Home Buying Basics
How do I begin?
How can you increase your odds of having a great experience and finding the best home? Simply by doing exactly what you are doing right now. Invest time educating yourself, work with, and heed the advice of the best professionals available.
A Loan Officer and Real Estate Agent, if you opt to use one, will do their best to keep you informed and educate you about the home buying process. Your Loan Officer will let you know ahead of time what expenses you can expect to encounter and will do their best to solve problems before they start. This way you will feel more comfortable and in control and you will play a more active role in the outcome of your transaction.
How much can I qualify for?
Many factors are used to determine the size of the loan you are eligible for. Your Loan Officer generally prefers that your housing expenses (mortgage, taxes, insurance and special assessments) do not exceed 25% of your gross monthly income. Your other financial obligations should not exceed more than 36% of your gross monthly income.
There are many different types of loans available. Which one you select can also affect how much you qualify for. Your Loan Officer will verify your credit and employment history before an exact amount can be determined.
Some tips to keep in mind.
1) Get "Pre-Approved", not just "Pre-Qualified"
When making an offer on a home you want to have the upper hand in negotiating. Keep in mind that price is not the only issue on the bargaining table. Information such as the reliability of the buyer to obtain financing or how much time is needed before the buyer is ready to close is very important to a seller. For this reason, it is important that you get "pre-approved", which is a step further than getting "pre-qualified."
The pre-qualification process is simply giving your best estimate of your financial situation to a lender and having them make an assessment of how much you could be approved for based on that information.
Pre-approval on the other hand, occurs when your Loan Officer actually verifies the information you give them when you get pre-qualified. By doing this, unforeseen circumstances can be resolved appropriately before you make an offer on a home. At the end of this process you are actually approved for the loan.
Your Loan Officer will give you or your agent a pre-approval certificate or letter to present to the sellers. This is key in negotiating the lowest purchase price and smooth closing for everyone.
2) Sell your existing property first before you buy a new one
If you currently own a home and are looking to buy a new one, it is strongly recommended that you sell before you buy. If you were to find a home that you absolutely had to have, you would ideally want the seller to reduce the price AND wait to close escrow until after you have sold your home. This makes sellers very wary and they may counter your offer demanding the full price because of the contingency that you have to sell your home. Following that, you may rush to sell your home as quickly as possible; perhaps even selling it for less than you could if you weren't in such a hurry.
For these reasons, it is recommended to sell before you buy. This does not mean you can't start looking for properties, nor does it mean you can't list your own before you have found your dream home. One trick is to make the sale of your home "subject to seller finding suitable housing." When you do find a buyer for your home, you will have time to find a new one. If you don't, then you don't have to sell your current home.
3) Don't settle for something less than you want
Make a list up front of qualities you want your new home to have, and qualities you don't want. This will help you clarify exactly what you are looking for, as well as save you time. If you are using a Real Estate Agent, be sure that you are seeing all of the homes available that meet the requirements you have set by going over the Multiple Listing printout with them.
4) Plan for the unexpected
When you’re calculating how much money to save towards buying a home, always over estimate by about $1,000. There are many unexpected things that could come up between the time the seller accepts your offer and when you close on the home. For example, inspections might point out items that need repairing but the seller may refuse to fix them, or the cost is greater than the amount agreed upon in the contract. Perhaps interest rates change, affecting your required down payment amount and the closing costs you are responsible for.
A Real Estate Agent and Loan Officer will do their best to avoid or prepare you for such situations to save you some heartache, but by planning to set aside some extra money ahead of time you will be less likely to be shocked or upset by any changes.
5) Trust your representation
There is a lot involved in buying a home and, at times, you may feel a little "lost" in the process. Remember that your Loan Officer and your Real Estate Agent, if you opt to use one, represent you and that they will do their best to make sure things go smoothly and that you are fully satisfied. Be sure to ask questions if you are unclear about any aspect of the transaction.
What to expect during your buying transaction.
There are several stages involved in buying a home. Keep in mind that individual situations vary, so it is always best to consult with your Loan Officer and Real Estate Agent, if you opt to use one, for details about your own unique circumstances.
The most common first step is to decide whether or not to use a Real Estate Agent to represent your needs. Of course, you don't have to contract with an agent, but it is a very helpful to have someone familiar with the process looking out for you.
Next, it is a very good idea to obtain pre-approval. It is important to note the difference between pre-qualification and pre-approval. During pre-qualification, your Loan Officer will make a determination as to the size of the loan you are likely to qualify for. This determination is based solely on the information you give them. No official search or documentation is made to verify the information given to the lender, so pre-qualification is not a guarantee.
Pre-approval is documented research into your credit worthiness, thereby allowing the Loan Officer to make a more concrete assessment of your loan qualifications. It is the next best thing to actual approval. This way, you can avoid possible heartbreak by falling in love with a house that you might not be able to qualify for.
Additionally, pre-approval gives you increased leverage during the buying process. For one thing, it shows the seller you are serious in your desire to buy a home. Also, if a buyer is fielding numerous offers, they are much more likely to accept someone who has been pre-approved even if the offer isn't the largest one on the table.
With the preliminary work done, it is time to find a home. If you have opted to be represented, your Real Estate Agent will provide help in this area. Once you have found an affordable property that meets your needs, discuss your offer with your Real Estate Agent if you have one. Draft a contract with your offer for presentation to the seller. This is usually followed by the negotiation process (the seller, of course, can accept, deny or negotiate your offer with you).
Ideally your offer is accepted at the close of the negotiation process. Your next step is to open escrow. (See next section, "Escrow") Your Loan Officer will assist you with this part of the process. You will prepare an "earnest money" deposit, usually 1% to 3% of the purchase price of the home. When you deposit this "earnest money" into escrow, a Preliminary Report will be ordered.
Once you have submitted your loan application, the contingency period begins. Have a physical inspection of the property done by a qualified inspector. Next, obtain all the necessary insurance you will need as a homeowner. Ensure that your coverage will be in effect at the close of escrow.
You and the seller will sign the necessary documentation. Once the Title Company receives the signed documents, you will provide a cashier's check or money order for the down payment. This should be done prior to the closing date. Once the down payment and closing costs are deposited into escrow, the lender will send the balance of the loan to the Title Company. Your Deed is recorded with the County Recorder's office. The only thing left to do is unpack!
The Escrow Process.
Escrow is defined by Webster's dictionary as "a deed, a bond, money or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition." Escrow provides confidentiality and impartiality during a real estate transaction.
Buyers, sellers and lenders have a personal stake in the outcome of any real estate transaction. Escrow is a neutral third party designed to assist these three parties in meeting all of the mutually agreed upon terms and conditions required to successfully complete a real estate transaction.
The escrow holder is used as a depository. Both the buyer and the seller provide funds, deeds, inspection reports, insurance information and any other related documentation to the neutral third party. The buyer, seller and lender give the escrow officer written instructions that must be met prior to completion of the transaction. Doing so enables the escrow officer to save time in the closing process.
Once a buyer and seller successfully negotiate an offer, escrow begins. Once the seller accepts an offer, the buyer will then deposit the earnest money into escrow. Earnest money is typically 1% to 3% of the purchase price of the real estate property.
Once escrow is opened, a title report is ordered to ensure the seller actually owns the property in question, and to determine if there are any liens against the property.
At this time, any applicable financing is processed. Once loan approval is obtained, the loan instructions and documents are prepared and sent to escrow by the lender. Inspections are completed and insurance information is typically gathered and processed at this time. New insurance policies are then set up for the new owner. This includes title insurance, homeowner's insurance, and any other applicable or desired coverage.
Once inspections are completed and insurance has been obtained, a loan agreement has been reached, and a title search has been completed, the next step begins. The escrow officer will review the file to determine that all contractual conditions have been met, the lender's instructions have been followed, and all title requirements have been satisfied. The closing documentation is then prepared.
Both buyer and seller sign all related documentation at this time. The buyer (traditionally, although this can also be the seller or a combination of both parties) will then submit all closing funds into escrow. The loan funds are deposited into the escrow account by the lender. Escrow then authorizes the release of recording.
Documents are recorded at the county recorders office. Funds are disbursed in accordance with the Disclosure/Settlement Statement, and the final documentation is forwarded to all interested parties.
Escrow is then closed.
Addressing your insurance needs.
You may be surprised to learn that a homeowner is not the only person or entity that can have a claim on the property. Depending on the situation, governmental bodies, contractors, lenders, judgment creditors and the Internal Revenue Service may also have claims to the property. Occasionally the homeowner is not even aware of these claims.
Before buying a piece of real estate, a complete investigation of the property is done, including a title inspection. A title search can be complicated. It involves a thorough examination of records covering all recorded judgments, street and sewer assessments, taxes and anything else that may relate to assuring proper ownership of the property in question.
Usually all claims on the property are uncovered during this process. However, sometimes factors such as deeds surfacing that predate public record, clerical errors or misrepresentation from previous owners can prevent claims on the property from being revealed during this process.
A title insurance policy provides the homeowner with coverage against these situations.
Here is an example: A new homeowner purchases a property, not knowing that a contractor has recently refurbished the kitchen. This contractor was not paid by the previous owners and now has a valid claim on the property. They may file a lien on the property holder, the new homeowners.
This lien was not in the public record at the time the title search was completed. Nevertheless, the contractor's claim is valid, and they cannot be denied their interest in the property unless their claim has been settled or released.
The new homeowner is responsible for this claim, despite having no active knowledge of it. Title insurance provides protection against just such an occurrence.
Title insurance will pay for defending the policyholder against any lawsuits challenging their title. They will either clear up the title problems or pay for any losses the titleholder incurs.
Purchasing owner's title insurance is not mandatory, but it is a good idea. A one-time premium covers the policy, which provides protection throughout the time period a policyholder holds the title.
While a mortgage lender does require lender's title insurance, this only provides protection against their interest. It does not apply to any monies the homeowner has invested, such as a down payment. For this reason, purchasing title insurance is just good protection for any homeowner.
People sometimes acquaint insurance with throwing away good money on something that probably isn't going to happen. While it is tempting to think of insurance this way, it is neither accurate nor sensible.
First, when you buy a new home, just about every lender in the free world will require you to purchase homeowner's insurance. That's easy enough. Reason number one to have insurance: you have no choice.
Insurance just makes good sense. If you are like most American homeowners, your home is one of your most valuable assets. Even if it isn't, it's still worth a significant amount of money. Something this important should be protected.
There are three things homeowner’s insurance is designed to cover, namely your home, your personal property and liability.
Your home: If your home should be damaged or destroyed (which is most frequently due to fire), the cost of rebuilding can be very expensive. That is, of course, unless someone else pays for it.
The cost to rebuild your home should be based on the square footage of your dwelling space. Your coverage amount should not be based on the amount you paid for the home or the amount of your mortgage. Ask your insurance agent about a policy that includes a guaranteed replacement cost provision. This will ensure that the insurance company will rebuild your home, even if the cost of construction has gone up and is more than the policy coverage. Each insurance company defines guaranteed replacement cost provision differently, so make sure that your insurance agent explains their definition clearly.
It is important to note that these policies usually do not cover rising water (flood) or earth movements (earthquake) which are additional types of insurance that may be required, depending on your location. See below for description of those policies.
Your property: This insurance will cover up to a specific amount towards the replacement of your personal items in the home. It is similar to the insurance that you would carry if you were renting. Some insurance companies also offer personal property replacement guarantees, which pay for the actual cost of the item today. Ask your agent which items are not covered under your policy. An expensive piece of jewelry may not be covered; however you can purchase a separate policy for it.
Liability: This insurance is intended to protect you in the event that someone is injured on your property. Frequently this is something that can't be predicted. Someone may slip on an ice patch on your driveway. Someone else may fall down your staircase. As the property owner, you are the responsible party in the event of a lawsuit.
A good rule of thumb is to carry coverage that equals twice as much as your assets. If your assets are valued at over a few hundred thousand dollars, you may want to consider an umbrella policy, also known as excess liability. This increases the liability coverage on your home and car (if applicable). Umbrella policies are typically sold in increments of $1 million
Important Note: To keep the cost of your insurance premiums down, consider purchasing policies with the highest deductible you think you can afford.
In addition to the homeowner's insurance outlined above, there are a number of additional types of coverage available to protect homeowners. Some of the more common types are outlined below. You may be required to carry one or more of these policies as well. Speak with your Loan Officer and/or Insurance Agent for more detailed information as to what you required to carry, as well as what coverage would be in your best interests.
PMI (Private Mortgage Insurance): This insurance protects the lender if the homebuyer should default on their loan. It is usually required on loans if the down payment is less than 20% of the purchase price of the home. After the equity in your property increases to the 20% mark, you do not need PMI. You may talk to your servicing lender about removing it at that time.
Mortgage Life Insurance: This type of policy guarantees that your lender will receive their money in the event of your death. Your insurance agent and financial planner will be able to tell you about the different types of insurance that would best fit your needs.
Flood Insurance: Flood insurance is required only when a home sits in a federally designated flood area. It is not required if the home sits outside of the flood area. Your standard homeowner's insurance policy most likely does not cover rising water. Rising water can come from a river, a street or a torrential downpour. Flood insurance is inexpensive when your home is not located in a designated flood area.
Earthquake Insurance: If your home is located in an area where earthquakes are a risk, you will need to purchase earthquake coverage. Earthquake insurance policies pay to rebuild or repair your home if it is damaged by an earthquake, hence the name. Remember, your homeowner's insurance policy does not cover earth movement.
Fire Insurance: You may be wondering why you need fire insurance if your homeowner's policy already covers the cost of rebuilding. Usually you don't, but in some places fire insurance is not covered by your city taxes. In other words, this policy is designed to cover the cost of extinguishing a fire in your home, such as fire trucks, equipment, firemen and so forth. Homes not located in a fire district can usually be covered with this separate fire insurance policy.
Information on property inspections
Why should I pay for a home (property) inspection?
No matter how intelligent or experienced you may be, no one can tell how much work is needed on a home just by looking at it. You can't see if there is a problem with the electrical system, if the furnace's heat exchanger is cracked or if the foundation is sound without a home inspection.
Loan Officers and Real Estate Agents are not qualified to advise you about a home's physical condition. This is why it is necessary to hire a home inspector.
What are the qualities of a good home inspector?
A good property home inspector is a full-time professional, not part-time. The inspector carries errors-and-omissions insurance and is a member of the American Society of Home Inspectors (ASHI). They typically conduct 100 to 300 inspections per year (this number varies in different areas). Many inspectors have backgrounds in related fields, such as electricity, plumbing, architecture, engineering, construction or insurance claim adjusting. Experience in these areas will certainly help with your home inspection. Nevertheless, your inspector should never offer to do anything other than inspect the property. Any inspector who offers to do the corrective work is creating a conflict of interest to their advantage.
Should I be at the inspection?
Your inspector should also insist that you are present during the property inspection. Even if the house is in perfect condition, your inspector will be able to show you where important items are located, such as: circuit breakers, emergency shut off valves, switches, water systems and more. If it is impossible for you to be at the inspection, make sure you have someone you can trust there on your behalf, such as your agent, a friend or a relative.
What is the American Society of Home Inspectors (ASHI)?
ASHI is a professional association of independent home inspectors. All certified members have performed at least 250 property inspections and have passed two written exams to become a member. They must adhere to ASHI's standards of practice, continuing education requirements and code of ethics.
What does the pre-purchase inspection cover?
Your property inspection should cover all of the property's major structural and mechanical systems inside and out, from the roof to the foundation. A thorough property inspection usually takes about two hours. Remember that you should accept nothing less than a written report.
Should the seller's agent be present during the inspection?
The sellers are more likely to accept the findings of the inspector if their own agent was present during the inspection. The seller will also know that a skilled professional inspected their home. This will help you during negotiations, as the seller will know that they have a legitimate problem that needs to be fixed, whether or not you purchase their home.
How much does the inspection cost?
Many home inspectors base their pricing for inspections on the square footage of the home. Usually the fees charged by competent inspectors are pretty similar. Don't get caught up in $25 off coupons. You definitely don't want a new inspector practicing on you.
Why do I need an inspection if I am buying new construction?
An inspection for new construction is at least as important as if you are purchasing a pre-owned home. It is best to catch any problems early. People are human and problems do occur. Even if the finest team of builders collaborated to construct your home, there could be any number of problems that can't be seen just by looking at them. An inspection guarantees that the home you are buying is up to par. Besides, it's better to find out right away about any problems. It can save you a lot of money.
What types of inspections are there?
The standard home inspection is not the only one that is available. In fact, depending on where you live, some other inspections are required. Talk to your Loan Officer to see what, if any, additional inspections you will need to have done. Some examples of different types of inspections include, but are not limited to, the following:
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