Buyer Q & A
When discovering your dream home lots of questions can arise. As your local real estate expert and Realtor®, I work by a code of ethics that has been in place for over 100 years. When you partner with me, I will perform my due diligence and work with your greatest benefit in mind in every transaction. We have the solutions to your home buying needs.
Question 1: What price home can I afford?
As a “rule of thumb” you can afford to buy a home equal in price to twice your gross annual income. More precisely, the price you can afford to pay for a home will depend on six factors:
- Your income
- The amount of cash you have available for the down payment, closing costs and cash reserves required by the lender
- Your outstanding debts
- Your credit history
- The type of mortgage you select
- Current interest rates
Lenders will analyze your income in relation to your projected cost of the home and outstanding debts. This will determine the size loan you can borrow. Your housing expense-to-income ratio is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your loan, property taxes and hazard insurance. The sum of these costs is referred to as “PITI.”
If you’re purchasing a condominium or townhouse monthly homeowner association dues and private mortgage insurance are added to the PITI. Your housing income-to-expense ratio should fall in the 28 to 33 percent range. 28 percent of your gross monthly income is allotted toward PITI. 33 percent of your gross monthly income is allowed for PITI and all long term debt. Your total income-to-debt ratio should not exceed 34 to 38 percent of your gross income.
Question 2: How do I find out about the condition of the home I’m considering?
It is strongly recommended that you hire a professional to inspect the home. Many inspectors belong to the American Society of Home Inspectors (ASHI) in order to stay abreast of the latest developments.
Some states require sellers to complete a disclosure form revealing everything known about their property. Home sellers are required to indicate any significant defects or malfunctions existing in the home’s major systems. A checklist specifies interior and exterior walls, ceilings, roof, insulation, windows, fences, driveway, sidewalks, floors, doors, foundation, as well as the electrical and plumbing systems.
Sellers are also asked to note the presence of environmental hazards, walls or fences shared with adjoining landowners, any encroachment of easements, room additions or repairs made without the necessary permits or not in compliance with building codes, zoning violations, citations against the property and lawsuits against the seller affecting the property.
Also look for settling, sliding or soil problems, flooding or drainage problems.
When purchasing a condominium you will need to know about any covenants, codes and restrictions or other deed restrictions, as well as, if the homeowners association has any authority over the subject property and ownership of common areas with others. Be sure to ask questions about anything that remains unclear or does not seem to be properly addressed by the forms provided to you.
Question 3: How low can I consider offering?
There are always some sellers who for some reason must sell quickly, however in general, a very low offer in a normal market might be rejected immediately. In a strong buyer’s market, the below-market offer will usually either be accepted or generate a counteroffer. If few offers are being made, an outright rejection of offers becomes unlikely. In a strong seller’s market, offers are often higher than full price. While it is true that offers at or above full price are more likely to be accepted by the seller, there are other considerations involved:
- Is the offer contingent upon anything, such as the sale of the buyer’s current house? If so, such an offer, even at full price, may not be as attractive as an offer without that condition.
- Is the offer made on the house “as is,” or does the buyer want the seller to make some repairs before the close of escrow or make a price concession instead?
- Is the offer all cash, meaning the buyer has waived the financing contingency? If so, then an offer at less than the asking price may be more attractive to the seller than a full-price offer with a financing contingency.
- Are there any requests for seller concessions, such as asking the seller to contribute towards points and/or closing costs? If so, the offer is not really full price.
Question 4: How and what do I negotiate?
Different sellers price houses very differently. Some deliberately overprice, others ask for pretty close to what they hope to get and a few underprice their homes in the hope that potential buyers will compete and overbid. A seller’s advertised price should be treated only as a rough estimate of what they would like to receive.
If possible try to learn about the seller’s motivation. For example, a lower price with a speedy escrow may be more acceptable to someone who must move quickly due to a job transfer. People going through a divorce or are eager to move into another home are frequently more receptive to lower offers.
Some buyers believe in making deliberate low-ball offers. While any offer can be presented to the seller, a low-ball offer often sours a prospective sale and discourages the seller from negotiating at all. Unless the house is extremely overpriced, the offer probably will be rejected anyway.
Before making an offer, ask your real estate agent how much comparable homes have sold for in the area so that you can determine whether the home is priced right.
Question 5: How much down payment should I put down?
Various types of loan programs exist. Some require a minimum of 3 percent down payment (FHA Loans) or 5 percent on conventional loans. Veterans can purchase with no money down (VA Loan).
Putting down as little as possible allows buyers to take full advantage of the tax benefits of home ownership. Mortgage interest and property taxes are fully deductible from state and federal income taxes. Buyers using a small down payment also have a reserve for making unexpected improvements. It may be more prudent to make a larger down payment and thereby reduce the amount of debt that must be financed. Once a buyer puts twenty percent or more as a down payment on their desired home, they will waive the requirement for mortgage insurance.
Mortgage insurance is a requirement on all loans, with the exception of veterans guaranteed loans. That means a full years premium for the insurance is collected “up front’ at the closing of escrow, plus you will be paying monthly as part of your PITI, principle-interest-taxes-insurance.
Question 6: What is title insurance?
Title insurance is a form of insurance for an owner, lessee, mortgage or other holder of an estate lien, or other interest in real property. It indemnifies against loss up to the face amount of the policy, suffered by reason of title being vested otherwise than as stated, or because of defects in the title, liens and encumbrances not set forth or otherwise specifically excluded in the policy, whether or not in the public land records, and other matters included within the policy form, such as lack of access to the property, loss due to unmarketability of title, etc. The title policy form sets forth the specific risks insured against. Additional coverage of related risks may also be added by endorsements to the policy or by the inclusion of additional affirmation insurance to modify or supersede the impact of certain exceptions, exclusions or printed policy “conditions.” The policy also protects the insured for liability on various warranties of title.
Additionally, the policy provides protection in an unlimited amount against costs and expenses incurred in defending the insured estate or interest.
Before it issues a title policy, the title insurance company conducts an extensive search, examination and interpretation of the legal effect of all relevant public records to determine the existence of possible rights, claims, liens or encumbrance that affect the property.
However, even the most comprehensive title examination, made by the most highly skilled attorney or lay expert, cannot protect against all title defects and claims. These are commonly referred to as the “hidden risks.” The most common examples of these hidden risks are fraud, forgery, alteration of documents, impersonation, secret marital status, incapacity of parties (whether they be individuals, corporations, trusts or any other type), and inadequate or lack of powers of REALTORS® or fiduciaries. Some other hidden risks include various laws and regulations that create or permit interests, claims and liens without requiring that they first be filed or recorded in some form so that the potential buyers and lenders can find them before parting with their money.
Since the cost for home owner’s title insurance is usually sharply reduced when taken simultaneously with the issuance of a purchase money mortgage, the risk is one that a well-informed buyer should not take. In fact, several states have adopted statutory requirements which require a notice to home buyers as to the availability of title insurance similar to that being obtained by their purchase money mortgages.
Question 7: What steps should I take when looking for a home loan?
It is strongly recommended that home buyers are prequalified or pre-approved for a loan as their first step in the process. By being prequalified, a buyer knows exactly how much house they can afford. They can make more informed decisions in the market place. This does not mean they will definitely get the loan because their credit reports, wages and bank statements still need to be verified before you can receive a commitment from the lender for the loan.
Almost all mortgage lenders prequalify people at no charge. Our in-house loan officer can assist with this process. In order to be pre-approved, an application will be taken. For a fee, your credit report will be pulled, and your employment, income, checking, and savings accounts will also be verified. The only things remaining will be for you to find a home, obtain an appraisal to prove its value to the bank and perform whatever inspections you may want on the property. This process considerably shortens the time frame to closing.
Question 8: Is it possible to negotiate interest rates?
Occasionally some lenders are willing to negotiate on both the loan rate and the number of points. This isn’t typical among many of the established lenders who set their rates. Always look at the combination of interest rate and points to get the best deal possible. This is reflected in what is called the APR or Actual Percentage Rate.
The interest rate is much more open to negotiation on purchases that involve seller financing. Generally, these are based on market rates but some flexibility exists when negotiating such a deal.
Question 10: Fixer-Uppers – Are they good or bad?
Distressed properties or fixer-uppers can be found everywhere. These properties are poorly maintained and have a lower market value than other houses in the neighborhood. It is often recommended that buyers find the least desirable house in the best neighborhood. You must consider if the expenses needed to bring the value of that property to its full potential market value are within your budget. Most buyers should avoid run-down houses that need major structural repairs.
Question 11: Can you borrow the money to repair?
HUD’s Rehabilitation loan program, Section 203(K) is a program designed to facilitate major structural rehabilitation of houses with one to four units that are more than one year old. Condominiums are not eligible.
A 203(K) loan is frequently done as a combination loan. You purchase a “fixer-upper” property “as is” and rehabilitate it. Or, you may refinance a temporary loan to buy the property and do the rehabilitation. It can also be done as a rehabilitation-only loan.
Investors are required to put 15 percent down. Owner-occupants have a required down payment of 3 to 5 percent. A minimum of $5,000 must be spent on major improvements.
Major repairs can be: a new heating system, roof, replacement windows, etc. You may then also finance additional repairs and improvements i.e.: new carpeting, kitchen cabinets, appliances, etc. You must of course “qualify” for the total amount you will be borrowing through this program.
Two appraisals are required. These appraisals will be on the property “as repaired” not “as is.” Plans and specifications for the proposed word must be submitted for architectural review and cost estimation. Once approved mortgage proceeds are advanced periodically during the rehabilitation period to finance the construction costs.
Question 12: Is there a good “return” for my efforts?
Remodeling a home improves its livability and enhances curb appeal, making it more salable to potential buyers. Some of the popular improvement communities are updated kitchens and baths, enlarged master bedroom suits, home-office additions and increased amenities in older homes.
The resale market is often difficult because you are competing with new construction. You need to give your home every competitive advantage you can if you are selling an older home.
Home offices are a relatively new remodeling trend. Adding one to a house often recoups 58 percent of the costs, according to a survey found in a report called “Cost vs. Value Report” in Remodeling Magazine.
I look forward to working with you and will be available to answer your questions and concerns. Reach out to me today whether you want to find your next home, upgrade from where you are, or purchase your first home.