Your Guide to Financing a Home
As a newcomer to the United States, you may not be new to the home-buying process. Even so, it's helpful to review all the steps involved as well as region-specific resources and conditions that make home buying here a pretty rewarding experience.
With hundreds of neighborhoods in every major city, it's important to decide where you'd like to live. That decision you make may be based on a number of factors, including the location of your place of employment, the schools you choose for your children and lifestyle choices - do you want to live in an urban setting or would you prefer a master-planned community with amenities, such as a golf course?
Selecting an Agent
Before you relocate to the area, a good idea is to find an agent who is a relocation specialist or a buyer's agent. A relocation specialist specializes in helping people move to a new area, and many are available through nationwide real estate brokerages. If you're unfamiliar with real estate companies in the United States, you can ask a real estate agent you know in your current city for a company recommendation or affiliation. You can also go online and search for companies that meet your needs and geographic location.
In selecting your real estate agent, consider what's important to you. Questions to ask include:
* Is the real estate agent a Realtor(R)?
* How long has the agent been in the business?
* How many transactions was the agent involved in last year?
* Does the agent work full time or part time?
* Is the agent a good communicator and present himself professionally?
* Does the agent know the community you may be interested in? This will be important as you'll have questions about schools and other facilities in the area.
In addition to helping you find a home, an agent serves as the "manager" of a larger team and is responsible for coordinating other team players at the appropriate time in the process. These other team players include the mortgage company, inspectors, title company, insurance company and possibly an attorney.
Your agent should be able to perform the following as part of his service to you:
* Explain the property tax system in the city of your choice
* Help in creating a budget that will ultimately set the home price
* Explain deed restrictions, homeowner's associations and zoning
* Be knowledgeable of community property laws in the area
* Guide you on purchasing a new home or a resale home
* Ensuring you view neighborhood and homes within your price range
* Negotiation of the best possible price for the home
* Explain the contract
* Be present with you for all inspections
* Ensure that paperwork is expedited among all parties involved
Home Financing Options
A fixed-rated mortgage comes with an interest rate that remains the same for the life of the loan. The life or term of a mortgage is 30 years by industry standards, but 15 and 20-year term loans are also available.
Shorter term loans come with cheaper interest rates. A 15-year mortgage's interest rate is typically one-quarter to one-half percent lower than a 30-year mortgage. Both the cheaper rate and the shorter term mean you'll also pay less over the life of the loan than you would if you borrowed the same amount of money with a long term loan.
Monthly payments of a shorter term loan, however, are generally higher than the same loan for a long term because the larger payments of the short term loan are necessary to repay the debt sooner.
A long-term loan with smaller monthly payments can be easier to budget, but if you have a stable salary that allows you to afford the larger monthly outlay, the shorter term loan could be to your advantage.
Whatever term you choose, fixed rate mortgages protect you from the risk of rising interest rates. Of course, since you are locked in to a given rate, you could end up with a rate higher than the going rate, should rates fall.
Adjustable-rate mortgages or ARMs come with interest rates that adjust up or down, depending upon current economic trends. An ARM's rate is based on a money market index. The one-year U.S. Treasury bill is commonly used because its yield is similar to the 30-year U.S. Treasury bill used to set rates on 30-year fixed mortgages. ARMs might also be tied to other indexes, including certificates of deposit (CDs) or the London Inter-Bank Offer Rate (LIBOR) rates, among other regularly published indexes.
To come up with the ARM rate, the lender will add a "margin," usually two to four percentage points, to the index. Initially, the ARM rate is lower than the fixed rate, from about a quarter point to two points or more, depending upon the economy. When the first adjustment occurs (from six months to many years) and how often the rate adjusts, depends upon the terms of the loan. After the first adjustment occurs, subsequent adjustments can occur every six months, once a year, or during larger periods. The adjustment period is disclosed in the loan.
ARMs generally have limits or "caps" on how high it can adjust during each adjustment period as well as over the life of the loan. The caps protect you from drastic market changes, but ARMs don't offer the stability of a fixed rate loan. ARMs' lower initial rate, however, can help you qualify for a larger loan or start you off with smaller payments than you'd have to pay for the same mortgage with a higher fixed rate. And if index rates fall with an ARM, of course, so does your monthly mortgage.
ARMs could also be a good choice for someone who knows his or her income will rise and at least keep pace with the loan rate's periodic adjustment cap. If you plan to move in a few years and are not concerned about the possibility of a higher rate, an ARM also could be a good choice.
If you plan on a down payment of less than 20 percent, you will need an escrow account. The lender automatically will place a portion of the homeowner's monthly note into an account specifically designated to pay for insurance and taxes, and the mortgage company is responsible for paying the annual bills from that account.
Getting Prequalified and Preapproved
Most professionals in the industry agree that getting prequalified is the first step in the mortgage process. It involves supplying a lender with basic information regarding your debt, income and assets. From this information, lenders can get an idea of the mortgage amount for which you qualify, and it can usually be done at no cost.
Getting preapproved is the next step. The process requires that you complete a mortgage application (and usually pay an application fee) and supply a lender with all the necessary documentation to check your financial background and credit rating. You will then be told the exact mortgage amount for which you are approved.
The obvious advantage of completing both of these steps before you look for a home is knowing in advance how much you can afford to spend. You won't waste time looking at properties beyond your means. The initial prequalification stage allows you to discuss with your lender any goals or needs you may have regarding your mortgage. He or she can then explain your mortgage options and recommend the type that might be best suited to your particular requirements.
Getting preapproved for a mortgage also enables you to move quickly when you find the home of your dreams and make an offer that is not contingent upon obtaining financing. It also lets a seller know your offer is serious and could prevent you from losing out to another purchaser who already has financing arranged.
Now you're ready to look for your dream home. You know your budget and have identified the general location for your home. Without leaving your home or office, you can view details of just about every home for sale via the Internet by going to har.com, which is one of the most popular home search sites.
Once you've selected homes you want to visit, the real estate agent will schedule viewings, typically three to four showings at one time within one area will be scheduled. This allows the buyer to see different neighborhoods and their proximity to work, schools, parks and any other places you consider important.
Making the Offer
You've found the home you love, and now it's time for the agent to make the offer.
Oral promises are not legally enforceable when it comes to the sale of real estate. Therefore, you need to enter into a written contract, which starts with your written proposal. This proposal not only specifies price, but all the terms and conditions of the purchase. For example, if the sellers said they'd help with $2,000 toward your closing costs, be sure that's included in your written offer and in the final completed contract, or you won't have grounds for collecting it later.
Realtors(R) usually have a variety of standard forms (including Residential Purchase Agreements) that are kept up to date with the changing laws. When you use a Realtors(R) these forms will be available to you. In addition, Realtors(R) cover the questions that need to be answered during the process. In many states certain disclosure laws must be complied with by the seller, and the Realtors(R) will ensure that this takes place.
If you are not working with a Realtors(R), keep in mind that you must draw up a purchase offer or contract that conforms to state and local laws and that incorporates all of the key items. State laws vary, and certain provisions may be required in your area.
After the offer is drawn up and signed, it will usually be presented to the seller by your Realtors(R), by the seller's Realtors(R) if that's a different agent, or often by the two together. In a few areas, sales contracts are typically drawn up by the parties' lawyers.
What the offer contains
The purchase offer you submit, if accepted as it stands, will become a binding sales contract (known in some areas as a purchase agreement, earnest money agreement or deposit receipt). It's important, therefore, that it contains all the items that will serve as a "blueprint for the final sale." These purchase offer items include such things as:
-Address and sometimes a legal description of the property
-Terms - for example, all cash or subject to your obtaining a mortgage for a given amount
-Seller's promise to provide clear title (ownership)
-Target date for closing (the actual sale)
-Amount of earnest money deposit accompanying the offer, and whether it's a check, cash or promissory note, and how it's to be returned to you if the offer is rejected, or kept as damages if you later back out for no good reason
-Method by which real estate taxes, rents, fuel, water bills and utilities are to be adjusted (prorated) between buyer and seller
-Provisions about who will pay for title insurance, survey, termite inspections and the like
-Type of deed to be given
-Other requirements specific to your state, which might include a chance for attorney review of the contract, disclosure of specific environmental hazards or other state-specific clauses
-A provision that the buyer may make a last-minute walk-through inspection of the property just before the closing
-A time limit (preferably short) after which the offer will expire
-Contingencies, which are an extremely important matter and discussed in detail below
If your offer says "this offer is contingent upon (or subject to) a certain event," you're saying that you will only go through with the purchase if that event occurs. The following are two common contingencies contained in a purchase order:
-The buyer obtaining specific financing from a lending institution. If the loan can't be found, the buyer won't be bound by the contract.
-A satisfactory report by a home inspector "within 10 days (for example) after acceptance of the offer." The seller must wait 10 days to see if the inspector submits a report that satisfies you. If not, the contract would become void. Again, make sure that all the details are nailed down in the written contract.
You're in a strong bargaining position and will look particularly welcome to a seller if:
-You're an all-cash buyer; or
-You're already preapproved for a mortgage; and
-You don't have a present house that has to be sold before you can afford to buy.
In those circumstances, you may be able to negotiate some discount from the listed price. On the other hand, in a "hot" seller's market, if the perfect house comes on the market, you may want to offer the list price (or more) to beat out other early offers.
It's very helpful to find out why the house is being sold and whether the seller is under pressure. Keep these considerations in mind:
-Every month a vacant house remains unsold represents considerable extra expense for the seller;
-If the sellers are divorcing, they may just want out quickly; and
-Estate sales often yield a bargain in return for a prompt deal.
This is a deposit that you give when making an offer on a house. A seller is understandably suspicious of a written offer that is not accompanied by a cash deposit to show "good faith." A Realtor(R) or an attorney usually holds the deposit, the amount of which varies from community to community. This will become part of your down payment.
Buyers: the seller's response to your offer
You will have a binding contract if the seller, upon receiving your written offer, signs an acceptance just as it stands, unconditionally. The offer becomes a firm contract as soon as you are notified of acceptance. If the offer is rejected, that's that, and the sellers could not later change their minds and hold you to it.
If the seller likes everything except the sale price, or the proposed closing date, or the basement pool table you want left with the property, you may receive a written counteroffer, with the changes the seller prefers. You are then free to accept or reject it or to even make your own counteroffer. For example, "We accept the counteroffer with the higher price, except that we still insist on having the pool table."
Each time either party makes any change in the terms, the other side is free to accept or reject it, or counter again. The document becomes a binding contract only when one party finally signs an unconditional acceptance of the other side's proposal.
Withdrawing an offer
Can you take back an offer? In most cases the answer is yes, right up until the moment it is accepted, or even in some cases, if you haven't yet been notified of acceptance. If you do want to revoke your offer, be sure to do so only after consulting a lawyer who is experienced in real estate matters. You don't want to lose your earnest money deposit, or find yourself being sued for damages the seller may have suffered by relying on your actions.
Before purchasing a home, you want to ensure it is in good condition. A home inspection is an evaluation of a home's condition by a trained expert. During a home inspection, a qualified inspector takes an in-depth and impartial look at the property you plan to buy. The inspector will:
* Evaluate the physical condition: the structure, construction and mechanical systems.
* Identify items that should be repaired or replaced.
* Estimate the remaining useful life of the major systems (such as electrical, plumbing, heating, air conditioning), equipment, structure and finishes.
After the inspection is complete, you will receive a written report of the findings from the home inspector, usually within five to seven days.
It's important to note that an inspection is not an appraisal. A property appraisal is a document that provides an estimate of a property's market value. Lenders require appraisals on properties prior to loan approval to ensure that the mortgage loan amount is not more than the value of the property. Appraisals are for lenders; home inspections are for buyers.
Finding a Qualified Home Inspector
As the homebuyer, it is your responsibility to carefully select a qualified inspector and pay for the inspection.
The following sources may help you find a qualified home inspector:
* State regulatory authorities. Some states require licensing of home inspectors.
* Professional organizations. Professional organizations may require home inspectors to pass tests and meet minimum qualifications before becoming a member.
* Phone book yellow pages. Look under "Building Inspection Service" or "Home Inspection Service."
* The Internet. Search for "Building Inspection Service" or "Home Inspection Service."
* Your real estate agent. Most real estate professionals have a list of home inspectors they recommend.
Purchasing a home typically is the single largest investment most people will make in their lifetime. This is one good reason to have an attorney review and explain all of the documents before the signing. The buyer's real estate agent can recommend a good real estate attorney.
What to expect - Settlement is a brief process where all of the necessary paperwork needed to complete the transaction is signed. Closing is typically held in an office setting, sometimes with both buyer and seller at the same table, sometimes with each party completing their papers separately.
Whatever the case, the result is that title to the property is transferred from seller to buyer. The buyer receives the keys and the seller receives payment for the home. From the amount credited to the seller, the closing agent subtracts money to pay off the existing mortgage and other transaction costs. Deeds, loan papers and other documents are prepared, signed and filed with local property record offices.
What you need to do - One of the best parts of settlement is that buyers and sellers need to do very little. Before closing, buyers typically have a final opportunity to walk through the property to assure that its condition has not materially changed since the sale agreement was signed. At closing itself, all papers have been prepared by closing agents, title companies, lenders and lawyers. This paperwork reflects the sale agreement and allows all parties to the transaction to verify their interests. For instance, buyers get the title to the property, lenders have their loans recorded in the public records and state governments collect their transfer taxes
Why Work with a Realtor?
All real estate licensees are not the same. Only real estate licensees who are members of the National Association of Realtors (NAR) are properly called Realtors. When you begin your home search, consider using a member of the National Association of Realtors
1. Your Realtor(R) can help you determine your buying power - that is, your financial reserves plus your borrowing capacity. If you give a REALTOR(R) some basic information about your available savings, income and current debt, he or she can refer you to lenders best qualified to help you. Most lenders - banks and mortgage companies - offer limited choices.
2. Your Realtor(R) has many resources to assist you in your home search. Sometimes the property you are seeking is available but not actively advertised in the market, and it will take some investigation by your agent to find all available properties.
3. Your Realtor(R) can assist you in the selection process by providing objective information about each property. An agent who is a Realtor(R) have access to a variety of informational resources. A Realtor(R) can provide local community information on utilities, zoning, schools, etc. There are two things you'll want to know. First, will the property provide the environment I want for a home or investment? Second, will the property have resale value when I am ready to sell?
4. Your Realtor(R) can help you negotiate. There are myriads of negotiating factors, including but not limited to price, financing, terms, date of possession and often the inclusion or exclusion of repairs and furnishings or equipment. The purchase agreement should provide a period of time for you to complete appropriate inspections and investigations of the property before you are bound to complete the purchase. Your agent can advise you as to which investigations and inspections are recommended or required.
5. Your Realtor(R) provides due diligence during the evaluation of the property. Depending on the area and property, this could include inspections for termites, dry rot, asbestos, faulty structure, roof condition, septic tank and well tests, just to name a few. Your Realtor(R) can assist you in finding qualified responsible professionals to do most of these investigations and provide you with written reports. You will also want to see a preliminary report on the title of the property. Title indicates ownership of property and can be mired in confusing status of past owners or rights of access. The title to most properties will have some limitations; for example, easements (access rights) for utilities. Your Realtor(R) title company or attorney can help you resolve issues that might cause problems at a later date.
6. Your Realtor(R) can help you in understanding different financing options and in identifying qualified lenders.
7. Your Realtor(R) can guide you through the closing process and make sure everything flows together smoothly.
8. When selling your home, your Realtor(R) can give you up-to-date information on what is happening in the marketplace and the price, financing, terms and condition of competing properties. These are key factors in getting your property sold at the best price, quickly and with minimum hassle.
9. Your Realtor(R) markets your property to other real estate agents and the public. Often, your Realtor(R) can recommend repairs or cosmetic work that will significantly enhance the salability of your property. Your Realtor(R) markets your property to other real estate agents and the public. In many markets across the country, over 50% of real estate sales are cooperative sales; that is, a real estate agent other than yours brings in the buyer. Your Realtor(R) acts as the marketing coordinator, disbursing information about your property to other real estate agents through a Multiple Listing Service or other cooperative marketing networks, open houses for agents, etc. The Realtor(R) Code of Ethics requires Realtor(R) to utilize these cooperative relationships when they benefit their clients.
10. Your REALTOR(R) will know when, where and how to advertise your property. There is a misconception that advertising sells real estate. The National Association Of Realtors(R) studies show that 82 percent of real estate sales are the result of agent contacts through previous clients, referrals, friends, family and personal contacts. When a property is marketed with the help of your Realtor(R), you do not have to allow strangers into your home. Your Realtor(R) will generally prescreen and accompany qualified prospects through your property.
11. Your Realtor(R) can help you objectively evaluate every buyer's proposal without compromising your marketing position. This initial agreement is only the beginning of a process of appraisals, inspections and financing - a lot of possible pitfalls. Your Realtor(R) can help you write a legally binding, win-win agreement that will be more likely to make it through the process.
12. Your Realtor(R) can help close the sale of your home. Between the initial sales agreement and closing (or settlement), questions may arise. For example, unexpected repairs are required to obtain financing or a cloud in the title is discovered. The required paperwork alone is overwhelming for most sellers. Your Realtor(R) is the best person to objectively help you resolve these issues and move the transaction to closing (or settlement).
Who Is Fair Isaac?
Founded in 1956, Fair Isaac uses advanced math and analytics to help businesses make smarter decisions. Besides inventing the FICO(R) score, Fair Isaac has also created other leading tools, including products that help businesses detect credit fraud, manage credit accounts and automate complex business decisions. It is important to note that while Fair Isaac works with the credit reporting agencies to provide your FICO(R) scores, it does not determine the accuracy of the information in your credit report.
Your FICO(R) Score - A Vital Part of Your Credit Health
When you're applying for credit - whether it's a credit card, a car loan, a personal loan or a mortgage - lenders want to know your credit risk level. In other words, "If I give this person a loan or credit card, how likely is it that I will get paid back on time?" There are three major credit reporting agencies in the United States (Equifax, Experian and TransUnion) that maintain records of your use of credit and other information about you.
These records are called credit reports, and lenders will want to check your credit report when you apply for credit. In most cases, lenders will also want to know your credit score. What is a credit score? A credit score is a number that summarizes your credit risk, based on a snapshot of your credit report at a particular point in time. A credit score helps lenders evaluate your credit report and estimate your credit risk.
The most widely used credit scores are FICO(R) scores, the credit scores created by Fair Isaac Corporation. Lenders can buy FICO(R) scores from all three major credit reporting agencies. Lenders use FICO(R) scores to help them make billions of credit decisions every year. Fair Isaac develops FICO(R) scores based solely on information in consumer credit reports maintained at the credit reporting agencies.
Your credit score influences the credit that's available to you and the terms (interest rate, etc.) that lenders offer you. It's a vital part of your credit health. Understanding your FICO(R) score can help you manage your credit health. By knowing how your credit risk is evaluated, you can take actions that may lower your credit risk - and thus raise your credit score - over time. A better FICO(R) score means better financial options for you. More information on FICO(R) scores and credit scoring can be found online at www.myfico.com/crediteducation.
National Credit-Reporting Agencies:
* Equifax 800-685-1111 www.equifax.com.
* Experian 888-397-3742 www.experian.com.
* TransUnion 800-916-8800 www.transunion.com.
Go to www.annualcreditreport.com to ask for a free copy of your credit report, once a year, or call 877-322-8228. See, also, www.FTC.gov.
How a FICO Score Breaks Down
These percentages are based on the importance of five categories for the general population. For particular groups, for example, people who have not been using credit long - the relative importance of these categories may be different.
Types of Credit in Use: (pls create a pie chart)
10% - Types of credit in use
10% - New credit
15% - Length of credit history
30% - Amounts owed
35% - Payment history
Ten Important Questions to Ask Your Home Inspector
1. What does your inspection cover?
The inspector should ensure that their inspection and inspection report will meet all applicable requirements in your state if applicable and will comply with a well-recognized standard of practice and code of ethics. You should be able to request and see a copy of these items ahead of time and ask any questions you may have. If there are any areas you want to make sure are inspected, be sure to identify them upfront.
2. How long have you been practicing in the home inspection profession and how many inspections have you completed?
The inspector should be able to provide his or her history in the profession and perhaps even a few names as referrals. Newer inspectors can be very qualified, and many work with a partner or have access to more experienced inspectors to assist them in the inspection.
3. Are you specifically experienced in residential inspection?
Related experience in construction or engineering is helpful, but is no substitute for training and experience in the unique discipline of home inspection. If the inspection is for a commercial property, then this should be asked about as well.
4. Do you offer to do repairs or improvements based on the inspection?
Some inspector associations and state regulations allow the inspector to perform repair work on problems uncovered in the inspection. Other associations and regulations strictly forbid this as a conflict of interest.
5. How long will the inspection take?
The average on-site inspection time for a single inspector is two to three hours for a typical single-family house; anything significantly less may not be enough time to perform a thorough inspection. Additional inspectors may be brought in for very large properties and buildings.
6. How much will it cost?
Costs vary dramatically, depending on the region, size and age of the house, scope of services and other factors. A typical range might be $300 to $500 but consider the value of the home inspection in terms of the investment being made. Cost does not necessarily reflect quality. HUD does not regulate home inspection fees.
7. What type of inspection report do you provide and how long will it take to receive the report?
Ask to see samples and determine whether or not you can understand the inspector's reporting style and if the time parameters fulfill your needs. Most inspectors provide their full report within 24 hours of the inspection.
8. Will I be able to attend the inspection?
This is a valuable educational opportunity, and an inspector's refusal to allow this should raise a red flag. Never pass up this opportunity to see your prospective home through the eyes of an expert.
9. Do you maintain membership in a professional home inspector association?
There are many state and national associations for home inspectors. Request to see their membership ID, and perform whatever due diligence you deem appropriate.
10. Do you participate in continuing education programs to keep your expertise up to date?
One can never know it all, and the inspector's commitment to continuing education is a good measure of his or her professionalism and service to the consumer. This is especially important in cases where the home is much older or includes unique elements requiring additional or updated training.
Source: U.S. Department of Housing and Urban Development