- 10 Steps for Buyers
- 5 Common Buyer Mistakes
- Why use a Realtor
- Questions to ask a Realtor
- 7 reasons to buy
- Tax Benifits
- Stress free home buying
- Specialty Mortgages
- Loan Types
- Creative Financing
- Lender Checklists
- 10 Lender questions
- Finances to-do list
- Budget Basics
- Improving your credit
- 5 Credit factors
- What can I afford?
- What about short sales?
- 8 final tips
10 Ways to Prepare for Home Ownership 1. Decide what you can afford. Generally, you can afford a home equal in value to between two and three times your gross income. 2. Develop your home wish list. Then, prioritize the features on your list. 3. Select where you want to live. Compile a list of three or four neighborhoods you’d like to live in, taking into account items such as schools, recreational facilities, area expansion plans, and safety. 4. Start saving. Do you have enough money saved to qualify for a mortgage and cover your down payment? Ideally, you should have 20 percent of the purchase price saved as a down payment. Also, don’t forget to factor in closing costs. Closing costs — including taxes, attorney’s fee, and transfer fees — average between 2 and 7 percent of the home price. 5. Get your credit in order. Obtain a copy of your credit report to make sure it is accurate and to correct any errors immediately. A credit report provides a history of your credit, bad debts, and any late payments. 6. Determine your mortgage qualifications. How large of mortgage do you qualify for? Also, explore different loan options — such as 30-year or 15-year fixed mortgages or ARMs — and decide what’s best for you. 7. Get pre-approved. Organize all the documentation a lender will need to pre-approve you for a loan. You might need W-2 forms, copies of at least one pay stub, account numbers, and copies of two to four months of bank or credit union statements. 8. Weigh other sources of help with a down payment. Do you qualify for any special mortgage or down payment assistance programs? Check with your state and local government on down payment assistance programs for first-time buyers. Or, if you have an IRA account, you can use the money you’ve saved to buy your fist home without paying a penalty for early withdrawal. 9. Calculate the costs of homeownership. This should include property taxes, insurance, maintenance and utilities, and association fees, if applicable. 10. Contact a REALTOR®. Find an experienced REALTOR® who can help guide you through the process.
5 Common First-Time Home Buyer Mistakes 1. They don’t ask enough questions of their lender and end up missing out on the best deal. 2. They don’t act quickly enough to make a decision and someone else buys the house. 3. They don’t find the right agent who’s willing to help them through the homebuying process. 4. They don’t do enough to make their offer look appealing to a seller. 5. They don’t think about resale before they buy. The average first-time buyer only stays in a home for four years. Source: Real Estate Checklists and Systems, www.realestatechecklists.com.
Why You Should Work With a REALTOR® Not all real estate practitioners are REALTORS®. The term REALTOR® is a registered trademark that identifies a real estate professional who is a member of the NATIONAL ASSOCIATION of REALTORS® and subscribes to its strict Code of Ethics. Here are five reasons why it pays to work with a REALTOR®. 1. You’ll have an expert to guide you through the process. Buying or selling a home usually requires disclosure forms, inspection reports, mortgage documents, insurance policies, deeds, and multi-page settlement statements. A knowledgeable expert will help you prepare the best deal, and avoid delays or costly mistakes. 2. Get objective information and opinions. REALTORS® can provide local community information on utilities, zoning, schools, and more. They’ll also be able to provide objective information about each property. A professional will be able to help you answer these two important questions: 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? 3. Find the best property out there. Sometimes the property you are seeking is available but not actively advertised in the market, and it will take some investigation by your REALTOR® to find all available properties. 4. Benefit from their negotiating experience. There are many negotiating factors, including but not limited to price, financing, terms, date of possession, and inclusion or exclusion of repairs, furnishings, or equipment. In addition, 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. Property marketing power. Real estate doesn’t sell due to advertising alone. In fact, a large share of real estate sales comes as the result of a practitioner’s contacts through previous clients, referrals, friends, and family. When a property is marketed with the help of a REALTOR®, you do not have to allow strangers into your home. Your REALTOR® will generally prescreen and accompany qualified prospects through your property. 6. Real estate has its own language. If you don’t know a CMA from a PUD, you can understand why it’s important to work with a professional who is immersed in the industry and knows the real estate language. 7. REALTORS® have done it before. Most people buy and sell only a few homes in a lifetime, usually with quite a few years in between each purchase. And even if you’ve done it before, laws and regulations change. REALTORS®, on the other hand, handle hundreds of real estate transactions over the course of their career. Having an expert on your side is critical. 8. Buying and selling is emotional. A home often symbolizes family, rest, and security — it’s not just four walls and a roof. Because of this, home buying and selling can be an emotional undertaking. And for most people, a home is the biggest purchase they’ll ever make. Having a concerned, but objective, third party helps you stay focused on both the emotional and financial issues most important to you. 9. Ethical treatment. Every member of the NATIONAL ASSOCIATION of REALTORS® makes a commitment to adhere to a strict Code of Ethics, which is based on professionalism and protection of the public. As a customer of a REALTOR®, you can expect honest and ethical treatment in all transaction-related matters. It is mandatory for REALTORS® to take the Code of Ethics orientation and they are also required to complete a refresher course every four years.
Questions to Ask When Choosing a REALTOR® Make sure you choose a REALTOR® who will provide top-notch service and meet your unique needs. 1. How long have you been in residential real estate sales? Is it your full-time job? While experience is no guarantee of skill, real estate — like many other professions — is mostly learned on the job. 2. What designations do you hold? Designations such as GRI and CRS® — which require that agents take additional, specialized real estate training — are held by only about one-quarter of real estate practitioners. 3. How many homes did you and your real estate brokerage sell last year? By asking this question, you’ll get a good idea of how much experience the practitioner has. 4. How many days did it take you to sell the average home? How did that compare to the overall market? The REALTOR® you interview should have these facts on hand, and be able to present market statistics from the local MLS to provide a comparison. 5. How close to the initial asking prices of the homes you sold were the final sale prices? This is one indication of how skilled the REALTOR® is at pricing homes and marketing to suitable buyers. Of course, other factors also may be at play, including an exceptionally hot or cool real estate market. 6. What types of specific marketing systems and approaches will you use to sell my home? You don’t want someone who’s going to put a For Sale sign in the yard and hope for the best. Look for someone who has aggressive and innovative approaches, and knows how to market your property competitively on the Internet. Buyers today want information fast, so it’s important that your REALTOR® is responsive. 7. Will you represent me exclusively, or will you represent both the buyer and the seller in the transaction? While it’s usually legal to represent both parties in a transaction, it’s important to understand where the practitioner’s obligations lie. Your REALTOR® should explain his or her agency relationship to you and describe the rights of each party. 8. Can you recommend service providers who can help me obtain a mortgage, make home repairs, and help with other things I need done? Because REALTORS® are immersed in the industry, they’re wonderful resources as you seek lenders, home improvement companies, and other home service providers. Practitioners should generally recommend more than one provider and let you know if they have any special relationship with or receive compensation from any of the providers. 9. What type of support and supervision does your brokerage office provide to you? Having resources such as in-house support staff, access to a real estate attorney, and assistance with technology can help an agent sell your home. 10. What’s your business philosophy? While there’s no right answer to this question, the response will help you assess what’s important to the agent and determine how closely the agent’s goals and business emphasis mesh with your own. 11. How will you keep me informed about the progress of my transaction? How frequently? Again, this is not a question with a correct answer, but it reflects your desires. Do you want updates twice a week or do you not want to be bothered unless there’s a hot prospect? Do you prefer phone, e-mail, or a personal visit? 12. Could you please give me the names and phone numbers of your three most recent clients? Ask recent clients if they would work with this REALTOR® again. Find out whether they were pleased with the communication style, follow-up, and work ethic of the REALTOR®.
7 Reasons to Own Your Home 1. Tax breaks. The U.S. Tax Code lets you deduct the interest you pay on your mortgage, your property taxes, as well as some of the costs involved in buying your home. 2. Appreciation. Real estate has long-term, stable growth in value. While year-to-year fluctuations are normal, median existing-home sale prices have increased on average 6.5 percent each year from 1972 through 2005, and increased 88.5 percent over the last 10 years, according to the NATIONAL ASSOCIATION OF REALTORS®. In addition, the number of U.S. households is expected to rise 15 percent over the next decade, creating continued high demand for housing. 3. Equity. Money paid for rent is money that you’ll never see again, but mortgage payments let you build equity ownership interest in your home. 4. Savings. Building equity in your home is a ready-made savings plan. And when you sell, you can generally take up to $250,000 ($500,000 for a married couple) as gain without owing any federal income tax. 5. Predictability. Unlike rent, your fixed-mortgage payments don’t rise over the years so your housing costs may actually decline as you own the home longer. However, keep in mind that property taxes and insurance costs will increase. 6. Freedom. The home is yours. You can decorate any way you want and benefit from your investment for as long as you own the home. 7. Stability. Remaining in one neighborhood for several years gives you a chance to participate in community activities, lets you and your family establish lasting friendships, and offers your children the benefit of educational continuity. Online resources: To calculate whether buying is the best financial option for you, use the “Buy vs. Rent” calculator at www.GinnieMae.gov.
Tax Benefits of Home Ownership The tax deductions you’re eligible to take for mortgage interest and property taxes greatly increase the financial benefits of home ownership. Here’s how it works. Assume: $9,877 = Mortgage interest paid (a loan of $150,000 for 30 years, at 7 percent, using year-five interest) $2,700 = Property taxes (at 1.5 percent on $180,000 assessed value) ______ $12,577 = Total deduction Then, multiply your total deduction by your tax rate. For example, at a 28 percent tax rate: 12,577 x 0.28 = $3,521.56 $3,521.56 = Amount you have lowered your federal income tax (at 28 percent tax rate) Note: Mortgage interest may not be deductible on loans over $1.1 million. In addition, deductions are decreased when total income reaches a certain level.
Take the Stress Out of Homebuying Buying a home should be fun, not stressful. As you look for your dream home, keep in mind these tips for making the process as peaceful as possible. 1. Find a real estate agent who you connect with. Home buying is not only a big financial commitment, but also an emotional one. It’s critical that the REALTOR® you chose is both highly skilled and a good fit with your personality. 2. Remember, there’s no “right” time to buy, just as there’s no perfect time to sell. If you find a home now, don’t try to second-guess interest rates or the housing market by waiting longer — you risk losing out on the home of your dreams. The housing market usually doesn’t change fast enough to make that much difference in price, and a good home won’t stay on the market long. 3. Don’t ask for too many opinions. It’s natural to want reassurance for such a big decision, but too many ideas from too many people will make it much harder to make a decision. Focus on the wants and needs of your immediate family — the people who will be living in the home. 4. Accept that no house is ever perfect. If it’s in the right location, the yard may be a bit smaller than you had hoped. The kitchen may be perfect, but the roof needs repair. Make a list of your top priorities and focus in on things that are most important to you. Let the minor ones go. 5. Don’t try to be a killer negotiator. Negotiation is definitely a part of the real estate process, but trying to “win” by getting an extra-low price or by refusing to budge on your offer may cost you the home you love. Negotiation is give and take. 6. Remember your home doesn’t exist in a vacuum. Don’t get so caught up in the physical aspects of the house itself — room size, kitchen, etc. — that you forget about important issues as noise level, location to amenities, and other aspects that also have a big impact on your quality of life. 7. Plan ahead. Don’t wait until you’ve found a home and made an offer to get approved for a mortgage, investigate home insurance, and consider a schedule for moving. Presenting an offer contingent on a lot of unresolved issues will make your bid much less attractive to sellers. 8. Factor in maintenance and repair costs in your post-home buying budget. Even if you buy a new home, there will be costs. Don’t leave yourself short and let your home deteriorate. 9. Accept that a little buyer’s remorse is inevitable and will probably pass. Buying a home, especially for the first time, is a big financial commitment. But it also yields big benefits. Don’t lose sight of why you wanted to buy a home and what made you fall in love with the property you purchased. 10. Choose a home first because you love it; then think about appreciation. While U.S. homes have appreciated an average of 5.4 percent annually over from 1998 to 2002, a home’s most important role is to serve as a comfortable, safe place to live.
Specialty Mortgages: Risks and Rewards In high-priced housing markets, it can be difficult to afford a home. That’s why a growing number of home buyers are forgoing traditional fixed-rate mortgages and standard adjustable-rate mortgages and instead opting for a specialty mortgage that lets them “stretch” their income so they can qualify for a larger loan. But before you choose one of these mortgages, make sure you understand the risks and how they work. Specialty mortgages often begin with a low introductory interest rate or payment plan — a “teaser”— but the monthly mortgage payments are likely to increase a lot in the future. Some are “low documentation” mortgages that come with easier standards for qualifying, but also higher interest rates or higher fees. Some lenders will loan you 100 percent or more of the home’s value, but these mortgages can present a big financial risk if the value of the house drops. Specialty Mortgages Can: Pose a greater risk that you won’t be able to afford the mortgage payment in the future, compared to fixed rate mortgages and traditional adjustable rate mortgages. Have monthly payments that increase by as much as 50 percent or more when the introductory period ends. Cause your loan balance (the amount you still owe) to get larger each month instead of smaller. Common Types of Specialty Mortgages: Interest-Only Mortgages: Your monthly mortgage payment only covers the interest you owe on the loan for the first 5 to 10 years of the loan, and you pay nothing to reduce the total amount you borrowed (this is called the “principal”). After the interest-only period, you start paying higher monthly payments that cover both the interest and principal that must be repaid over the remaining term of the loan. Negative Amortization Mortgages: Your monthly payment is less than the amount of interest you owe on the loan. The unpaid interest gets added to the loan’s principal amount, causing the total amount you owe to increase each month instead of getting smaller. Option Payment ARM Mortgages: You have the option to make different types of monthly payments with this mortgage. For example, you may make a minimum payment that is less than the amount needed to cover the interest and increases the total amount of your loan; an interest-only payment, or payments calculated to pay off the loan over either 30 years or 15 years. 40-Year Mortgages: You pay off your loan over 40 years, instead of the usual 30 years. While this reduces your monthly payment and helps you qualify to buy a home, you pay off the balance of your loan much more slowly and end up paying much more interest. Questions to Consider Before Choosing a Specialty Mortgage: How much can my monthly payments increase and how soon can these increases happen? Do I expect my income to increase or do I expect to move before my payments go up? Will I be able to afford the mortgage when the payments increase? Am I paying down my loan balance each month, or is it staying the same or even increasing? Will I have to pay a penalty if I refinance my mortgage or sell my house? What is my goal in buying this property? Am I considering a riskier mortgage to buy a more expensive house than I can realistically afford? Be sure you work with a REALTOR® and lender who can discuss different options and address your questions and concerns! Learn about the NATIONAL ASSOCIATION OF REALTORS® Housing Opportunity Program at www.REALTORS.org/housingopportunity. For more information on predatory mortgage lending practices, visit the Center for Responsible Lending at www.responsiblelending.org
Loan Types to Consider Brush up on these mortgage basics to help you determine the loan that will best suit your needs. Mortgage terms. Mortgages are generally available at 15-, 20-, or 30-year terms. In general, the longer the term, the lower the monthly payment. However, you pay more interest overall if you borrow for a longer term. Fixed or adjustable interest rates. A fixed rate allows you to lock in a low rate as long as you hold the mortgage and, in general, is usually a good choice if interest rates are low. An adjustable-rate mortgage is designed so that your loan’s interest rate will rise as market interest rates increase. ARMs usually offer a lower rate in the first years of the mortgage. ARMs also usually have a limit as to how much the interest rate can be increased and how frequently they can be raised. These types of mortgages are a good choice when fixed interest rates are high or when you expect your income to grow significantly in the coming years. Balloon mortgages. These mortgages offer very low interest rates for a short period of time — often three to seven years. Payments usually cover only the interest so the principal owed is not reduced. However, this type of loan may be a good choice if you think you will sell your home in a few years. Government-backed loans. These loans are sponsored by agencies such as the Federal Housing Administration ( www.fha.gov) or the Department of Veterans Affairs (www.va.gov) and offer special terms, including lower down payments or reduced interest rates to qualified buyers. Slight variations in interest rates, loan amounts, and terms can significantly affect your monthly payment. For help in determining how much your monthly payment will be for various loan amounts, use Fannie Mae’s online mortgage calculators (www.fanniemae.com/homebuyers/calculators).
6 Creative Ways to Afford a Home 1. Investigate local, state, and national down payment assistance programs. These programs give qualified applicants loans or grants to cover all or part of your required down payment. National programs include the Nehemiah program, www.getdownpayment.com, and the American Dream Down Payment Fund from the Department of Housing and Urban Development, www.hud.gov. 2. Explore seller financing. In some cases, sellers may be willing to finance all or part of the purchase price of the home and let you repay them gradually, just as you would do with a mortgage. 3. Consider a shared-appreciation or shared-equity arrangement. Under this arrangement, your family, friends, or even a third-party may buy a portion of the home and share in any appreciation when the home is sold. The owner/occupant usually pays the mortgage, property taxes, and maintenance costs, but all the investors’ names are usually on the mortgage. Companies are available that can help you find such an investor, if your family can’t participate. 4. Ask your family for help. Perhaps a family member will loan you money for the down payment or act as a co-signer for the mortgage. Lenders often like to have a co-signer if you have little credit history. 5. Lease with the option to buy. Renting the home for a year or more will give you the chance to save more toward your down payment. And in many cases, owners will apply some of the rental amount toward the purchase price. You usually have to pay a small, nonrefundable option fee to the owner. 6. Consider a short-term second mortgage. If you can qualify for a short-term second mortgage, this would give you money to make a larger down payment. This may be possible if you’re in good financial standing, with a strong income and little other debt.
Lender Checklist: What You Need for a Mortgage • W-2 forms — or business tax return forms if you’re self-employed — for the last two or three years for every person signing the loan. • Copies of at least one pay stub for each person signing the loan. • Account numbers of all your credit cards and the amounts for any outstanding balances. • Copies of two to four months of bank or credit union statements for both checking and savings accounts. • Lender, loan number, and amount owed on other installment loans, such as student loans and car loans. • Addresses where you’ve lived for the last five to seven years, with names of landlords if appropriate. • Copies of brokerage account statements for two to four months, as well as a list of any other major assets of value, such as a boat, RV, or stocks or bonds not held in a brokerage account. • Copies of your most recent 401(k) or other retirement account statement. • Documentation to verify additional income, such as child support or a pension. • Copies of personal tax forms for the last two to three years
10 Questions to Ask Your Lender 1. What are the most popular mortgages you offer? Why are they so popular? 2. Which type of mortgage plan do you think would be best for me? Why? 3. Are your rates, terms, fees, and closing costs negotiable? 4. Will I have to buy private mortgage insurance? If so, how much will it cost, and how long will it be required? (NOTE: Private mortgage insurance is usually required if your down payment is less than 20 percent. However, most lenders will let you discontinue PMI when you’ve acquired a certain amount of equity by paying down the loan.) 5. Who will service the loan — your bank or another company? 6. What escrow requirements do you have? 7. How long will this loan be in a lock-in period (in other words, the time that the quoted interest rate will be honored)? Will I be able to obtain a lower rate if it drops during this period? 8. How long will the loan approval process take? 9. How long will it take to close the loan? 10. Are there any charges or penalties for prepaying the loan? Used with permission from Real Estate Checklists & Systems, www.realestatechecklists.com.
Get Your Finances in Order: To-Do List 1. Develop a household budget. Instead of creating a budget of what you’d like to spend, use receipts to create a budget that reflects your actual spending habits over the last several months. This approach will factor in unexpected expenses, such as car repairs, as well as predictable costs such as rent, utility bills, and groceries. 2. Reduce your debt. Lenders generally look for a total debt load of no more than 36 percent of income. This figure includes your mortgage, which typically ranges between 25 and 28 percent of your net household income. So you need to get monthly payments on the rest of your installment debt — car loans, student loans, and revolving balances on credit cards — down to between 8 and 10 percent of your net monthly income. 3. Look for ways to save. You probably know how much you spend on rent and utilities, but little expenses add up, too. Try writing down everything you spend for one month. You’ll probably spot some great ways to save, whether it’s cutting out that morning trip to Starbucks or eating dinner at home more often. 4. Increase your income. Now’s the time to ask for a raise! If that’s not an option, you may want to consider taking on a second job to get your income at a level high enough to qualify for the home you want. 5. Save for a down payment. Designate a certain amount of money each month to put away in your savings account. Although it’s possible to get a mortgage with only 5 percent down, or even less, you can usually get a better rate if you put down a larger percentage of the total purchase. Aim for a 20 percent down payment. 6. Keep your job. While you don’t need to be in the same job forever to qualify for a home loan, having a job for less than two years may mean you have to pay a higher interest rate. 7. Establish a good credit history. Get a credit card and make payments by the due date. Do the same for all your other bills, too. Pay off the entire balance promptly.
Budget Basics Worksheet The first step in getting yourself in financial shape to buy a home is to know exactly how much money comes in and how much goes out. Use this worksheet to list your income and expenses below. INCOME Take Home Pay (all family members): Child Support/Alimony: Pension/Social Security: Disability/Other Insurance: Interest/Dividends: Other: Total Income: EXPENSES Rent/mortgage (including taxes, principal, and insurance): Life insurance: Health/Disability Insurance: Vehicle Insurance: Homeowner’s or Other Insurance: Car Payments: Other Loan Payments: Savings/Pension Contribution: Utilities (gas, water, electric, phone): Credit Card Payments: Car Upkeep (gas, maintenance, etc.): Clothing: Personal Care Products (shampoo, cologne, etc.): Groceries: Food Outside the Home (restaurant meals and carryout): Medical/Dental/Prescriptions: Household Goods (hardware, lawn, and garden): Recreation/Entertainment: Child Care: Education (continuing education, classes, etc.): Charitable Donations: Miscellaneous: Total Expenses: Remaining Income After Expenses (subtract total income from total expenses):
What You Can Do to Improve Your Credit Credit scores, along with your overall income and debt, are big factors in determining whether you’ll qualify for a loan and what your loan terms will be. So, keep your credit score high by doing the following: 1. Check for and correct any errors in your credit report. Mistakes happen, and you could be paying for someone else’s poor financial management. 2. Pay down credit card bills. If possible, pay off the entire balance every month. Transferring credit card debt from one card to another could lower your score. 3. Don’t charge your credit cards to the maximum limit. 4. Wait 12 months after credit difficulties to apply for a mortgage. You’re penalized less for problems after a year. 5. Don’t order items for your new home on credit — such as appliances and furniture — until after the loan is approved. The amounts will add to your debt. 6. Don’t open new credit card accounts before applying for a mortgage. Too much available credit can lower your score. 7. Shop for mortgage rates all at once. Too many credit applications can lower your score, but multiple inquiries from the same type of lender are counted as one inquiry if submitted over a short period of time. 8. Avoid finance companies. Even if you pay the loan on time, the interest is high and it will probably be considered a sign of poor credit management. This information is copyrighted by the Fannie Mae Foundation and is used with permission of the Fannie Mae Foundation. To obtain a complete copy of the publication, Knowing and Understanding Your Credit, visit www.homebuyingguide.org.
5 Factors That Decide Your Credit Score Credit scores range between 200 and 800, with scores above 620 considered desirable for obtaining a mortgage. The following factors affect your score: 1. Your payment history. Did you pay your credit card obligations on time? If they were late, then how late? Bankruptcy filing, liens, and collection activity also impact your history. 2. How much you owe. If you owe a great deal of money on numerous accounts, it can indicate that you are overextended. However, it’s a good thing if you have a good proportion of balances to total credit limits. 3. The length of your credit history. In general, the longer you have had accounts opened, the better. The average consumer’s oldest obligation is 14 years old, indicating that he or she has been managing credit for some time, according to Fair Isaac Corp., and only one in 20 consumers have credit histories shorter than 2 years. 4. How much new credit you have. New credit, either installment payments or new credit cards, are considered more risky, even if you pay them promptly. 5. The types of credit you use. Generally, it’s desirable to have more than one type of credit — installment loans, credit cards, and a mortgage, for example. For more on evaluating and understanding your credit score, visit www.myfico.com.
How Big of a Mortgage Can I Afford? Not only does owning a home give you a haven for yourself and your family, it also makes great financial sense because of the tax benefits — which you can’t take advantage of when paying rent. The following calculation assumes a 28 percent income tax bracket. If your bracket is higher, your savings will be, too. Based on your current rent, use this calculation to figure out how much mortgage you can afford. Rent: _________________________ Multiplier: x 1.32 Mortgage payment: _________________________ Because of tax deductions, you can make a mortgage payment — including taxes and insurance — that is approximately one-third larger than your current rent payment and end up with the same amount of income. For more help, use Fannie Mae’s online mortgage calculators (www.fanniemae.com)
What if the Property Is a Short Sale? Are you looking to buy a new home? Are you thinking that now’s a great time to find bargains? Before you make an offer, it pays to know a little about the seller’s situation. If a home is being sold for below what the current seller owes on the property—and the seller does not have other funds to make up the difference at closing—the sale is considered a short sale. Many more home owners are finding themselves in this situation due to a number of factors, including job losses, aggressive borrowing against their home in the days of easy credit, and declining home values in a slower real estate market. A short sale is different from a foreclosure, which is when the seller’s lender has taken title of the home and is selling it directly. Homeowners often try to accomplish a short sale in order to avoid foreclosure. But a short sale holds many potential pitfalls for buyers. Know the risks before you pursue a short-sale purchase. You’re a good candidate for a short-sale purchase if: • You’re very patient. Even after you come to agreement with the seller to buy a short-sale property, the seller’s lender (or lenders, if there is more than one mortgage) has to approve the sale before you can close. When there is only one mortgage, short-sale experts say lender approval typically takes about two months. If there is more than one mortgage with different lenders, it can take four months or longer for the lenders to approve the sale. • Your financing is in order. Lenders like cash offers. But even if you can’t pay all cash for a short-sale property, it’s important to show you are well qualified and your financing is set. If you’re preapproved, have a large down payment, and can close at any time, your offer will be viewed more favorably than that of a buyer whose financing is less secure. • You don’t have any contingencies. If you have a home to sell before you can close on the purchase of the short-sale property—or you need to be in your new home by a certain time—a short sale may not be for you. Lenders like no-contingency offers and flexible closing terms. If you’re serious about purchasing a short-sale property, it’s important for you to have expert assistance. Here are some people you want to work with: • Experienced real estate attorney. Only about two out of five short sales are approved by lenders. But a good real estate attorney who’s knowledgeable about the short-sale process will increase your chances getting an approved contract. Also, if you want any provisions or very specialized language written into the purchase contract, a real estate attorney is essential throughout the negotiation. • A qualified real estate professional.* You may have a close friend or relative in real estate, but if that person doesn’t know anything about short sales, working with him or her may hurt your chances of a successful closing. Interview a few practitioners and ask them how many buyers they’ve represented in a short sale and, of those, how many have successfully closed. A qualified real estate professional will be able to show you short-sale homes, help negotiate the purchase when you find the property you want to buy, and smooth communications with the lender. (All MLSs permit, and some now require, special notations to indicate that a listing is a short sale. There also are certain phrases you can watch for, such as “lender approval required.”) • Title officer. It’s a good idea to have a title officer do an initial title search on a short-sale property to see all the liens attached to the property. If there are multiple lien holders (e.g., second or third mortgage or lines of credit, real estate tax lien, mechanic’s lien, homeowners association lien, etc.), it’s much tougher to get that short sale contract to the closing table. Any of the lien holders could put a kink in the process even after you’ve waited for months for lender approval. If you don’t know a title officer, your real estate attorney or real estate professional should be able to recommend a few. Some of the other risks faced by buyers of short-sale properties include: • Potential for rejection. Lenders want to minimize their losses as much as possible. If you make an offer tremendously lower than the fair market value of the home, chances are that your offer will be rejected and you’ll have wasted months. Or the lender could make a counteroffer, which will lengthen the process. • Bad terms. Even when a lender approves a short sale, it could require that the sellers sign a promissory note to repay the deficient amount of the loan, which may not be acceptable to some financially desperate sellers. In that case, the sellers may refuse to go through with the short sale. Lenders also can change any of the terms of the contract that you’ve already negotiated, which may not be agreeable to you. • No repairs or repair credits. You will most likely be asked to take the property “as is.” Lenders are already taking a loss on the property and may not agree to requests for repair credits. The risks of a short sale are considerable. But if you have the time, patience, and iron will to see it through, a short sale can be a win-win for you and the sellers. * Not all real estate practitioners are REALTORS®. A REALTOR® is a member of the NATIONAL ASSOCIATION OF REALTORS® and is bound by NAR’s strict code of ethics. Note: This article provides general information only. Information is not provided as advice for a specific matter. Laws vary from state to state. For advice on a specific matter, consult your attorney or CPA.
8 Tips to Guide for Your Home Search 1. Research before you look. Decide what features you most want to have in a home, what neighborhoods you prefer, and how much you’d be willing to spend each month for housing. 2. Be realistic. It’s OK to be picky, but don’t be unrealistic with your expectations. There’s no such thing as a perfect home. Use your list of priorities as a guide to evaluate each property. 3. Get your finances in order. Review your credit report and be sure you have enough money to cover your down payment and closing costs. Then, talk to a lender and get prequalified for a mortgage. This will save you the heartache later of falling in love with a house you can’t afford. 4. Don’t ask too many people for opinions. It will drive you crazy. Select one or two people to turn to if you feel you need a second opinion, but be ready to make the final decision on your own. 5. Decide your moving timeline. When is your lease up? Are you allowed to sublet? How tight is the rental market in your area? All of these factors will help you determine when you should move. 6. Think long term. Are you looking for a starter house with plans to move up in a few years, or do you hope to stay in this home for a longer period? This decision may dictate what type of home you’ll buy as well as the type of mortgage terms that will best suit you. 7. Insist on a home inspection. If possible, get a warranty from the seller to cover defects for one year. 8. Get help from a REALTOR®. Hire a real estate professional who specializes in buyer representation. Unlike a listing agent, whose first duty is to the seller, a buyer’s representative is working only for you. Buyer’s reps are usually paid out of the seller’s commission payment.