Buying - General Information
Why buy a house?
What is the first step to buying a home?
Basic home buying steps
Save on your home purchase
What can I afford?
What can you afford?
When is the best time to buy?
How do you qualify as a first-time buyer?
Do we dig deep and buy a dream home or settle for a starter home?
How do you choose between buying and renting?
Shopping for homes
Where do I get information about housing discrimination?
Building green - Good for you and for the environment
What do all of those real estate acronyms in the ads mean?
Why buy a bouse?
Here are some frequently cited reasons for buying a house:
- You need a tax break. The mortgage interest deduction can make home ownership very appealing.
- You are not counting on price appreciation in the short term.
- You can afford the monthly payments.
- You plan to stay in the house long enough for the appreciation to cover your transaction costs. The costs of buying and selling a home include real estate commissions, lender fees and closing costs that can amount to more than 10 percent of the sales price.
- You prefer to be an owner rather than a renter.
- You can handle the maintenance expenses and headaches.
- You are not greatly concerned by dips in home values.
What is the first step to buying a home? Finding out what you can afford is one of the fist steps, which can be done by pre-qualifying for a home loan. This step will help younarrow your search for both a neighborhood and particular houses. A pre-qualification is a simple calculation that considers several factors, but primarily your income. There are no guarantees with a prequalificaiton, but it will be expected of you when you make an offer on a home.
Basic home buying steps Determine What You Want Create a prioritized list of the features you want to find in your new home and the reasons why. While making the list consider how long you will likely be in the house and how your family and lifestyle may change over time. Use this list as a search guide and tool to help your Realtor filter through the available properties and focus on homes that meet your lifestyle and requirements. Remember that you may need to make some compromises based on location and financing limitations.
- Square Footage
- Closets and Storage
- Overall Appearance
- Daily Commute
- Community Services
- Traffic and Noise
Determine What You Can Afford In today's market, touring homes without having a clear understanding of your buying power can be very discouraging and a waste of time. Spending the brief amount of time to get pre-approved with a lender gives you confidence, eliminates surprises and saves valuable time. By taking the time to get pre-approved you accomplish two major goals. First, you know how much house you can afford and approximately what your monthly payment will be. Second, pre-approval tells the seller that you are a serious buyer and can afford to buy their home.
Select Your Team You want to select a team of professionals to assist you in your home purchase. Real estate and lending are service industries and the people you select to help find and finance your home only get paid if they have done their job. A good Realtor will save hours of your precious time during The home search, will negotiate on your behalf, assist you with inspections, and advise you through the offer, contract and closing. A good lender will make sure you are qualified and comfortable with the purchase price, find the right loan program that works with your current financial situation and future goals, and ensure the loan closing goes smoothly.
Starting The Home Search Once you have determined the features you need in a home, desired location and the amount you feel comfortable spending, it is time to start looking at houses. Your Realtor will review all of the properties that meet your specifications and then schedule a time with you and the sellers to visit the selected homes. As you are comparing properties, make sure to look at all aspects of the property and compare them to your list. Keep an open mind when you are looking at homes and imagine what the house could become with you as the owner.
The Offer Once you have selected a home, you will need to make an offer. Traditionally this can be a bit of a difficult time since both parties (buyer and seller) have completely different goals. After considering the asking price and reviewing what comparable homes are selling for, your Realtor will advise you in determining the offer price and writing the contract. You then sign the contract and provide your Realtor with the earnest money deposit, and then the offer is submitted to the seller. After reviewing, the seller will accept, reject or make a counter offer. When an agreement is reached between the two parties, the property is under contract.
Inspection & Insurance After your offer is accepted, your Realtor and lender will help you schedule, coordinate and interpret title, appraisal and inspections. The home inspection is a major step in the buying process and there are many problems that can be discovered during this period. The majority of these problems are common. The difference between closing on the home or starting the search process again, is what occurs during the negotiations between you and the seller. Your Realtor can greatly assist in making these discussions go smoother. In addition, at this time you will also need to arrange for homeowners insurance and finalize the mortgage.
Closing Before the closing your lender will confirm that the mortgage, title work, homeowners insurance and other necessary items are completed and brought to the closing table. Your Realtor will work with the listing agent and title company to make sure that the real estate closing documents are prepared and accurate. After you and the sellers have signed all of the documents to complete the closing, the transaction has been completed, you have just become a new home owner.
Save On Your Home Purchase
Whether you are buying your first home, or your fifth, the process of buying a home is a detailed, time-consuming venture. It is also an emotional period filled with difficult choices. You want to ensure that the home you purchase meets your family's needs now, as well as in the future.
The points listed here are designed to help you become a savvier buyer, by noting some of the pitfalls to avoid in the home-buying process. Included are points such as deciding what you want before you begin shopping, taking your time to shop, selecting the right realtor and lender, and remaining objective while viewing potential homes. Using this information will help you find your ideal home.
Develop A List Before shopping for a home develop a list of your needs vs. wants. Begin with the items you really need like adequate space, garage and number of bedrooms. Consider your basic needs first. Now consider additional desires and luxury items, and then decide if you can manage these benefits financially. Take this list with you when looking at homes, you're less likely to get caught up in the excitement of home shopping, and will be more focused on finding what you need and can afford.
Get Pre-Approved Speak with your financial or lending institution prior to buying a home. Your lender can get you pre-approved for a loan prior to actually making an offer. By reviewing your needs and objectives with a loan officer, you can decide on the right loan program, know how much you feel comfortable spending and how much your monthly payment will be. Most importantly, an approval letter will tell sellers that you are a serious prospect.
Select Your Team Buying a home is a complex process; from choosing the right mortgage, finding a home inspector and viewing available properties, there are numerous steps involved even for the most experienced buyer. Adding a professional Realtor to your team will provide access to these services and many more. A good agent has the knowledge and experience developed from many years of helping buyers and sellers. A strong Realtor has amassed a network of people, from lenders, attorneys, home inspectors and movers, all to assist both buyers and sellers.
Communicate Spending time with your Realtor will reap huge dividends. Communicating a clear picture of the type of home you're looking for will have your agent closer to finding the perfect home for you. You will not waste time looking at homes that do not meet your criteria.
Location A home is not a stand-alone item. The value of a home is greatly affected by the surrounding homes and neighborhood. The desirability and resale value of your home depends greatly on location, more than any other factor. Most people want a desirable community that includes character, quality schools, an easy commute, access to major transportation areas, recreational facilities, etc. Other factors that affect the property value of a home include traffic, sounds, smells and zoning bylaws. Remember to be objective and don't rely too heavily on your emotions. Make sure that you are completely satisfied with the neighborhood and community.
Use Your Realtor A comprehensive knowledge of available homes is one of your Realtors strongest assets. With the aid of computerized systems, a Realtor is notified within hours of a property becoming available. Remember that your agent is trained in all aspects of real estate, including understanding supply and demand, economics and the neighborhoods of the city in which they work. A professional Realtor can do much of the research and due diligence for you, by reviewing your needs, reviewing the properties and advising you of any potential matches.
Watch For "Red Flags" When evaluating a home, be sure you know the difference between acceptable and unacceptable problems. Cosmetic items like peeling paint, unattractive wallpaper and worn flooring can easily be remedied. These can also be used as negotiating items, as there could be costs involved in updating the home. However, major problems are "red flags". Watch for items such as major foundation cracks, water damage, outdated electrical systems and inadequate plumbing.
Get A Home Inspection A professional home inspection will cover all areas of the house including the foundation, electrical, plumbing, heating, floors, walls, ceilings, attic, roof, siding, porches, patios, decks, garage and drainage. The inspector will give you an objective view of the property, with a written report, indicating the present condition and items that will need repair.
Be Cautious With Fixer-Uppers Prior to purchasing a fixer-upper, carefully consider the condition of the home and all the repairs that need to be made. On occasion, a fixer-upper can be purchased below market value, and after sufficient repairs have been made, to bring it to a good sale condition, you can realize a profit. However, not all fixer-uppers will bring in the profits you might expect. It depends on the price of the home, the type and amount of repairs needed and the market conditions at the time of sale.
Consider Future Needs Review your current lifestyle and plans for the future. If your future plans call for a larger home than you presently need, it may be easier and less expensive to purchase a home that can meet those future needs now, rather than having to move to a larger home in the future.
Proceed Quickly The best properties usually sell fast, so when you sure of a property and are ready to buy, move quickly.
Request A CMA A Comparative Market Analysis (CMA) is an analysis of comparable homes in the neighborhood. It shows the list price, sales price and time on market of homes that have sold, along with the asking price and days on market of homes currently for sale. This report will provide you with the information so you can determine if the property you are interested in has a too-high asking price, or one that is a bargain.
Investigate The Seller's Situation The seller's reasons for moving could work to your advantage during negotiations. For example, a seller who has been transferred to another city may be more motivated to sell than someone who is still shopping for a new home. A vacant house or a house that has been on the market for several months and reduced in price could also be indications of a motivated seller.
Keep Personal Information Confidential Conversely, information about your mortgage, down payment, move-in deadline or motivations could be used to your detriment. You will want to share this information with your agent, but not with the seller or their agent.
Exercise Your Negotiating Skills Even if you prefer not to haggle over the price, it can be worth it, especially when it is your home and your future. Most sellers expect to negotiate over price. That is often why the listing price is often set a bit higher than the actual sales price. If you want to get the best home for the least amount of money, you need to negotiate.
Avoid Bidding Wars Occasionally, the listing agent may use tactics to rush the sale or increase the price. If there is another buyer or some other reason that pressure is being applied, whoever wins the bidding war may also lose because they end up overpaying.
Property Disclosure Legally, sellers must disclose all known material defects of a property. Consider the ramifications of these defects, how serious they are and how much they may cost in the future.
Hidden Costs There are many fees associated with buying a home, more than just the mortgage. As a buyer, you may be responsible for items including mortgage insurance, appraisal fees, legal fees, inspection fees, transfer faxes, title insurance, inspections, etc. Your Realtor can explain all of the costs associated with buying a home.
Appraised Value Consumers are often frustrated because their perception is that the appraised value of their home is far less than what it is actually worth. In some cases they are right. However, this does not change the fact that real estate appraisers must adhere to very specific rules and guidelines bestowed upon them by the lender.
Adjustments In the case of determining value for the purpose of a finance transaction, appraisers must follow guidelines set by the lenders, which in many cases results in a slightly more conservative final value estimate. Everything that an appraiser adjusts for (positive or negative) must be bracketed and supported by comparable sales.
Example If a home is purchased for $100,000 and the owners choose to add a pool at a cost of $30,000, the value of the home does not automatically increase to $130,000. The appraiser must determine through a paired sales analysis what the market will support for a pool. If a comparable home without a pool sold for $100,000 and a comparable home with a pool sold for $115,000 then, the appraiser can only support a $15,000 adjustment. This is the case with any features that an appraiser can adjust for, not just a pool.
Remodels & Rebuilds On homes two to three years old or newer, upgrades can be typically recovered in an appraised value at actual cost. The only way for new homes to have these upgrades is to have paid actual cost and this is typically reflected in higher sales prices by a similar amount. However, when dealing with older homes, upgrades usually do not recapture their full cost for the same reasons as indicated in the example above.
Example If a forty-year-old home in average to good condition is purchased for $100,000 and the buyers choose to tear down the existing dwelling and build a new house at a cost of $100,000, the value is not automatically $200,000. In most cases, the new appraised value would be the land value plus the cost of the improvements. The reason for this is the original structure had value. Unless the home is in very poor condition, the sales price reflects value for the subject improvements. The same applies to a kitchen or bathroom remodel in that the original rooms had value. This is why the cost of upgrades or remodeling of older homes can rarely be fully recaptured.
Estimating Value State and Lender guidelines require appraisers to base value on closed and verified comparable sales. Although property values are increasing in most areas of the country, typically lenders will not allow time adjustments to be made on comparables that sold within the past six months. When using pending sales on listings as comparables, lender want to see an adjustment made for possible negotiations. Even though homes can sell above their list prices, adjustments of around 5% off of the list price are usually made. This guideline automatically prevents appraisers from estimating value too high. It is also for this reason that when appraising a home that has just sold within the past three or four months, a lender will not accept an appraisal at a significantly higher value than the previous purchase price based on the passage of time alone, unless documentation is provided that the property was sold below market value. The only way to show an increase in value is to provide documentation that supports upgrades or remodeling completed by the current owners since the last sale transaction.
Margin For Error Although there is nothing in writing, appraisers are typically given a 5% margin of error by lenders. An appraisal that is questionable will most likely be cut by one of the lenders appraisal review staff. Therefore, an appraiser can be off by a couple of percent, and while the reviewer will know when an appraiser is pushing value; if it is within a small percentage, usually they will let it slide. When appraised value is pushed above and beyond what the property is worth based on comparable sales, the reviewer can significantly cut the value.
Keep in mind that every lender in today's mortgage marketplace has a review department. It is not in the appraiser or clients best interest when the appraised value is inflated.
What can I afford?
Know what you can afford is the first rule of home buying, and that depends on how much income and how much debt you have. In general, lenders don't want borrowers to spend more than 28 percent of their gross income per month on a mortgage payment or more than 36 percent on debts. It pays to check with several lenders before you start searching for a home. Most will be happy to roughly calculate what you can afford and prequalify you for a loan. The price you can afford to pay for a home will depend on six factors:
- gross 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
Another number lenders use to evaluate how much you can afford is the housing expense-to-income ratio. It is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes and hazard insurance (or PITI as it is known). If you have to pay monthly homeowners association dues and/or private mortgage insurance, this also will be added to your PITI. This ratio should fall between 28 to 33 percent, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio should be in the 34 to 38 percent range.
What Can You Afford?
Now that you have made the decision to buy, it is important to figure out what you can buy. Lenders will look at your current budget (income, assets, and debts), and how much you would like to down pay and calculate two ratios to determine how much they are willing to lend. The first ratio sets a limit on what they think you can spend on housing. For example, a 28% housing ratio means your projected housing cost should be less than 28% of your gross monthly income. These numbers are all flexible depending on your down payment. Generally, the bigger your down payment, the less your monthly payment will be. People can usually afford a house 2.5-3 times their gross annual income. The second ratio compares monthly debt obligations to monthly income. After all this is calculated, you can get pre-approved for a loan. This will tell you officially how much you can afford and what your monthly payments will be. Also, this tells the seller you can afford to buy their home. Often buyers can use their pre-approved status as leverage during negotiations.
When is the best time to buy?
Because many buyers prefer to move in the spring or summer, the market starts to heat up as early as February. Families with children are eager to buy so they can move during summer vacation, before the new school year begins. The market slows down in late summer before picking up again briefly in the fall. November and December have traditionlly been slow months, although some astute buyers look for bargains during this period.
How do you qualify as a first-time buyer?
In general, lenders define a first-time home buyer as someone who has not owned any real estate -- whether a personal residence, vacation home or investment property -- during the past three years. Lenders verify an applicant's status by examining their income tax returns, checking to see that the individual did not take any deductions for mortgage interest or property taxes.
Do we dig deep and buy a dream home or settle for a starter home?
Do we dig deep and buy a dream home or settle for a starter home? Choosing between a smaller house in an affluent neighborhood, an older, bigger house in a more working-class community or a brand-new home is not easy. If you're in this situation, start by examining your priorities and asking the following questions:
- Is the surrounding neighborhood or the home itself the most important consideration?
- Is each of the neighborhoods safe?
- Is quality of the schools an issue?
- Do any of the areas seem to attract more families with children or adult residents? And where do you fit in?
As for the return on your investment, home-price appreciation is hard to predict. In the late 1980s, and again 10 years later, the more expensive move-up housing appreciated wildly. But during the recession that followed, smaller homes tended to hold their value better than more expensive ones.
How do you choose between buying and renting?
Home ownership offers tax benefits as well as the freedom to make decisions about your home. An advantage of renting is not worrying about maintenance and other financial obligations associated with owning property. There also are a number of economic considerations. Unlike renters, home owners who secure a fixed-rate loan can lock in their monthly housing costs and make prudent investment plans knowing these expenses will not increase substantially. Home ownership is a highly leveraged investment that can yield substantial profit on a nominal front-end investment. However, such returns depend on home-price appreciation. "For some people, owning a home is a great feeling," writes Mitchell A. Levy in his book, "Home Ownership: The American Myth," Myth Breakers Press, Cupertino, Calif.; 1993. "It does, however, have a price. Besides the maintenance headache, the amount of after-tax money paid to the lender is usually greater than the amount of money otherwise paid in rent," Levy concludes. As for evaluating the risk associated with home ownership, David T. Schumacher and Erik Page Bucy write in their book "The Buy & Hold Real Estate Strategy," John Wiley & Sons, New York; 1992, that "good property located in growth areas should be regarded as an investment as opposed to a speculation or gamble." The authors recommend that prospective buyers spend a few months investigating a community. Many people make the mistake of buying in the wrong area. "Just because certain properties are high-priced doesn't necessarily mean they have some inherent advantage," the authors write. "One property may cost more than another today, but will it still be worth more down the line?"
Shopping For Homes
Use all your resources to research for homes. Online websites, real estate agents, and mailers can tell you which homes are available in your desired area. Choose to visit houses that possess your desired qualities, as well as fits in your price range. Visiting houses can be done through an agent as well as visiting open houses on your own. Often real estate agents have the inside track on houses just placed on the market. When looking at houses it is important to take notes and pictures so you can remember later which houses you looked at. Writing down your immediate feelings about the house is very helpful also. Start from the outside and check out the yards and exterior paint jobs. When inside notice the interior paint jobs, windows and tiles. Be sure to note any changes or renovations will have to made later. Imagine yourself in living in the house, and mentally place your furniture in the rooms, your pictures on the walls.
Defining What You Want Before going out to search for your dream home, it is important to know what that dream home looks like. Making a prioritized list of what you want in your next home will help narrow down your search. The size of the house depends, not only on your immediate needs, but also what may be needed in the future. For example, a young couple would need to think about possibilities of more children in the future, while a family with teenagers may address the fact that those teens may soon be off at college soon. Your needs for additional rooms as studies, or guest rooms should be addressed also. Other desired features in the house should be considered also. For instance, if you are a gardener, a house with a yard would be wanted. Thinking about desired locations is important too. Check out local information like neighborhood statistics and community links. If you have children, researching the schools in the area would be necessary. Depending on your funding, compromises will probably need to be made.
Where do I get information about housing discrimination?
For information about housing discrimination, call the U.S. Department of Justice at (202) 514-2000, 950 Pennsylvania Ave., NW DC 20530 or your local U.S. Department of Housing and Urban Development office. For detailed information, the booklet, "Your Loan is Denied, Defending Yourself Against Mortgage Lending Discrimination," is available from the Center for Investigative Reporting, 500 Howard Street, Suite 206, San Francisco, CA 94105-3008 or call (415) 543-1200.
Building Green - Good for you and for the Environment
Many people here on South Whidbey are interested in knowing more about how to build new or remodel with the environment in mind. Green Building is gaining wide recognition across the country, and there are many local resources, classes, and examples of structures that are functional, aesthetic, and easy on the land and natural resources.
Green building applies principles of resource and energy efficiency, healthy buildings and materials, and ecologically and socially sensitive land-use to achieve "an aesthetic sensitivity that inspires, affirms, and ennobles." (International Union of Architects "Declaration of Interdependence for a Sustainable Future)
Green building requires an integrated, multi-disciplinary design process and a "whole-building" systems approach that considers the building's entire life-cycle (from planning, design, and construction to operation and maintenance, renovation, and demolition or building reuse). Together, these provide the means to create solutions that optimize building cost and performance.
Here are some resources as you consider building or remodeling with the environment in mind.
A resource for design and planning your green building project What's Working. Here you can also order the book Green Remodeling - Changing the World One Room at a Time by David Johnston.
Each month, Second Use Building Materials diverts 60-100 tons of reusable materials from the waste stream and resells them at affordable prices to the public. You may find the perfect piece for your remodeling project there!
There are two main types of loan programs available to potential home owners.
The first of these two types is the fixed rate mortgage. Fixed rate mortgages are loans where the interest and the principal payments remain the same for the entire loan period. Some advantages of fixed rate mortgages are that there are consistent principal and interest payments, so you won't need to worry about market fluctuations. This type of loan is good for buyers planning on staying in the house for a long time. A disadvantage of this type of loan is that they are usually priced higher than adjustable rate mortgages. If current market rates are high, an adjustable rate loan will likely have better prices. Fixed rate mortgages can have terms of 30, 20 or 15 years. This means that the monthly payments are consistent for 30, 20 or 15 years respectively. Thus, if the market is good at the time of purchase, buyers can lock in the lower interest rate for the term of the loan. The shorter termed loans are advantageous because the loan can be paid off more quickly, meaning less interest will be paid. Shorter termed loans also result in higher payments than the longer termed loans. If the buyer can handle the higher payments, shorter termed loans are beneficial in the long run.
The second type of loan program is adjustable rate mortgage (ARM). Adjustable rate mortgages have interests that change over the life of the loan. The initial interest rates, and thus monthly payments, are lower for ARMs than for fixed rate mortgages. Even though interest rates may be adjusted at predetermined times, most programs offer rate cap protection, which limits the amount interest rates can be increased. ARMs are the best choice for owners who plan to relocate in the near future (3-5 years). A disadvantage of ARMs is the possibility of increased monthly payments if interest rates do increase. All ARMs are amortized over 30 years. ARMs can be purchased as X/1 ARMs. X can be 10, 7, 5 or 3, and represents the number of years the ARM is held at a fixed initial rate before adjusting every year thereafter. Buyers should plan to move after X years since after the Xth year, rates may increase.
What do all of those real estate acronyms in the ads mean?
If you find yourself stumbling over weird acronyms in a real estate listing, don't be alarmed. There is method to the madness of this shorthand (which is mostly adopted by sellers to save money in advertising charges). Here are some abbreviations and the meaning of each, taken from a recent newspaper classified section:
- assum. fin. -- assumable financing
- dk -- deck
- gar -- garage (garden is usually abbreviated "gard")
- expansion pot'l -- may be extra space on the lot, or possibly vertical potential for a top floor or room addition. Verify actual potential by checking local zoning restrictions prior to purchase.
- fab pentrm -- fabulous pentroom, a room on top, underneath the roof, that sometimes has views
- FDR -- formal dining room (not the former president)
- frplc, fplc, FP -- fireplace
- grmet kit -- gourmet kitchen
- HDW, HWF, Hdwd -- hardwood floors
- hi ceils -- high ceilings
- In-law potential -- potential for a separate apartment. Sometimes, local zoning codes restrict rentals of such units so be sure the conversion is legal first.
- large E-2 plan -- this is one of several floor plans available in a specific building
- lsd pkg. -- leased parking area, may come with an additional cost
- lo dues -- find out just how low these homeowner's dues are, and in comparison to what?
- nr bst schls -- near the best schools
- pvt -- private
- pwdr rm -- powder room, or half-bath
- upr- upper floor
- vw, vu, vws, vus -- view(s)
- Wow! -- better check this one out.
"Real Estate's Ambiguous Language You Oughtta Understand," Glennon H. Neubauer, Ethos Group Publishing, Diamond Bar, CA; 1993.