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 principals 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.
- 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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