5. Types of credit available to you-10%
Your credit score can be improved over time. Managing your credit in a responsible manner can help you get the best possible score. Therefore, you should try not to become delinquent on your credit obligations and try not to over extend yourself with debt. Remember that your credit score is only one of the factors used in determining wherher you will get the loan or not. However, a high score gives you a better chance!
2. Income: you must be receiving some form of income. This income must be verifiable
(paystubs, W-2"s). The bank will be asking for your tax returns for at least the last two years.
If you cannot document what you earn, then you don't earn it!
3. Savings and Income Sufficiency: you need to have monies saved for the down payment and
try to purchase within your means.
4. Front end ratio: this is referred to as the "mortgage to income ratio." Here, the lender seeks
the relationship between your income and what your maximum mortgage should be. It is
calculated as an individual's monthly housing expense divided by his or her monthly gross
income and is expressed as a percentage. Monthly gross income is simply annual income
divided by 12 (months).
Front-End Ratio=Monthly Housing Expense
Monthly Income
For example, if you earn $60,000 per year, your monthly gross is $5,000 ($60,000/12). If the
lender allows a ratio of 33%, the lender would then be allowing you to allocate as much as
$1,650 towards your mortgage payment. A typical mortgage payment will include the
mortgage principle, interest, taxes and insurance. It is also known as PITI. Please keep in
mind that the lenders are using "GROSS INCOME." We do not spend "gross income." We
spend "Net Income" which is gross income after taxes. In this example, you are not bringing
home $5,000 per month, therefore it is up to you to look at what you are actually bringing
home. You must then decide if you feel comfortable putting out that much of your income
towards the mortgage.
5. Back End Ratio: This is often referred to as the "debt to income ratio." This is a ratio that
indicates what portion of a person's monthly income goes toward paying debts. Total
monthly debt includes expenses such as mortgage payments (PITI), credit card payments,
child support and other loan payments. It is the long term debts that they are concerned
with. If your debts are excessive, they will reduce the amount of money you can borrow to
buy a house. Lenders are looking out for each other. They want to be sure that once you've
gotten a mortgage, you'd still be able to manage paying your other bills.
Now let's suppose a lender allows a back end ratio of 38%. If your gross is $5,000 a month,
this would amount to $1900. This means that your mortgage payment and your other bills
cannot total more than $1900. Or for example, let's say that you already have bills of $700
per month. The lender will deduct that from your 38% which gives us a total of $1200 that
can be allocated for a mortgage.
Back End Ratio= Total Monthly Debt Expense
Gross Monthly Income X 100
Here is one other example, let's suppose your monthly income is $5000 and your total
monthly debt payments are $2000. Your back end ratio would be 40%. Some lenders may
not want you to go above 40% but depending on your credit some may allow you to go
higher. Some may only look at the back end ratio!
HOUSING PROGRAMS
When one is looking to purchase a home, one should try to get as much information as they
possibly can about the process. You want to be well informed so that you are not taken
advantage of. You can contact lenders to see if they have any programs for first time home-
buyers. In the past, lenders would make special allowances under their housing programs.
However, the first time homebuyer had to sit in on a workshop to be educated about the process
of buying a home
As I've stated earlier, there are counseling agencies that can assist you. These agencies are often
in contact with various lenders and can let you know what housing programs may be available.
Having the assistance of a "housing counselor" can make this process less intimidating.
If you live in Pennsylvania for example, there is a state agency under the name of Pennsylvania
Housing Finance Agency (PHFA). PHFA offers attractive homeownership financing programs and
information services as well as directing you to free "pre-purchasing counseling." Closing cost
assistance is also offered. This assistance can range from $1,000-$14,999 depending on the
program selected. Also, there is a program for individuals with physical disabilities as well as for
people who are low to moderate income.. For additional information, you can go to their website
at www.phfa.org.
In Philadelphia, the OFFICE OF HOUSING AND COMMUNITY DEVELOPMENT (OHCD) has
First-Time Homebuyer Programs. One program that is very popular is the "settlement assistance
grant." The grant provides up to $500 per household to help first-time Philadelphia homebuyers
pay for closing costs. Homeownership counseling is required and this counseling is free! In order
to be eligible for the grant, at least three conditions must be met as follows: 1) you must be a first-
time homebuyer ( someone who has not owned a principle residence during the three year period
prior to the purchase), 2) you must be income eligible (Section 8 income guidelines) and 3) you
must complete homeownership counseling through an OHCD-funded housing counseling agency
"before" signing an "agreement of sale." A file is usually created on the client where everyting is
documented. I always advise the client to make the realtor and lender aware that the client is
involved in a workshop. A certificate is usually given to the clients to show that they were involved
in a workshop . Now everyone knows that a counselor is looking over the client's shoulders to
make sure they are not taken advantage of.
Another program is the AMERICAN DREAM DOWNPAYMENT INITIATIVE (ADDI). ADDI offers up
to $10,000 (or 6 % of the purchase price of the house, whichever is lower) to first-time buyers. For
additional information, you can go to the website-www.phila.gov/ohcd/settgrt.htm or place a call to
215-686-9723, in Philadelphia, Pa. You should also be able to look up OHCD in other cities.
INTEREST RATES: FIXED vs. ARM
When you are out there looking for a mortgage, you should compare the rates of the various lenders. You'd be upset if you went to Lender A, settled for their rate and later find that Lender B's rates were better! You will want to consider whether or not you want a "fixed rate" or an "adjustable
rate mortgage" (arm)
What are the differences between the two? You need to know so that depending on your financial situation, you can decide which is best for you. Let's compare:
FIXED RATE MORTGAGE: the rate is fixed meaning that the rates and payments remain
constant. For example, If you currently have a 5% rate and mortgage rates later jump to
10% or higher, you don't have to worry. Your rate will not change and neither will your
monthly payments. If your payments does change it will probably be because either your
taxes or your insurance premium has increased. You should already be aware that the
higher the interest rate, the higher your monthly payments will be.
What are the disadvantages? One is that in order for you to take advantage of falling
interest rates, you would have to refinance. This means gathering all your docs as
required by the lender and again paying "closing costs." Also, if rates are currently high,
this may mean that some borrowers may not be able to afford a fixed rate mortgge.
ADJUSTABLE RATE MORTGAGE; some advantages are:
1) the rates and payments are lower in the early part of the loan term (more affordable)
2) because the rate starts out low, the borrower can now buy a larger home that otherwise
would be unaffordable.
3) when rates fall, borrowers do not have to bother to refinance to take advantage of the
lower rate-their rate will adjust lower
4) It offers a borrower a cheaper way to buy a house especially if they don't plan to stay
there long. When the rate increases, the borrower can then sell.
Disadvantages:
1) rates and payments can rise significantly over the life of the loan. Would you be able to
afford the payment at that time? For example, you may start off paying a mortgage of
$900 /mo. but when rates rise over time, you may end up having to pay $1200/mo.
or more depending on the rate increase.
2) most "arms" adjust every year on the anniversary date of the mortgage. Some adjust
as frequently as every month. If the rates are going up, so are your payments!
3) uncertainty of the economy means uncertainty of the amount of your next payment
PRE-APPROVAL
I strongly suggest that before you start looking for a home, you should get a "pre-approval." Even if you do not know where you want to move to or how much you want to spend on a house, a pre-approval would be best for you. A number of banks do not charge you for this process. The lender will ask for your social security number to generate a credit report and your monthly income to determine how much of a home you can afford. Your income will be verified later when you locate your dream home. Based on the information given, the lender will bet back with you and let you know how much they are willing to lend you. Now with a pre-approval, you will know what price range you can shop in. This means that you can save time by looking only at homes that you know that you can afford. With a pre-approval you'll probably be able to increase your bargaining and negotiating power. This is because the seller knows that you are backed by the lender for the money! Also, you should be able to enjoy a faster closing period. When the agreement of sale is signed by both parties and a copy is given to the lender, an appraisal can be ordered immediately. Your pre-approval is given based upon the information given to the lender. The lender will now ask you to complete a loan application, seek employment verification and check your credit again before a decision can be rendered. Of course, your realtor will pre-qualify you for a certain amount. However, the realtor is not lending you the money! The bank is! Therefore, it is their guidelines that you must meet.
SEARCHING FOR A HOME
The most exciting part for the home buyer is finding the right house. Several questions need to be asked in doing so, as follows:
1. Location
2. Housing type (single, duplex, row)
3. Transportation
4. Shopping convenience and location of schools
However, you may answer, it all boils down to personal preference. Your reasoning for moving into a particular neighborhood may not be the same reason as your neighbor's. Let's now look at some of what you must consider:
1. Location: The location of your home should be considered for a future selling point; you
should check the other properties in the area to see if they are well maintained. You
should check for reasonable real-estate taxes and think about how far you'd have to travel
to work as well
2. Type of House: What style of house is available (single, duplex, row)? Would you prefer a
yard, garden, or off-street parking? Also, the size of the house is important . You not only
have to think about your present family size but also whether or not the house will be large
enough to accommodate a larger family in the future.
3. Transportation: How far are you away from your place of employment? How convenient is
public transportation?
4. School and Shopping: How good are the schools in the area and how far away? Are there
malls or shopping centers nearby for easy access to shopping?
So, how do you go about finding houses that are available for sale? There are a number of resources that you can look into, such as local newspapers, real estate shoppers guide, For Sale"
signs seen while driving through a neighborhood (owner/agent), foreclosures and even estate auctions.
REALTOR
Once you have decided on a home location, you now need the professional services of a realtor. The majority of home sales are sold through the services of a realtor. You can either use the services of the realtor who placed the "for sale" sign or any other agent that you feel comfortable with. You will want an agent who does not mind answering your questions and who will provide you with all the knowledge and services you need.
There are different types of agency (agent) relationships. The law does require the disclosure of agency relationship before listing contracts and agreement of sale. What follows is a listing of these agency relationships and their functions:
1. SINGLE AGENCY: most real estate transactions involves the seller's agent which is known as
a single agency. This means that the agent represents only one party to a transaction
(usually the seller). However, sometimes a buyer approaches the broker for representation
This means that the broker will become the agent of the buyer. If the agent is representing
the seller, all material information supplied by the buyer will be told to the seller. The agent
has fiduciary duties to the seller. Seller's agents often work with buyers but not for buyers. If
the agent is representing the buyer, all material information supplied by the seller will be told
to the buyers. The buyer's agent works only for the buyer but must also act honestly with the
seller.
2. DUAL AGENCY: The agent works for both buyer and seller. The firm must make written
disclosure to both parties. It must first obtain the informed written consent of the buyer and
seller. This means that the agent must disclose that in addition to working for one party, they
will also be working for the other party and explain his or her fiduciary duties.
3. DESIGNATED AGENCY: One agent is assigned by a broker to represent the buyer and
another agent to represent the seller within the same office.
4. TRANSACTION BROKER: The agent does not represent the buyer or the seller. All
information acquired from one party may be told to the other party. However, the transaction
broker does not promote the interest of one party over the interest of the other party to the
transaction.
You may find that a realtor may want to pre-qualify you to buy a house before showing you any properties. He or she basically wants to make sure that they are not wasting their time by showing you property when you are not in position to buy anything! In pre-qualifying you, the realtor will pull your credit history and verify your income. However, if you have already been pre-approved by a lender, you have a head start in buying a house. Once it is known how much you can afford, the realtor will only show you properties within that price range.
AGREEMENT OF SALE
One of the most important documents that you will be dealing with in buying your home is the "agreement of sale." When a buyer and seller reach an agreement on the terms of the property, it is generally written up on a pre-printed form. The blanks must be filled in properly, and sometimes clauses or additions (addendum) need to be added to the agreement.
The agreement is the sales contract concerning the transfer of owership interests in realty. It sets forth the price, the terms, and the rights and obligations of the parties and is signed by buyer and seller.
Each party to the agreement should have a copy of it to prove that a contract does exist. For example, the seller, buyer, lender, and agent should all have a copy. However, in order for this agreement to be a legally valid contract, it must first meet certain basic requirements. They are as follows:
1. OFFER and ACCEPTANCE: There must be an offer by one party to another party for
acceptance, and in turn, the acceptance must be communicated to the offering party (you can
always make a counter offer to the offer and hope that it will be accepted).
2. CONSIDERATION: There must be something of value given by one party in exchange for the
actions of another party. The consideration must be of value between all parties (usually it
is money).
3. LEGALLY COMPETENT PARTIES: All parties must be of legal age and of sound mind to
understand the nature and consequences of their actions.
4. LEGALITY of OBJECT: The parties actions must not violate law. Also, if you signed a contract
because someone threatened you in one way or another, that contract should be voidable.
The situation is known as acting under duress. This means that you wre unable to act under
your own free will but was forced into signing the agreement.
Do not sign an agreement if you are unsure of what you are signing. The realtor should interpret the many pages of the agreement so that you will know what you are agreeing to. Some states such as new Jersey will give you time to review it. This legally binding contract becomes final in three business days. During this period you may consult with and attorney who can review and cancel the contract if needed. Regardless what state you are in, if you feel uncomfortable about signing, you can always consult with an attorney or visit a ":housing counselor" in your area.
Below is a sample listing of items found in a standard agreement for the sale of real estate in Pennsylvania:
1. Listing of brokers for seller and buyer
2. Dated with names of the parties to the agreement (buyer/seller)
3. Property description
4. Terms such as purchase price, down payment, and other monies to be recieved
5. Time limit for sellers (signature)
6. Tentative settlement date
7. Excluded items and fixtures-this will show what items the seller plans to take with them and
that which will not go with the sale of the house.
8. Special clauses
9. Mortgage Contingency- you are buying the house contingent upon your being able to get a
mortgage. If the bank turns you down, you are entitled to get your deposit back
10. Sellers Assist-If you ask, the seller may be willing to assist you with your closing costs.
Some lenders put a limit on how much the seller can give you (3-6% of the purchase price).
If the realtor increases the sale price of the house by the amount of seller's assist you are
asking for, that is not seller's assist. You the buyer is paying it. The seller isn't giving you
anything, only on paper!
11. Wood Infestation: -You will want a termite certification at the buyer's or seller's expense to
determine whether or not there is infestation before you purchase the property ( determine
if treatment is needed)
12. Lead- Don't forget to read the pamphlet and items that pertain to lead based paint,
especially if you have young children
13. Home Inspection- You don't want to buy a home without getting it inspected by a certified
housing inspector. Therefore, in your sales agreement, you should have a contingency
agreement for a satisfactory inspection report. The report is paid for by the buyer and is
well worth it. From the report you can find out what problems exist at the property. The
report may be divided up into as many as seven categories or more. They are as follows:
site and grounds, structure, roof system, HVAC system, plumbing, electrical system and
fixed appliances. The overall conditions stated within each section are generally noted as
standard or sub-standard. If problems or symptoms are found, the inspector may
recommend further evaluations. The report will also contain costs estimates for some
conditions. The contingency in the agreement gives the buyer options to accept or decline
the property based upon information found in the report. Sometimes, the seller may offer
certifications in lieu of your getting the house inspected. The certifications are for the roof,
electrical, and plumbing and heating systems. I would prefer a home inspection.
Sometimes warranties are given to protect the systems in your home in case problems
arise after your purchase.
You cannot assume that after you have signed an agreement, changes can be made later. It is then up to the seller to agree to any changes that you may want to make. The realtor should also give you a "good faith estimate" (GFE) which is an estimate of the costs involved in your buying the house.
EARNEST DEPOSIT
There are at least two costs involved in buying a home. You have the down payment (earnest deposit) and closing costs (settlement costs). The down payment initiates the transaction between buyer and seller. The closing costs will finalize the transaction. I referred to the down payment as "earnest money deposit." Earnest money deposit refers to the money earned from the sweat of your brow.! This means that you cannot borrow your down payment. This is so because the lenders feel that you are less likely to walk away from the deal if the money is yours. You give the realtor a deposit to show that you are sincere in buying the property. This takes the property off the market and should be at least $500. Some lending programs require 5% down while other programs may require less. The realtor will only draw up the agreement after receiving a deposit.
The second costs involved are called closing costs. You pay these costs when you go to settlement. On this day you become the new homeowner. You are paying to transfer the property from the seller to you. Unlike your down payment, your closing costs can come from any source (lender, sellers assist, or other programs etc). These costs can range from five to eight percent of the purchase price.
Now that you have the agreement of sale signed, you can now go to a lender and apply for a mortgage. Within three days of application, the lender will send you a "truth in lending" disclosure detailing the details of the loan. If there is an "X" beside pre-payment penalty on the form, you may not want to sign for that loan. Why? Well, because you are not signing for an "open ended mortgage." An open ended mortgage is a mortgage that you can pay off anytime without fear of being penalized for paying off the mortgage early. If pre-payment is checked off, then you will have to pay an additional fee if you decide to pay your house off early.
MORTGAGES
You will probably get one of the three types of mortgages that are available to you. Your lender will be asking you what type of mortgage you prefer. Your choices are:
1. VA * if you are a veteran, you can choose this type of mortgage.. The VA does not give
anyone any money for a mortgage. However, what it does is make a guarantee to the
lender that if a homeowner defaults and lose the home to sheriff sale, it will make up the
deficit lost to the lender. Also, there is no money down with this type of mortgage.
2. FHA * just like the VA, FHA does not lend money either. FHA insures the mortgage with the
lender in case of default by the homeowner. If you do not put 20% down, be prepared to pay
"mortgage insurance premium" (MIP). The premium will be a part of your mortgage payment
to cover the insurance. FHA usually have a number of programs to make housing affordable
to buyers.
3. CONVENTIONAL * A mortgage other than FHA or VA. These mortgages are pretty much
competitive with FHA
TRUTH IN LENDING STATEMENT (T I L )
This is a disclosure statement that federal law requires lenders to provide to applicants which
discloses all the costs associated with making and closing the loan. The lender must give this
statement to the borrower within three business days of receiving the loan application. It can be
revised just prior to closing because it is based on the "good faith estimate."
What follows are the costs that are disclosed in the Truth in Lending Statement:
A) Annual Percentage Rate (APR): The APR is the cost of a borrower's credit calculated
as an annual rate. This includes finance charges, the contractual interest rate, the
required private mortgage insurance paid during the term of the loan, and the amount
of prepaid finance charges paid at or before the loan closing. This is why the APR
always exceeds the interest rate quoted on the note and mortgage.
B) Finance Charge: This is the dollar amount that the credit will cost the borrower. It is
the borrower's estimated closing costs. It includes any charge (including interest)
paid by the borrower as a condition of the loan.
C) Amount Financed: This is the amount of credit provided to the borrower or on the
borrower's behalf. In other words, it is the borrower's "loan amount."
D) Total of Payments: This is the total amount of money the borrower will have paid
after he or she has made all scheduled payments, including principal, interest,
prepaid finance charges, and mortgage insurance if the borrower makes minimum
required payments for the term ot the loan. This is usually a very large amount.
because the loan term is usually long (from 20-30 years). This will include the
original mortgage amount and the total of all interest the borrower will pay over the
loan's lifetime.
E) Payment Schedule: This is the breakdown of the borrower's monthly payments. It
sets forth the principal and interest amounts, as well as all tax and hazard insurance
amounts and how those payments are to be made. It also indicates any late payment
charges or prepayment charges to be levied.
I would be looking for a loan that is referred to as an "open ended mortgage." With this type of
loan there is no fear of a "pre-payment penalty." This means that I can pay this loan off at any
time without having to pay an early termination fee (pre-payment penalty)
THE ESCROW ACCOUNT
As noted above in the TIL, you will be given a payment schedule. Your mortgage payment will
consist of P I T I (principal, interest, taxes and insurance). The principal portion pays down the
balance of your mortgage, and the interest is the lender's earnings for providing the loan. The
taxes and insurance portions goes into what is called an "escrow " account. This is a special
account which is usually set up at closing, which is designed to hold monies for property taxes
and/or insurance (private mortgage insurance, homeowners , flood) and is collected with the
homeowner's monthly mortgage payment.
There are benefits to having an "escrow" account. With the "escrow" account, the homeowner
does not have to worry about coming up with several large, lump-sum payments when due.
For example, it is much easier for most people to pay $200 per month into an escrow account
instead of paying $2400 at once. There are others who would have to pay much more! The
escrow account also ensures these items are paid when they are due, and removes the risk of
delinquent taxes or lapses in insurance policy. The escrow service makes these payments
for you. Also, if the escrow account is short, the mortgage company will advance the shortage
necessary to cover the escrow item.
There is a limit however, on the amount a lender may require a homeowner to put into an escrow
account. Lenders will review the escrow amount yearly and inform the homeowner of any
shortages or excess. This is called a "reconciliation " where you will receive a statement of past
payments and expected future payments. If there is an excess, that is usually refunded once it
is above a certain dollar amount. If there is a shortage, then you are expected to pay it. You have
the option of paying in one lump sum or have the payments prorated over 12 months.
When there is no escrow set aside, the homeowner is then responsible for paying all property
taxes and/or insurance in full by the due date. The homeowner is required to provide their
lender with evidence of payments. The lender wnats to be assured that their asset (your house)
is protected. If the lender finds that you have no insurance, you will be given time (if policy has
lapsed) to provide proof of coverage. If you can't , the lender will place a policy on the home and
and may not care what it costs. I had a client who was paying $600/yr for homeowners
insurance. The policy lapsed and her lender bought a replacement policy for $4000/yr. For you
see, the cost of the policy will be charged back to you (added to your mortgage principal). The
same goes for your taxes. Therefore, a mortgage escrow account is an easy and simple way to
manage your annual tax and insurance payments. It may cost a little extra every month, but it is
well worth the convenience and there will be less stress!
MORTGAGE COMMITMENT
Hopefully, you will soon receive a "mortgage commitment" from the lender. This means that the bank is making a commitment to give you the monies needed to purchase the house. Sometimes, the commitment is conditional. This means that some requirements that are not yet satisfied, must be met before the full commitment and your settlement. Once you have received your
commitment letter, you are ready to close on your loan.
THE CLOSING
Now that you have a mortgage commitment, your realtor must now schedule a settlement date. The settlement dat is given to you through a document called "notice of settlement" (NOS). This notice will give you the date, time and name of the title company or closing agent.
One important thing for you to remember to do before you go to settlement is to take a "pre settlement walk through." Here, you are making sure that the property is as it was when you agreed to purchase (check the house out). If any problems exist, then you bring it up at the settlement table.
Depending on your location, closings can be conducted by title companies, attorneys or closing agents. In some areas, there may be an escrow agent responsible for the paper work and collecting and disbursement of funds. For example, if you have a title clerk present, he or she is responsible for handling the legal aspects of the closing. It is their company that prepares the deed and title. The title is defined as a legal document that shows a person (s) ownership or right to a property. A deed is a document that, when executed (signed) and delivered, conveys (transfer) title to or an interest in real estate. The title company will have examined the records to make sure that you are getting the property free of liens and encumbrances. The title insurance is to protect the lender and/or buyer (optional) against disputes over ownership of the property. Whatever party handles the closing will handle the monies in the closing. You will need to find out how much money you will need to bring to closing. You can bring cash, or a cashier's check to settlement. Also, you will need to bring an insurance policy to settlement to show placement of insurance on the property you are now closing on. Your "I-D " is usually taken to verify who you are, as well.
Earlier, I mentioned that you will get a GFE to show estimate of costs to close on the property.
At the settlement, you will get a HUD1 which shows actual costs that are paid by buyer and seller involved in this transaction. Actually, one business day before the settlement, you have the right to inspect the HUD1 Settlement Statement. The first page of the HUD1 summarizes all the costs and adjustments for the borrower and seller. Section J is the summary of the borrower's transaction and SectionK is the summary of the seller's side of the transaction. Some fees may be listed on the HUD1 to the left of the borrower's column and marked "POC." Fees such as those for credit reports and appraisals are usually paid by the borrower before closing/settlement. POC stands for "paid outside of closing."
POST PURCHASE
Now that you are a homeowner, you have a mortgage to pay. Most people elect to get a 30 year mortgage. This means , of course that you will be paying for your mortgage for a period of 30 years. Your mortgage payments will consist of at least four components. They are P-I-T-I. P and I go together as monthly principle and interest. These two components are applied toward paying off your mortgage. The principle is the actual amount that is being credited to bring down the balance and the interest is what is being charged to you by the lender. The T & I components are for taxes and insurance. The lender will collect one twelfth of your yearly taxes and insurance each month. These payments will go into an escrow account which is used to pay the taxes and insurance bills when they become due. The lender takes care of the payments for you.
MORTGAGE PREPAY
Paying a mortgage for 30 years is a long time. The term can be shorter. But the shorter the term, the higher your mortgage payments. So much of your payments are eaten up in interest. However, you can save a lot of that interest by using the "half-time method." The half time method means that you can pay off your mortgage in half the time (30 yrs paid off in 15 years). It would be helpful if you have an "amortization" schedule which shows your every monthly payment. For example, a $100,000 mortgage would show 360 monthly payments with interest attached to each. The schedule only shows principle and interest. Let's assume your first payment is in January. When you send in your payment for January, take a look at the principle for February. You can send in additional payments as much as the next month's payment or more! You have to indicate to the lender that the additonal payments are to be applied to the principle. You can indicate this right on your payment coupon. By doing so, this means the lender is not entitled to the interest for the months covered for which you've paid extra principle. You can knock months off your mortgage by doing this. Of course, you still have to make each and every monthly payment, but your balance moves further down the schedule. Before you know it, your house is paid off! The bank has lost all that interest which is money that you've saved.
I don't care for the biweekly method that some lenders are asking homeowners to get involved in. For example, if your mortgage is $600/month, the lender will ask if you'd be willing to pay 1/2 the mortgage every two weeks ($300-biweekly). You are told that this method will knock some years off your mortgage. However, the bank will charge you a fee for each biweekly payment. Now they are getting extra money from you! Over the years those fees do add up. If you are being paid on your job bi-weekly, you know that twice a year you get paid three times in one month. The bi-weekly payments create a 13th month each year . Therefore, every year you are paying one extra month to your mortgage. Whereas with the halftime method, if you choose to do so, you can knock off many months off your mortgage during each year and there is no fee! GOOD LUCK!
FIRST TIME HOMEBUYER- FEDERAL TAX CREDIT
Below, you will find details of the tax credits that was brought about to stimulate housing (FYI)
Federal tax credits were enacted by Congress in early 2009. This is a great opportunity for many first time home buyers. The credit was designed to stimulate buying activity and help get the housing market moving again. Details are as follows:
1. A first time homebuyer is defined as someone who has not owned a principle residence
during the three year period prior to the purchase. For married couples, both spouses
ownership history is considered.
2. The actual amount of the credit is 10 percent of a home purchase price up to a maximum of
$8,000
3. It does not have to be repaid as long as you don't sell the home for at least three years
4. The house must be your principle residence. It can either be a new house or a resale
5. To obtain the credit, you must close on a home between january 1, 2009 and Nov. 30, "09
6. The full credit is available to single taxpayers with incomes up to $75,000 and married
couples with incomes up ro $150,000. For those making more, the credit is reduced or
eliminated
THE EXTENSION
The Worker, Homeownership, and Business Assistance Act of 2009 has extended the tax credit of up to $8,000 for qualified first-time home buyers purchasing a principle residence. The extension applied to sales occurring on or after January 1, 2009 and on or before April 30, 2010. If a contract was signed by April 30, 2010, a home purchase completed by June 30,2010 qualifies. The act also establised a tax credit of up to $6,500 for qualified move-up/repeat home buyers (existing homeowners) purchasing a principle residence after Nov. 6 2009 and on or before April 30, 2010 with sale completed by June 30, 2010.
Another extension is expected. I am hearing that it may go through to September 2010 as long as you have signed a contract by April 30, 2010
