Your lender will consider these factors when assessing the types of mortgages appropriate for you. Remember, though, that you need to be conservative in estimating the amount of total debt your household can comfortably carry. Just because you qualify for a ‘stretch’ loan doesn’t mean you should take it.
Key factors in the mortgage include:
- The required down payment
- Both the interest rate and the annual percentage rate (APR)
- Standard closing costs and fees
- Requirements from secondary lenders, such as Fannie Mae and Freddie Mac, that might acquire your mortgage. These secondary lenders prefer cookie-cutter, standardized loans so they can assemble portfolios of identical mortgages for investors. If your situation is unusual – for instance, if you are self-employed or have an erratic income – you might not be able to get a loan that conforms to the secondary market. That will significantly complicate your ability to secure a mortgage.
The most common types of mortgages include:
Conventional Mortgages. A conventional mortgage offers a fixed rate, typically for 10, 15 or 30 years. The down payment requirement will likely range from 10% to 20% or even more. If you put less than 20% down, you’ll be asked to carry private mortgage insurance (PMI). If you’re a first-time homebuyer, you might qualify for a loan through a Federal program, such as the FHA, or a state program, geared for first-time or moderate-income buyers. These loans typically require smaller down payments.
Adjustable rate mortgages. Adjustable rate mortgages carry an interest rate that changes to reflect current market rates. This is an option for buyers planning to stay in their home for a short time. If you plan to stay in the home for an extended period of time, you may be better off locking in a fixed rate with a conventional loan. When deciding whether an ARM is right for you, determine the following:
- Will I be able to afford higher mortgage payments if interest rates go up?
- Will I be making other sizable purchases in the near future such as a car or college?
- How long do I plan to own this home?
FHA mortgages. Loans through The Federal Housing Administration (FHA) help low-to-moderate income home buyers purchase homes with low down payments (historically, 3%). Rules for FHA loans have been changing, so check with your lender for the latest parameters.
VA mortgages. Veteran Affairs loans may provide the opportunity to buy a home with no down payment. They are offered up to a predetermined loan amount (not more than $200,000) and might be assumable by qualified buyers. Check with your lender to learn the current rules applying to VA loans.
Assumable mortgages. An assumable mortgage is a loan that stays with the property. It is simply transferred to the qualified home buyer. This means considerable savings for the next buyer. It may include no points, no interest rate change and low closing costs. Assumable mortgages are often the most valuable part of a property. An assumable loan can be a marketing advantage when you sell the house because the new owner can take over the loan payments. However, parameters for government-backed loans have been changing, so always check with your lender for the latest rules.
Balloon mortgages. The balloon mortgage has a fixed rate for a certain time frame, typically seven years, followed by a "balloon" payment requiring repayment of the entire home loan balance. Interest rates are generally lower than conventional loans. People may choose this type of loan because they plan on either selling the home, paying it off, or refinancing before the balloon payment is due. Balloon mortgages were in favor during the housing bubble, but have since fallen in popularity because many borrowers could not afford the balloon payments.
Private mortgage insurance. If you put less than 20% down on a loan, you will likely have to pay PMI or Private Mortgage Insurance. PMI protects the lender against a loss in the event of default by the borrower. You can ask your mortgage company to remove the PMI if you’ve paid 20% of the loan. However, you will be asked to provide an appraisal.
Most lenders require you pay real estate taxes and insurance on a monthly basis. This cost is included in your monthly mortgage payment, placed in an escrow account, and paid out by your mortgage company.
Most people consider househunting the most enjoyable part of the home buying process.
If you choose to buy a property directly from the owner, the home seller may reduce the price by the %2-3% commission that would typically be diverted to the listing agent.
Experienced home buyers are likely comfortable with dealing directly with a “by owner” seller, though of course, they will still want to engage a real estate attorney to review the contract and ensure that they are complying with all state laws regarding real estate transactions.
First time buyers may want to engage a buyer’s agent. A buyer’s agent has a fiduciary responsibility to you.
It can be confusing to sort out a real estate agent’s loyalty. If you are simply ‘working with’ an agent who is showing you houses, that agent probably actually is loyal to the seller...even if that agent did not list the seller’s house. To ensure than an agent is completely loyal to your interests, is looking out for your financial wellbeing (that’s the ‘fiduciary responsibility’), and will maintain confidentiality about your finances and buying considerations, you must sign a ‘buyer’s agent’ contract. If you have not contracted specifically with the agent to represent you, it is possible that the agent’s fiduciary responsibility to the listing agent and the home seller.
Beginning your home search
Using your home-search priorities as a guide, start looking for houses you can afford in the neighborhoods that best suit your needs.
Hang out in local coffee shops and parks. Attend neighborhood events. Go to open houses. Talk with friends and co-workers. Look at the neighborhood association and municipal websites.
Keep a log of the houses you are interested in. Take photos and collect listing sheets so you can compare details. This will help you stay organized and remember what you’ve seen.
Where to find listings of homes for sale
ForSaleByOwner.com – This is the largest website for “by owner” sales. These owners are committed to pricing their houses realistically and working with buyers directly to help them capture the best value. These listings typically include extensive details about the houses.
Realtor.com – Operated by the National Association of Realtors, Realtor.com is by far the largest collection of listings in the country. It includes ForSaleByOwner.com listings from sellers who specifically requested that their houses be placed on Realtor.com. By looking at Realtor.com, you are in good company; 93% of househunters start their home search online, according to the NAR. Listings typically include the basic property data, or more, depending on the effort of the listing agent.
Craigslist.com – This popular online classified service is rich with listings, both by agents and ‘by owner.’ Craigslist is organized by geography, and can be difficult to search. You will need to scroll through it daily to see the latest listings.
Newspapers – Sunday papers are a rich trove of listings, news and analysis about the local real estate market. Many newspaper web sites offer handy email services that can update you when new listings that fit your specifications become available.
Multiple Listing Service – If you are working with a buyer’s broker, your broker will scan listings posted by other agents to this commonly owned and operated database of houses for sale. In the past, MLS listings have been for agents’ eyes only. But now it is common for agencies to put all MLS listings on their websites. Don’t hesitate to look at MLS listings on brokers’ sites, but be wary of the fiduciary responsibility of any agent who offers to show you a house you inquire about. If you are in doubt, specifically ask the agent about any legal obligations that you might incur before you go to see a house. In some states, simply being shown a house by an agent means that the agent is owed a 3% commission — even if you thought you were buying the house directly from the owner.
Yard Signs – Even in the internet age, yard signs are still important. If you are getting familiar with a new neighborhood, you will notice new “for sale” yard signs.
Making an Offer
Once you’ve found a house that looks promising, you will want to research the price parameters of recently sold, similar houses. This will ensure that you are making an offer consistent with recently completed sales – and it increases the chance that your offer will be confirmed by the appraiser your lender will assign to confirm the validity of the deal.
A comparable market analysis (CMA) lists the recent sale information of nearby homes, including how long each home stayed on the market, how close the asking price was to the actual sale price and other factors. It then compares the information regarding these houses with the one in question. If you’re using an agent, she will do this for you to help you determine a realistic price. There are several online appraisal services that can provide you the same information as a CMA. Zillow.com offers a popular service. You can also check local property tax records to find recently sold houses within a short radius of the house you are considering. To order an Electronic Appraisal click here http://www.forsalebyowner.com/pricing_report/
As you go through this buying process, remember that everything is negotiable, and everything should be in writing. You should be very specific when you prepare your purchase offer, and the sellers should be equally specific when they issue their counter offer.
Here are tips for smart negotiating:
- Work with an experienced local real estate lawyer.
- Don’t make a verbal offer.
- Don’t offer full price unless the home is a real steal. You need room to negotiate.
- Include a home inspection contingency. This enables you to cancel the deal if you inspector unearths major problems that can’t be fixed efficiently or economically.
- Make sure the contract includes an "out" in the event you cannot secure financing.
Earnest money proves to house sellers that you’re serious. After all, they’re going to take their home off the market on your behalf. Earnest money is typically between 1% -5% of the purchase price. The money should be held by an attorney or title company in escrow. Never give the money directly to the house seller. Such a deposit does not mean you’re bound to the contract. Your full deposit is credited toward the down payment and closing costs.
Once your offer is accepted, it becomes a binding contract, so be sure to include the necessary contingencies. Contingencies are clauses that, if not met, will render the contract null and void. Common contingencies are the sale being subject to approved financing, the sale of an existing home and/or a satisfactory home inspection.
You’ve made your offer. Now you need to have an expert verify exactly what you are purchasing.
A formal inspection determines if anything needs to be repaired or replaced. Be sure the purchase contract spells out who pays for the inspection and how you will work out with the seller who covers any necessary repairs. The contract should also include a contingency in case the inspection reveals flaws that cannot be resolved with the seller.
Licensed home inspectors inspect homes to determine what, if anything needs repairing or replacing. Typical inspections may include.
- Termites – signs of termites in the home or foundation.
- Plumbing – checks for leaks, dripping faucets, toilet tank leaks, etc.
- Electrical – does it meet the local building code? Do all outlets and switches work properly? Can the electric service handle the current?
- Exterior – settling cracks, paint peeling, structural problems, likely flooding.
- Interior – signs of leaks in walls or ceilings, structure and general condition.
- The roof – leaks or damage.
- Windows – condition and age.
- Insulation – is it in good enough shape to buffer the interior from extreme heat and cold?
- Appliances, and heating and cooling systems – do they work efficiently? Are breakdowns likely?
- Radon gas – an odorless and colorless gas that is sometimes found in the earth’s rock and soil.
- Lead-based paint – some older homes may still have lead-based paint that can be hazardous if ingested by children.
- Asbestos – homes built in the early 1970s and before often had asbestos tile floors and asbestos ceiling tiles. This substance poses a health risk and must be removed.
The home inspector will write up an inspection report with all minor and major defects itemized. Good inspectors will find minor flaws in nearly any home. It’s up to you to decide if these flaws are deal-killers. It’s also important to tour the house with your inspector so you can get an introduction to its mechanics and condition. To find an inspector click here http://www.forsalebyowner.com/pro/search
When the inspection is done, it’s time to move into the title and closing phase.
Title Insurance, Appraisal and Homeowner’s Insurance
Some people can get confused about this stage of the real estate transaction, but with a little knowledge and guidance, it’s easy to understand. We’ll break down the basics for you.
When you buy a home, a title company examines the chain of titles (previous owners) to insure that there are no problems with obtaining clear title to the property. Parties other than the current owner of the home may have rights to it for things such as mortgages, liens due to unpaid taxes, lien claims to those who the owner owes money for home improvement projects and so on. As a new owner, you may know nothing about these risks, but you are still vulnerable to such claims on your property. A deed is not sufficient protection. That’s why title insurance is necessary.
It is very common for title companies to also handle the escrow portion of the transaction, meaning they serve as a neutral party to exchange funds and make sure both parties adhere to the agreed upon terms of the contract. To find a title/escrow company click here http://www.forsalebyowner.com/pro/search
Some real estate agencies have partnerships, or own, title insurance companies so they can keep this lucrative stream of fees in–house. If an agent recommends a title insurer to you, ask if the insurer is owned or affiliated with the real estate agency. Keep shopping around to find the best rate for the title search and closing services.
Lenders require appraisals to confirm that the home for which they’re providing you a loan is in fact worth what you intend to pay. From 2008 to 2010, appraisal regulations shifted abruptly and often. Be sure to be aware of the current regulations that set parameters for what appraisers can and cannot do.
However, you are allowed – even encouraged – to work with the seller to furnish the appraiser with documentation that supports the purchase price. This documentation can include receipts and permits for home improvements and upgrades; listing sheets and tax records for comparable, recently sold properties; and evidence that some recently sold neighborhood properties were foreclosures or distress sales and thus not appropriate comparisons for your sale. The fees appraisers charge vary and are typically built into your loan costs.
Your lender may also require a location survey that certifies the house is within the boundaries of the lot. The lender often selects the surveyor, but you may have a choice.
If you are not assuming the seller’s homeowner’s policy, you will need to buy your own. Title will not be transferred until you can prove you have the home covered by insurance. This protects you and the lender from the unforeseen, such as fire, flood, tornados, or any other damage to the home. You may also consider additional levels of insurance to cover natural disasters that are more prevalent in your area.
Compare home insurance rates by clicking here http://www.forsalebyowner.com/insurance
Escrow and Closing
When the closing is schedule, you are getting close to the finish line. At the closing, your seller officially signs over the title to the house. Your lender releases the purchase funds to the buyer, and of course, you sign reams of documents pledging to pay back your lender.
The escrow agent conducts the closing and is often affiliated with the title insurance company. Their job is to ensure the buyer obtains a clean title, the lender obtains a good mortgage, that the costs of the transaction are paid, that the seller’s mortgage is paid off, and that the seller receives their proceeds.
The escrow agent prepares a closing statement that outlines what the required funds are, who’s paying and where the funds are to be deposited. The agent will not disburse funds until they can guarantee that the above noted items have been taken care of.
To learn more about title/escrow, click here http://www.forsalebyowner.com/pro/search
Utilities – Water, gas and electric meters will be read on the day of closing and the seller will owe for the utility usage up until that day. You may also need to make deposits with both the water and electric companies.
Service Contracts – If you are taking over any service contracts from the home seller, you will owe the seller for the unused portion of those contracts that have been pre-paid. These could include pest control, pool and/or lawn services, home maintenance contracts, etc.
The check – The title/escrow company you are using will tell you how much you need to bring to closing. Personal checks are not accepted, so bring a cashier’s check.
Home Warranty – You might want to purchase a home warranty, especially if the heating and cooling systems and major appliances are not new. The warranty will cover the repair or replacement costs in case items such as appliances break down after you purchase the home.