First Time Home Buying 101: The Closing

Well, you have offered to purchase the home and your offer has been accepted! Yeah! The house passed the home inspection with flying colors!

However, the work is not over yet....now it is up to your mortgage broker to secure the loan you need. Now your mortgage broker knows what house and how much you are paying for it. He/she will now search for the best "program" to fit your needs at the lowest interest rate. This will require all the "conditions" in your folder (bank statements, etc.,) submitted to the lender. He/she will order an appraisal of the property and anything else the "lender" asks.

The lender (and there are far fewer of them than in the past) will want to be assured that you will be able to afford to pay for the property that you are buying. They also want to know that the property is worth the asking price (in case they end up selling it along with the thousands of foreclosures they already have!) Don't worry you will be fine!

Let's assume that everything has been completed. Your loan is approved! Your mortgage broker has spent the time to explain what the terms of the loan are and what your payments will be.

Closing has been set up at a title company or with a real estate lawyer. Let's assume you are using a title company. They have assured that you are receiving the property "free and clear" prior to your purchase. They also provide a detailed statement of all monies in the transaction. When all the documents are in place, the sellers, either or real estate agent or mortgage broker (possibly both) will accompany you to the closing. The seller has an easier day, they just sign off on the title to the property and leave.

The title company will explain all the documents to you before your sign each one. There are a lot of them....expect to have a very tired writing hand! The reason it is really nice to have your agents with you, if by chance, there is an error in the paperwork, they can catch it here. Don't worry, if there is an error, it probably something simple like whether or not you "checked the box" to have your insurance and taxes included in your monthly mortgage payment. Sometimes, a lender will require that you do (so they know the payments are being made). Other, times it's your choice.

• You have signed the all the documents.
• You recieve a complete package of all the documents for your records.
• You are given the keys! You are a homeowner....go celebrate!

First Time Home Buying 101: The Offer

Finally, when you thought it would never happen! You found the house!

This a time when having an experienced real estate agent and a equally competent mortgage person working together to get "this show on the road" is really important!

As we discussed briefly earlier, the seller can ask any price they want for their home. That doesn't mean they will get it. If they have their property listed with a real estate agent, most likely the agent compared the "comps" (the prices that similar homes in the area actually sold for) and the house is priced reasonably for the area. Perhaps the home owner was really diligent and had a professional appraisal completed. The advantage is that prospective buyers know they are close to what a lender will loan on the property. In my world, I don't know to many people that can just "write a check" to own a specific property if its appraised value is a great deal lower than the asking price!

We spoke before about real estate being negotiable! It generally is, however, there are times when a seller just won't budge in price and then you again have choices to make. But first, your real estate agent will likely suggest placing an offer lower than the asking price. Take the advise.
If the seller doesn't like your offer, they will counteroffer.

Just a note on offers and counteroffers: If you submit your offer, and the seller agrees and signs it, it is a signed contract. If the seller, says "no" and returns with a "counteroffer", that is an entirely new contract agreement. If you sign it, it is a contractual agreement which you are obligated to complete. You can offer and counteroffer until you reach a "meeting of the minds". However, most real estate agents will not want to play this game too long. They are pretty aware of the circumstances. They will be speaking with the listing agent and both of them will want to complete the sale, each of them working for the best interest of their client.

Examples of circumstances that may influence your offer:
You want to spend the least amount of money for the home as possible.

• Your realtor has checked "the comps" and feels the price is too hgh.
• The appraisal is lower than the price, therefore you need a down payment higher than you want to spend.
• Their are things on the property which need repair, for example the roof will need replacing, a new heating system, foundation repairs,or you need to do some expensive "updates".
• The home has been on the market for an extensive period and the seller's are "motivated".
• Homes in the area are not selling quickly or there are a lot of foreclosures in the area affecting property prices.
• How badly you want the property. There is always a chance that the seller receives another offer. Will it devastate your life if you don't get it, or at some point are you willing to say, "its time to keep looking".

Real estate agents are generally expert negotiators, but also realistic. Hopefully, your real estate agent is realistic!

Examples of things in you offer that may influence the seller the to accept.

• The house has been on the market for a long time.
• They are living somewhere else and are paying two mortgages.
• You can give them a fast closing date - perhaps prior to their next double mortgage payment.
• They need the money and can't afford the repairs (if they could, they probably would have done them while living there).
• Since you are a first-time buyer, you don't have to wait for your house to sell to purchase.

NRCC's: If your real estate agent may refers to non-recurring closing costs. The laws and/or amounts on this may vary from state-to-state (I have seen them up to 6% of the sales price.) Let me give a hypothetical: You really like the house, everything is perfect, but the roof needs replacement. The seller doesn't want the expense or take the time to do it. You know that once you get your mortgage you will not have the cash available to spend to fix the roof. So, lets say you put in a "full price" offer with "non-recurring closing costs" at 6%.

• You are making a full-price offer (or somewhere close).
• Your mortgage is for the higher amount as well as your taxes.
• At closing you receive a check in the amount of the 6% (or what was agreed upon).
• You have the cash to replace the roof, and yet paying for it in your mortgage.
• If you don't have the cash, the interest rate on your mortgage is likely to be less than a credit card and/or it allows you to keep the savings you have for other expenses, subsequent loans may be hard to get, you can deduct interest paid on your mortgage on your taxes.

There are certain things you want your contract to contain when making your offer and/or counteroffer. Everything is negotiable!

• Who is paying closing costs (usually split), but not always.
• Contingent upon a home inspection that is acceptable to you.
• Contingent upon on your accepted financing. Your realtor may include the maximum interest rate acceptable on your financing.
• You can still accept if the contingencies are agreeable to you, for example if your interest is going to be higher than you anticipated; however, you can still afford the payment and want the house...it is then up to you to say "go for it".
• Someone that is selling their own home to buy this house, might have a clause "contingent upon the sale of their home."

The reason for this: Let's assume your mortgage person or bank is pretty confident that your loan will be approved at "?" interest rate. You sign the contract, the lender say they will give you the loan, but the approved interest rate approved is higher than anticipated and going to put the house out of your budget! If both you and the seller signed the contract, you bought a house. Perhaps, you'll have a real understanding seller, but I doubt it. Most likely, you will have a lawsuit.

To be fair, this can also work the other way, let's say the seller decides they want to change their mind and keep their house. Perhaps, the deal on the house they are moving into falls through, maybe they couldn't get their financing. Do you want to say, "I'm sorry, I'll give it back and start looking all over again." Chances are you've already picked out paint colors, been planning the decorating, maybe even registering the kids for school. Uh-uh! It is your house. These type of situations make that real estate agent or real estate lawyer worth every penny! Some of these agencies have some pretty powerful legal representation behind them and will force the parties to the contract to stand behind the deal!

Both you and the seller agree on the terms, your real estate agent assures you it is a good sales price and you sign the final contract. Your agent will ask you to submit a check to open escrow. This doesn't have to be a large amount, some will accept $500, but generally $1000. This check is never written to the real estate agent, it will be generally be written to the title company that the seller has selected to complete the closing. This money will be deducted from the sale as money paid.

First Time Home Buying 101: Finding the Home

Hopefully, at this point you have found your real estate agent. Your agent has referred you to a mortgage broker that is knowledgeable in ALL types of programs, including FHA, VA and/or community programs designed for persons such as teachers, firemen, etc. Or, you have found a mortgage broker, you are "pre-approved" for an estimated loan amount, and your broker has referred you to an exceptional real estate professional!

Granted, the law does not require you to hire a real estate agent. You can meet with a homeowner, agree on a sales price and sign a contract. However, if you do NOT hire a real estate professional, I strongly urge you to hire an experienced real estate lawyer. A lawyer is the only person that can give you legal advise. You really don't want to make foolish and costly mistakes. There are many more unusual circumstances in acquiring loans and finding homes than ever, with foreclosures, auctions, and short sales. Although, they have existed before, certainly not with the frequency as now. It can make for a really great deal, but you really want to know what the deal is!

AGENCY LISTINGS:
These are what you are used to seeing on the Internet, in the newspaper, from signs posted in front of homes. They are on MLS (Multiple Listing Service) and sold by a listing agent for a commission. They are the most familiar to the average real estate shopper. Of course, the listings will include foreclosures, short sales, bank owned, etc. (I'll give a brief definition in this section).

Foreclosures: There are a lot of them now, so I suspect most agents are pretty familiar with how to deal with these properties. But, you should ask your agent if they are skilled in this area. Sometimes these properties are fantastic, other times not so great....if the homeowner had to choose between the mortgage payment or food on the table, chances are they didn't do a lot of "renovations or updates". They will be sold "as is". In the case of a foreclosure, "as is" is exactly that, be aware, but don't run scared! You could find a real "diamond in the rough" A professional that is experienced can tell you what to walk away from, and a home inspection is critical.
Pre-foreclosures: Sometimes an ad will read "beat the bank". Generally, this means the homeowners are in trouble and no they can't keep up with the payments. Simply, they want to sell the home quickly and not destroy their credit. They will usually sell it for what they owe, plus an amount of a few thousand dollars to "keep their heads above water" or even pay for their first month rent and deposit! This may be less common than in the past because the market has changed so much that many houses are not even worth what is owed. You need to know the value of the house in today's market. Your real estate agent will have an "experienced estimate" as to whether the price is logical.
In foreclosure: Once the payment's have lapsed, the lender "bank" will serve notice to pay by a certain date or the house will go to auction. The homeowner will have pay the payments and a lot of attorneys fees to get out of foreclosure. Now, some banks are more willing to negotiate a different scenario with the homeowner simply because the banks now has a lot of vacant houses.
Short Sale: The property is in foreclosure, but not yet gone to auction. The seller owes more money than the house is now worth. The "bank" is willing to accept a short-sale. This means your offer is less than what is owed on the mortgage. The owner of the house could accept your offer, but the "bank" has to agree to accept it. The seller does not receive any money. These can sometimes take months. Again, a good idea to work with an agent or lawyer that knows the process.
Auction: The payments haven't been made in the time allotted and the house goes to auction.
The lender will usually place a reserve price. (If they don't receive that much, they will keep it.) It is really not for the faint of heart! Chances are you are bidding from a photo, without a pre-inspection. There are situations where after you purchase home, the former homeowner has an amount of time for "redemption". In some states, up to year to get the home back. If the people are still there, they become tenants and YOU might have to evict them. If they have moved, they sometimes get pretty angry. When you finally get to see the property, it could be trashed in the inside........actually, really trashed. You may be missing everything, water heaters, copper tubing, appliances, windows.
Foreclosed: Okay, so the house didn't sell at the auction. Nobody bid on it, the price was high, whatever. It now belongs to the bank. The "bank" has had to evict the tenants and contacts an agent to sell the property for them. You will see terms like "as is", bank-owned, no warranty. You truly get what you get. The bank has probably never seen this place and now owns hundreds or thousands just like it. But, now you and your agent can look at the house just as any other listed property. If you like it, you put in an offer, have it inspected and proceed. Your real estate professional could be a real asset to you here. The banks may be willing to negotiate on the price because of their inventory. Remember, a real estate agent can't tell you what to do or how much to offer on a property. They can tell you if it seems reasonable. They know the area, the prices homes in the area have been selling for, but they don't have a crystal ball. The final decisions will always be in your court!

FOR SALE BY OWNER:
There are Internet sites for houses sold by the owner also. These homeowners have decided they do not want to hire a real estate agent to sell their home. Have your real estate agent check with them if you feel it "might be the one". Often, if your real estate agent calls the homeowner they will allow YOUR real estate person to show the home. If not, and you proceed on your own, be sure you work with an experienced real estate lawyer. You want to know its "free and clear" and "ALL the ducks are in a row."

1. If you are considering one of these homes, ask the homeowner if the property has had an appraisal done. This is what a professional appraiser has determined the value of the property to be.
2. Ask the homeowner if they have a completed home inspection for you to view. Sometimes the homeowners (FSBO or not) will have completed appraisals, and ALL the inspections and have them available for you to read or have copies for you to take with you.
3. Often people feel that a FSBO is overpriced...that people think "their" home is worth more than it is when actually viewed by a professional.
4. They don't want to pay a commission.
5. They have had a really bad experience with a real estate agent.
6. A real estate agent has listed the property and they haven't been able to sell it.
7. They are living in the house and are tired of inconsiderate agents (there are always some that spoil it for everybody) calling for an appointment while in the driveway or knocking on the door with their phone in hand.
8. Whether they are living in the house or not, they will be the people showing it and selling it. It can be a bit more uncomfortable if you really don't like the house. It is hard to be "frank" with someone that decorated or remodeled a house they are extremely proud of, when you think it is less than wonderful! They might not "see" that it has defects.
9. The positive side is that you do meet the homeowners and they know ALL about the house. They generally will like to talk about the house and give more details, perhaps some that don't improve their chances of selling the house.
10. You will have a lot more homework to do without a real estate person. For example, checking the "comparables" in the neighborhood to see if the selling price asked is reasonable.
11. Don't buy without a thorough home inspection, it is usually completed after the offer is accepted. In your contract your agent or lawyer, will state the offer is "contingent upon the home inspection." You shouldn't buy any home without one, but your real estate agent would normally "walk you through" these steps and know which professionals to recommend.

Flat Fee Listings: These types of companies list properties for the seller on the MLS for a "flat" fee. Basically, the homeowner is showing and selling their home themselves. However, they generally encourage real estate agents to bring buyers to view the property. The buyer's agent will receive a commission.

LEASE TO OWN: The buyer pays an "option fee" and an additional amount above the rent each month. It is usually targeted for the person that would have difficulty obtaining a mortgage, probably due to credit issues. The theory is that you pay rent, plus an additional amount or premium to help with your future down payment. The contract should establish the purchase price of the home and is usually for 1 - 3 years. The hope for the buyer is that they will, in that amount of time, qualify for a mortgage. However, if the buyer chooses not to purchase or falls behind in their rent, they will lose both the "option fee" and the "rent premium" money.

1. Know the purchase price.
2. Buyers often pay all maintenance, taxes and insurance.
3. Sellers receive the mortgage deductions.
4. You pay the seller, not the mortgage company.
5. Probably a "hard to sell" property.

If you decide to do this, which would only make sense if you cannot get a mortgage at the current time, be sure you hire a real estate lawyer to check out the contract. A real estate agent cannot give legal advise.

1. Know where your money is going.
2. Know if there are liens or if this property is in or close to foreclosure.
3. Know what you can lose, and the reality of your personal situation. Do you really think you can have your credit corrected and obtain a mortgage in the allotted time? Or would you be better renting and correcting your credit without the "premium".

LAND CONTRACTS / CONTRACTS FOR DEED:
These were popular in the late 1970's, early 80's when interest rates were high. I suspect we may see more of them again, simply because loans are currently harder to get. Again, the laws on these will vary from location to location.

1. The sale is between the buyer and seller.
2. The seller receives a down-payment plus interest on the loan.
3. The seller finances the property and retains title until paid in full.
4. Know if you could pay in full prior to the ending date of the contract without penalty.
5. You will most likely not be working with the "skilled eye" of your real estate agent or with a mortgage broker to guide you through the contracts.

Again, hire a real estate lawyer for legal advise! You really want someone to assure that your interests are safe in this or any type of contract. Also, to assure all documents and title is retained with a holding company. If the seller has a mortgage on this property, remember, the seller is making the payments to the mortgage company. You will want to know they are being paid!

A home is probably the largest purchase you will make in your lifetime. It should be a happy time and one of celebration. It is smart to know your budget and be wise, but when spending this much money the price of a lawyer can be pretty small!

First Time Home Buying 101

INTRODUCTION

This blog is based on a scenario presented to me from my daughter who has been a renter. Her family is moving across country and considering purchasing their first home.

It is easy to let buying a home become an emotional decision, but it is also important to choose wisely. It is likely the greatest financial decision you have made to date, other than having children! The information included here is to assist you in making wise choices by asking questions, avoiding the impulsive, and having some knowledge of the process involved in buying a home. The laws pertaining to real estate will differ in every state; therefore, this is not intended to supersede the advice from your professional expert, but may include tips or clarifications any first time buyer may find beneficial.

Now is the time to buy!

You have great credit. The real estate market will probably never see as great a decline in home prices as we have seen in the past couple of years. It may get slower, but that is unpredictable. With all the foreclosures, employment losses, there is a "glut" of homes making it a "buyer's market. I don't think you should wait to see if this is the bottom of the market, if it isn't, it is close enough!

• "Media" experts are predicting interest rates at unprecidented lows.
• The new economic stimulus package is offering large tax credits for home purchases.
• As always you can deduct mortgage interest from your taxes, whereas rent is not deductable.

PREPARATION: The first thing I think you should do, even before looking for homes is to go to your bank and speak to your loan officer and/or a mortgage broker. Loans are harder to get - find out what you qualify for and what you preparations you will need to do.

The loan officer at the bank is an employee of the bank. They are selling the products of that bank, i.e., the loan. An independent mortgage broker sells "loans" from various lenders. Each lender offers different "products" with different rates, terms, etc., eventually I'll talk more about that. However, the choices offered have obviously gotten less with the high home foreclosures.

• Explain to bank/broker your situation, i.e., moving to another state, new job, more income, in the same industry, and want to prepare to purchase a home.
• Ask the bank or broker to run your credit report (usually nominal fee). Retain the report or a copy of it for your records. Each time a report is run, you can lose points on your FICO score. (Prior to final approval on a loan, the lending company will always run your credit report to verify information).
• Upon seeing your credit report, your banker/broker may make suggestions to you-- what you might want to "pay down" or "pay off". Lenders want to see that you have credit cards (usually 3), they want to see what your limits are, if they are "maxed" out, how you pay on them, so don't try to eliminate ALL your debt.
• When you see your good credit score, don't make a major purchase like buying a car. It could change your position on buying a house.

Take into consideration what you pay for rent now; is it a struggle to pay? If so, you don't want your house payment to be more. You will be responsible for taxes, insurance and maintenance. Your lender and real estate agent will help you with that later. Right now we are just doing homework. (I know you just can't wait to start browsing the net for homes!)

HOMEWORK - Set up your folder, either physical or electronic.

This is a good time to begin collecting all the information the banker/broker will need when getting your loan for that dream house. Start putting your folder together and keep it where you have secure, but easy access to it.

• Ask your banker/broker what information will be needed in that folder to apply for a loan.

The banker might talk about "conditions". This is really a term used by the lender that describes all the things they are going to ask you for. Some are pretty basic; they vary with different lenders and each loan program. When you think you've done them all, they will ask for something else or they will want them sent again! (That is why I recommend having this folder).

Examples of items for your folder or "conditions";

1. Credit Report;
2. Two years of bank statements;
3. Possibly a certain number of future house payment months in "reserve" (savings, or other form of available cash);
4. Verification of rent paid from your landlord; (have their name, address & phone available)
5. Verification of employment; (again, have contact information)
6. Verification of mutual funds, stocks, etc.;
7. Copies of business licenses;
8. Current pay stubs;
9. Tax returns for (?) years. These will vary with every loan to some degree. Invariably, you might think you have every possible bit of information in your "file" and when it comes right down to loan approval -- they will think of something else!
10. Your first born child. (Just checking to see if you are paying attention!) Actually, it may feel like this may be the next request at times. Don't get impatient...we know loans are harder to get and there are less companies to give them. Consider yourself one of the lucky ones.