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BE PREPARED….ASK QUESTIONS…..DO
YOUR RESEARCH!!!!!
If you're like most people, purchasing a home is the biggest
investment you'll ever make. If you're considering buying a
home, you're likely aware of the complexity of the endeavor.
Because of the numerous factors to consider when purchasing
a home, it's important to prepare as best you can. Some common
home-buying principles and caveats are presented here for your
consideration. By keeping them in mind, you'll help create a
successful and more enjoyable experience. These Top Ten lists
are by no means exhaustive. Since your home could cost you 25
to 40 percent of your gross income, it's important to conduct
research, ask questions and study the process carefully. |
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- Looking for a home
without being pre-approved.
As a potential buyer competing for a property, you'll
have a better chance of getting your offer accepted
by being as prepared as possible. Consider this hierarchy
of preparedness:
Neither pre-qualified nor pre-approved
Pre-qualified
Pre-approved
The benefits available at each
level can be easily understood when viewed from the
seller's perspective. Imagine you're a seller in receipt
of multiple offers to purchase your property. A complete
stranger (buyer) is asking you to take your property
off the market for at least the next two to three
weeks while they apply for a loan. As the seller,
lets consider the type of buyer you'd prefer to deal
with.
Neither pre-qualified
nor pre-approved
This buyer provides no evidence that they can afford
to purchase your property. You may wonder how serious
they are since they're not at least pre-qualified.
Pre-qualified
This buyer has met with a mortgage broker (or lender)
and discussed their situation. The buyer has informed
the broker regarding their income, expenses, assets
and liabilities. The broker may also have seen their
credit report. The buyer provided you with a letter
from the broker stating an opinion of what the buyer
can afford.
Pre-approved
This buyer has provided a broker written
evidence of income, expenses, assets, liabilities
and credit. All information has been verified by a
lender. As a result, much of the paperwork for this
buyer's loan has been completed. This buyer will probably
be able to close quickly. They provide you with a
letter (pre-approval certificate) from the lender.
You're as certain as possible that this buyer can
close.
As a potential buyer, you can see that being pre-approved
will give you the best chance of getting your offer
accepted. This is critical in a competitive situation.
- Making verbal agreements. If you're
asked to sign a document containing instructions contrary
to your verbal agreements--don't! For example, the
seller verbally agrees to include the washing machine
in the sale, but the written purchase contract excludes
it. The written contract will override the verbal
contract. More importantly, your state may require
that contracts for the sale of real property be in
writing. Do not expect oral agreements to be enforceable.
- Choosing a lender just because they have
the lowest rate. While the rate is important,
consider the total cost of your loan including the
APR , loan fees, discount and origination points.
When receiving a quote from a lender or broker, insist
that the discount points (charged by the lender to
reduce the interest rate) be distinguished from origination
points (charged for services rendered in originating
the loan).
The cost of the mortgage, however,
shouldn't be your only criterion. Have confidence
that the company you select is reputable and will
deliver the loan with the terms and costs they promised.
If in the final hours of the transaction you determine
that the lender has suddenly increased their profit
margin at your expense, you won't have time to start
again with a different lender. Ask family and friends
for referrals. Interview prospective mortgage companies.
- Not receiving a Good
Faith Estimate. Within three business days
after the broker or lender receives your loan application,
you must receive a written statement of fees associated
with the transaction. This is both the law and the
best way to determine what you'll pay for your loan.
Bring the Good Faith Estimate (GFE) with you when
you sign loan documents. You should not be expected
to pay fees which are substantially different from
those contained in your GFE.
- Not getting a rate
lock in writing. When a mortgage company
tells you they have locked your rate, get a written
statement detailing the interest rate, the length
of the rate lock, and program details.
- Using a dual agent--i.e.,
an agent who represents the buyer and the seller in
the same transaction. Buyers and sellers
have opposing interests. Sellers want to receive the
highest price, buyers want to pay the lowest price.
In the standard real estate transaction, the seller
pays the real estate commission. When an agent represents
both buyer and seller, the agent can tend to negotiate
more vigorously on behalf of the seller. As a buyer,
you're better off having an agent representing you
exclusively. The only time you should consider a dual
agent is when you get a price break. In that case,
proceed cautiously and do your homework!
- Buying a home without
professional inspections. Unless you're buying
a new home with warranties on most equipment, it's
highly recommended that you get property, roof and
termite inspections. This way you'll know what you
are buying. Inspection reports are great negotiating
tools when asking the seller to make needed repairs.
When a professional inspector recommends that certain
repairs be done, the seller is more likely to agree
to do them.
If the seller agrees to make repairs, have your inspector
verify that they are done prior to close of escrow.
Do not assume that everything was done as promised.
- Not shopping for
home insurance until you are ready to close.
Start shopping for insurance as soon as you have an
accepted offer. Many buyers wait until the last minute
to get insurance and do not have time to shop around.
- Signing documents
without reading them. Whenever possible,
review in advance the documents you'll be signing.
(Even though some specifics of your transaction may
not be known early in the transaction, the documents
you'll sign are standard forms and are available for
review.) It's unlikely that you'll have sufficient
time to read all the documents during the closing
appointment.
- Not allowing for
delays in the transaction. In a perfect world,
all real estate transactions close on time. In the
world we live in, transactions are often delayed a
week or more. Suppose you asked your landlord to terminate
your lease the day your purchase transaction was scheduled
to close. A day or two before your scheduled closing
date, you discover your transaction is delayed a week.
In a perfect world, no one is inconvenienced and your
landlord is willing to work with you. More likely,
however, your landlord is inconvenienced and angry.
Will you be thrown out? Will you have to find interim
housing for a week or more? The eviction process takes
a little time, so the Sheriff won't immediately remove
you, but this type of stress-producing episode can
be avoided. How? Terminate your lease one week after
your real estate transaction is scheduled to close.
That way, if there is a delay in closing your transaction,
you have some leeway. This approach might cost a little
more, then again, it might not.
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- Refinancing with your existing
lender without shopping around. Your existing
lender may not have the best rates and programs. There
is a general misconception that it is easier to work
with your current lender. In most cases, your current
lender will require the same documentation as other
companies. This is because most loans are sold on
the secondary market and have to be approved independently.
Even if you have made all your mortgage payments on
time, your existing lender will still have to verify
assets, liabilities, employment, etc. all over again.
- Not doing a break-even analysis.
Determine the total cost of the transaction, then
calculate how much you will save every month. Divide
the total cost by the monthly savings to find the
number of months you will have to stay in the property
to break even. Example: if your transaction costs
$2000 and you save $50/month, you break even in 2000/50
= 40 months. In this case you'd refinance if you planned
to stay in your home for at least 40 months.
Note: This is a simplified break-even analysis. If
you are refinancing considering switching from an
adjustable to a fixed loan, or from a 30-year loan
to a 15-year loan, the analysis becomes much more
complex.
- Not getting a written good-faith
estimate of closing costs. See item number
four above.
- Paying for an appraisal
when you think your home value may be too low.
Have the appraisal company prepare a desk review appraisal
(typically at no charge) to provide you with a range
of possible values. Your mortgage company's appraiser
may do this for you. Do not waste your money on a
full appraisal if you are doubtful about the value
of your home.
- Using the county tax-assessor's
value as the market value of your home. Mortgage
companies do not use the county tax-assessor's value
to determine whether they will make the loan. They
use a market-value appraisal which may be very different
from the assessed value.
- Signing your loan documents
without reviewing them. See item number nine
above.
- Not providing documents
to your mortgage company in a timely manner.
When your mortgage company asks you for additional
documents, provide them immediately. They are doing
what's necessary to get your loan approved and closed.
Delays in providing documents can result in a costly
delays.
- Not getting a rate lock
in writing. When a mortgage company tells
you they have locked your rate, get a written statement
which includes the interest rate, the length of the
rate lock and details about the program.
- Pulling cash out of your
credit line before you refinance your first mortgage.
Many lenders have cash-out seasoning requirements.
This means that if you pull cash out of your credit
line for anything other than home improvements, they
will consider the refinance to be a cash-out transaction.
This usually results in stricter requirements and
can, in some cases, break the deal!
- Getting a second mortgage
before you refinance your first mortgage.
Many mortgage companies look at the combined loan
amounts (i.e., the first loan plus the second) when
refinancing the first mortgage. If you plan on refinancing
your first loan, check with your mortgage company
to find out if getting a second will cause your refinance
transaction to be turned down.
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- Not knowing if your loan has a pre-payment
penalty clause. If you are getting a "NO
FEE" home-equity loan, chances are there's a
hefty pre-payment penalty included. You'll want to
avoid such a loan if you are planning to sell or refinance
in the next three to five years.
- Getting too large a credit line.
When you get too large a credit line, you can be turned
down for other loans because some lenders calculate
your payments based upon the available credit--not
the used credit. Even when your equity line has a
zero balance, having a large equity line indicates
a large potential payment, which can make it difficult
to qualify for other loans.
- Not understanding the difference between
an equity loan and an equity line. An equity
loan is closed--i.e., you get all your money up front
and make fixed payments until it is paid if full.
An equity line is open--i.e., you can get numerous
advances for various amounts as you desire. Most equity
lines are accessed through a checkbook or a credit
card. For both equity loans and lines, you can only
be charged interest on the outstanding principal balance.
Use an equity loan when you need all the money up
front--e.g., for home improvements, debt consolidation,
etc. Use an equity line when you have a periodic need
for money, or need the money for a future event--e.g.,
childrens' college tuition in the future.
- Not checking the lifecap on your equity
line. Many credit lines have lifecaps of
18 percent. Be prepared to make payments at the highest
potential rate.
- Getting a home-equity loan from your local
bank without shopping around. Many consumers
get their equity line from the bank with which they
have their checking account. By all means, consider
your bank, but shop around before making a commitment.
- Not getting a good-faith estimate of closing
costs. See item number four above.
- Assuming that your home-equity loan is
fully tax-deductible. In some instances,
your home-equity loan is NOT tax deductible. Do not
depend on your mortgage company for information regarding
this matter--check with an accountant or CPA.
- Assuming that a home-equity loan is always
cheaper than a car loan or a credit card.
Even after deducting interest for income tax purposes,
a credit card can be cheaper than a credit line. To
find out, compare the effective rate of your home-equity
line with the rate on your credit card or auto loan.
Effective rate = rate * (1 - tax bracket)
Example: The rate of the home-equity line is 12 percent,your
tax bracket is 30 percent, your effectiverateis: .12
* (1 - .3) = .12 * .7 = .084 = 8.4 percent.
If your credit card is higher than 8.4 percent, the
equity loan is cheaper.
- Getting a home-equity line of credit when
you plan to refinance your first mortgage in the near
future. Many mortgage companies look at the
combined loan amounts (i.e., the first loan plus the
second) when refinancing the first mortgage. If you
plan on refinancing your first, check with your mortgage
company to find out if getting a second will cause
your refinance to be turned down.
- Getting a home-equity line to pay off your
credit cards when your spending is out of control!
When you pay off your credit cards with an equity
line, don't continue to abuse your credit cards. If
you can't manage the plastic, tear it up!
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