Where do I Start?
For many, beginning the homebuying process can be overwhelming. You may be uncertain about taking the initial steps. I hope this guide will help clear up some of those uncertainties by providing you with some useful information about the homebuying process.
When is the right time to start talking to a professional, and who do I choose?
Anytime you have questions you want answered is the right time to start. You can begin with either a Realtor or a lender. A Realtor can help you assess your financial picture, counsel you through the entire homebuying process, find a home that suits you and introduce you to a lender who can work with you on a financing package that meets your needs. A Realtor will work through all the intricacies of the transaction until close of escrow. A lender will work with you on the loan process and can preapprove you for a loan before you even begin house-hunting.
If it happens that you are not ready for any of this, both professionals will be happy simply to provide you with information.
How do I choose a Realtor?
In today's market, finding and purchasing a home can be a very involved and a complicated process. It is essential to find a Realtor who is qualified and dedicated to providing you with the best representation. It is best that you hire a Realtor who is a Broker. A Broker has more education, knowledge and skills than a Realtor who only has a Sales license. Always check the Department of Real Estate to see how long the Realtor has had a license and if they are in good standing. You can go to: www.dre.org . Once you have found that the Realtor is experienced and a full-time professional who knows the market in the area in which you are interested, determine if they know the available inventory in your location and price range. Ask for and check for references.
Your Realtor should have the time and energy to devote to you and your search for a home. Perhaps most importantly, choose an agent with whom you have a personal rapport.
Buying a home is an intimate type of business transaction. Trying to go through the process with someone you can't relate to will not work. Find a qualified Broker who you like, one who matches your personality and meets your individual needs. This will make the home purchase experience much more enjoyable.
What happens after I have chosen a Broker Realtor and spoken with a lender?
Given your price range, decide what kind of home you want and need. Think about size, location, special features such as fireplace and garage.
Begin looking at properties with your Realtor Broker so you have a good basis for making a final decision. Assess whether the home you can afford to purchase is the right home for you. If this is not the case, you may be unrealistic in your expectations and may need to adjust them to suit your budget.
When you find the home you like, make an offer to purchase. Your Realtor Broker's knowledge of the market and market values will assist you in making sure the price you offer represents good value for the property.
I've found the home I want. I've made the offer. What happens next?
The seller may accept your offer, reject your offer, or make a counter offer. If your offer is rejected, you can make another offer or look for a different house. If the seller makes a counter offer, you can either accept that offer or counter with yet another offer. Negotiations may continue back and forth until you and the seller agree to a final purchase price and terms of the contract. When this agreement is reached, the offer is "ratified". Your Realtor will now be required to deposit the specifed amount as per your contract, into an escrow account with a Title Company. During the escrow period, which is usually 30 to 40 days, certain conditions ("contingencies") specified in the contract must be met or waived within agreed-upon time periods.
These conditions typically include: having a professional inspection of the property, obtaining formal loan approval from the lender, and reviewing the seller's disclosures.
When Will I Actually Own The Home?
You will own the home when all conditions of the contract are met and escrow closes. The following are some of the conditions commonly found in home purchase contracts:
Finding a loan for the amount and at the terms stated in the contract. You should have a pre approved loan with a lender prior to submitting an offer to purchase the property.
Receiving a satisfactory report on the condition of the home by a professional home inspector, and a termite inspector. Obtaining any other inspections you deem necessary. If major problems are discovered, you do not have to buy the home or you can renegotiate the contract.
Conducting a title search and ensuring the property is free of any legal claims against it. You will also have to buy title insurance for yourself and the lender, in case a problem with the title arises after you purchase the house.
Purchasing homeowner's or hazard insurance is required by the lender.
Asking and receiving satisfactory answers to any and all questions you have about the property.
Obtaining disclosures from the seller informing the buyer of any fact which the seller is aware of that would materially affect the value of the property.
The seller must make any repairs to the home which are agreed upon in the contract, you may purchase property in its present condition or ask the seller to credit money in escrow for repairs.
Just prior to close of escrow, your loan becomes effective (it "funds"). The escrow officer will explain the closing documents which you must sign. One of these is a HUD-1 settlement form from the lender. This form, required by federal law, itemizes the services and costs to the buyer and seller. You will also be required to pay the closing costs and the rest of the downpayment, either wired or by a cashier's check, to the title company at least 2 days prior to closing escrow.
The title company formally records the new deed of trust, and you go "on record" as the new owner. You get the keys to your new home and, it's yours!
How important is my credit?
In addition to verifying income, a lender will want a credit report showing that a borrower has repaid monthly debts on a timely and regular basis. It would be a good idea to examine your credit history prior to submitting a mortgage application. If you discover any discrepancies, be sure to notify the credit bureau to correct them, because any unexplained credit delinquencies can be a basis for a disapproval by a lender.
Many delinquent or late payment accounts can be resolved by writing a detailed explanatory letter to the credit bureau. There are several national credit bureaus that provide credit reports for a nominal fee. Listed below are the credit bureaus commonly used by the lending industry.
Equifax Information Service
P.O. Box 740241 Atlanta, GA 30374-0241
(800) 685-1111 ($8.00 service charge)
TRW Credit Data
P.O. Box 749029Dallas,TX 75374-9029
(1 free yearly)
When writing to the above agencies, provide your full name, present address, previous 5 year addresses, social security number, date of birth, and a verification of your name and present address (e.g. a copy of a billing statement).
How do I find the best loan?
Loans are available from a number of sources, including banks, mortgage companies, federal credit unions and financial companies. Your Realtor can be a good source of information about various lenders.
Assessing current needs and future objectives
You can simplify your search for the right loan if you start with a clear understanding of your plans for the property. Such an understanding requires some soul-searching on you part as to your personal and financial goals.
Are you looking to build equity quickly? Are you expecting increases in your income?
Is there a strong possibility of a career change or other situation which might cause you to have to move in the near future?
To what extent will the tax deductions from your home's interest payments affect your present and future tax situation?
Are you planning any major improvements? If so, how will they be financed?Before you start looking for homes, it is important to have a good idea of how much you can put down and how much you can afford in monthly payments.
You may intend to put 20% of the purchase price as a downpayment. There are loans available with as little as 5% down, although lenders may charge somewhat higher fees or interest on these. Also, a downpayment less than 20% often includes a requirement from the lender that you purchase private mortgage insurance (PMI) as a protection against possible default.
In addition to the downpayment, lenders want to determine if a borrower has enough stable income to make payments on a mortgage. Typically, they do not want a borrower's total housing costs, principal, interest, taxes, and insurance (PITI), to exceed 33 percent of his/her monthly income. The "33" is sometimes called a "top" ratio. Also, total housing costs plus other monthly expenses (car payments, student loans, credit cards, etc.) should not exceed 38 percent of the borrower's total gross income. These parameters are not absolute. Some buyers may qualify at a higher debt-to-income ratio
Types of loans
Today's borrower can choose from several types of loans. Some loans feature the same rate and payment amount for the duration of the loan (Fixed). Others are more flexible. Their rates and payment schedules can adjust to reflect changing economic factors (Adjustable). Still others offer a convertible feature, enabling you to convert from one type of loan to another after a period of time.
Fixed rate loans
Predictability is the key feature of a fixed rate loan. You can be certain that your rate and payment will never change as long as you have the loan. This makes it easier to plan and budget your finances.
Adjustable rate loans (ARMs)
ARM interest rates are tied to-and fluctuate to reflect changes in-a published financial index. When those index rates go up or down, ARM rates do too. By law, the index a lender uses cannot be controlled by that lender (e.g. a bank cannot use its prime rate as an index). Common indices include 11th District Cost of Funds, one-year T-note, and six-month T-bill. ARMs are easier to qualify for than fixed rate loans because the interest start rate is lower.
Glossary of lending terms
Annual payment capsAn annual cap limits the amount of change in payment that can occur. The maximum amount of change is usually 7.5% of the previous year's monthly payment. Payments cannot exceed that cap, no matter what the index rate does during the year. If, for example, your monthly payment is $1,000, it cannot go up by more than $75 per month the following year.
Annual percentage rate (APR)
APR is the effective interest rate over its projected life. It includes interest plus all other costs such as lender fees and closing costs (escrow, title insurance, appraisal fee, processing, etc.) Your loan's APR is a reflection of what you'll be paying annually for the loan and a good way to compare with other loans. Your lender is required by law to quote the APR when quoting an interest rate.
Expenses in addition to the price of the home incurred by buyers and sellers when a home is sold. Common closing costs include escrow fees, title insurance fees, document recording fees and real estate commissions.
There are a number of them. Some move sharply over relatively short time spans. Others change more slowly over longer period of time.
Interest rate adjustment caps
ARMs that don't have an annual payment cap will usually offer an annual cap of up to 2% of interest rates adjustments.
Lifetime interest rate caps
This feature puts a ceiling on the rate to which an ARM loan can be adjusted over the life of the loan. If the rate ever reaches the lifetime cap, the borrower has a fixed rate loan at that rate until the index falls again, and the rate can be adjusted downward.
Unlike fixed rate mortgages, many ARM loans can be assumed by a qualified borrower. This can be a valuable benefit when the time comes to sell the home.
The interest rate for an ARM loan reflects the index plus a fixed margin. The margin covers the lender's operating expenses and profit. The margin amount must be included in the loan document, and can not change once the loan is funded.
Negative amortization can occur when the payment is not large enough to cover the full amount of interest due. The borrower can choose whether he wants to pay the additional amount or have it added to the loan balance.
No prepayment penalty
Most ARMs can be paid off either fully or partially with no penalty.
One point equals 1 percent of the mortgage amount. Typically lenders charge from zero to two points. Loan points are tax deductible.
Also called a rate-lock, this is a lender's promise to commit to a certain interest rate on a loan, usually for 30 to 60 days.
Deciding on a Lender
It is important to find a lender you can depend on to provide you a loan at a competitive rate. In addition, you want your application processed swiftly and accurately at reasonable cost. The lending institution's stability, experience and commitment should also be examined.
Your Realtor can help you find a lender with a financing package that meets your needs.
What is an escrow and why is it needed?
An escrow is an arrangement in which a disinterested third party, called an escrow holder, holds legal documents and funds on behalf of a buyer and seller, and distributes them according to the buyer's and seller's instructions.
People buying and selling real estate often open an escrow for their protection and convenience. The buyer can instruct the escrow holder to disburse the purchase price only upon the satisfaction of certain prerequisites and conditions. The seller can instruct the escrow holder to retain possession of the deed until the seller's requirements, including receipt of the purchase price, are met. Both rely on the escrow holder to carry out faithfully their mutually consistent instructions relating to the transaction and to advise them if any of their instructions are not mutually consistent or cannot be carried out.
An escrow is convenient for the buyer and seller because both can move forward separately but simultaneously in providing inspections, reports, loan commitments and funds, deeds, and many other items using the escrow holder as the central depositing point. If the instructions from all parties to an escrow are clearly drafted, fully detailed and mutually consistent, the escrow holder can take many actions on their behalf without further consultation. This saves much time and facilitates the closing of the transaction.
Who may hold escrows
The escrow holder may be any disinterested third party (some states require escrow holders to be licensed). Escrow officers with established firms generally are experienced and trained in real estate procedures, title insurance, taxes, deeds and insurance.
An escrow officer must remain completely impartial throughout the entire escrow process.He or she must follow instructions of both parties without bias.
Escrow instructions are written documents, signed by the parties giving them, which direct the escrow officer in the specific steps to be completed so the escrow can be closed. Typical instructions might include: the method by which the escrow holder is to receive and hold the purchase price to be paid by the buyer; the conditions under which a lapse of time or breach of purchase contract provision will terminate the escrow without a closing; instructions on the payment of prior liens.
Closing the escrow
Once the terms and conditions of the instructions of both parties have been fulfilled, the escrow is closed and the safe and accurate transfer of property and money has been accomplished.
The escrow holder facilitates real estate sales or purchases by:
Acting as the impartial depository of documents and funds.- Keeping all parties informed of progress on escrow.
Responding to lender's requirements
Securing a title insurance policy
Prorating and adjusting insurance, taxes, etc
Recording the deed and loan documents
It's not always that simple
Every escrow is unique and most are more complex than explained here. If you have further questions, contact an escrow officer or attorney to provide more detailed information.
What protection does title insurance provide?
Title insurance protects against any matter affecting the past ownership of the property. Title insurance is issued after the title company carefully examines copies of the public record. However, even the most thorough search cannot absolutely assure that no title hazards are present, despite the knowledge ad experience of professional title examiners. In addition to matters shown by public records, other title problems may exist that cannot be disclosed in a search.
Some common hidden risks that can cause a loss of title or create an encumbrance on title:
False impersonation of the true owner of the property
Forged deeds, releases, or wills
Undisclosed or missing heirs
Instruments executed under invalid or expired power of attorney
Mistakes in recording legal documents
Misinterpretations of wills
Deeds by persons of unsound mind
Deeds by minors
Deeds by persons supposedly single, but in fact married
Liens for unpaid estate, inheritance, income or gift taxes
Title insurance will pay for defending against any lawsuit attacking your title problems or pay the insured's losses. For a one time premium, and owner's title insurance policy remains in effect as long as you or your heirs retain an interest in the property, or have any obligation under a warranty in any conveyance of it.
By combining expertise in risk elimination at the time of issuing a policy, and protection against hidden risks as long as the policy remains in effect, your title insurer protects against title loss.For more detailed information on title insurance, contact a title officer at your title company.
I hope you have found this information helpful. It is designed to be of general interest, and while the content is reliable, it is not intended as a substitute for the advice of professional lenders, accountants, escrow officers, attorneys, etc. Before acting on any matter contained herein, you should consult with your professional adviser.
Do not hesitate to call or email me if you have any questions .