Buyers: Common Questions Answered
COMMON QUESTIONS
Question 1: What can I afford?
As a "rule of thumb" you can afford to buy a home equal in price to three times your gross annual income. More precisely, the price you can afford to pay for a home will depend on six factors:
1. Your income
2. The amount of cash you have available for the down payment, closing costs and cash reserves required by lender.
3. Your outstanding debts
4. Your credit history
5. The type of mortgage you select
6. Current interest rates
Lenders will analyze your income in relation to your projected house payment and outstanding debts. This will determine the amount of money you can borrow. Your housing expense-to-income ratio is determined by calculating your projected monthly housing payment, which consists of the principal and interest payment on your loan, property taxes and hazard insurance. The sum of these costs is referred to as "PITI".
Monthly homeowner association dues, if your're purchasing a condominium or townhouse, and private mortgage insurance (often required with less than 20% down) are added to the PITI. Your housing income-to-expense ratio should fall in the 28 to 33 prcent range. 28 percent of your gross monthly income is allotted toward PITI. 33 percent of your gross monthly income is allowed for PITI and all long term debt. Some lenders will go higher under certain circumstances. Your total income-to-debt ratio should not exceed 34 to 38 percent of your gross income on a conventional loan. FHA and VA loans offer higher income-to-debt ratios and are often easier to qualify for.
Question 2: How do I find out about the condition of the home I'm considering?
First and foremost, it is strongly recommended that you hire a professional person to inspect the home. Many inspectors belong to the American Society of Home Inspectors (ASHI). They attend seminars and stay abreast of the latest developments.
Secondly, some states, including Washington, require sellers to complete a disclosure form revealing everything known about their property. Home sellers are required to indicate any significant defects or malfunctions existing in the home's major systems. A checklist specifies interior and exterior walls, ceilings, roof, insulation, windows, fences, driveway, sidewalks, floors, doors, foundation, as well as the electrical and plumbing systems.
The form also asks sellers to note the presence of environmental hazards, walls or fences shared with adjoining landowners, any encroachment of easements, room additions or repairs made without the necessary permits or not in compliance with building codes, zoning, violations, citiations against the property, CCR's (covenats, conditions and restrictions) and lawsuits against the seller affecting the property. Carefully review this form.
Also look for settling, sliding or soil problems, flooding or drainage problems, these will be noted on the Seller's Disclosure.
People buying a condominium must be told about covenants, conditions and restrictions or other deed restrictions, if the homeowners association has any authority over the subject property and ownership of common areas with others. Be sure to ask questions about anything that remains unclear or does not seem to be properly addressed by the forms provided to you. In Washington, this form is known as Form 17, Seller's Disclosure.
Question 3: How low can I consider offering?
There are always some sellers who for some reason must sell quickly, however in general, a very low offer in a normal market might be rejected immediately. In a strong buyer's market, the below-market offer wil usually either be accepted or generate a counteroffer. If few offers are being made, an outright rejection of offers becomes unlikely. In a strong seller's market, offers are often higher than full price. While it is ture that offers at or above full price are more likely to be accepted by the seller, there are other considerations involved:
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Is the offer contingent upon anything, such as the sale of the buyer's current house? If so, such an offer, even at full price, may not be as attractive as an offer without that condition.
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Is the offer made on the house "as is," or does the buyer want the seller to make some repairs before the close of escrow or make a price concession instead?
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Is the offer all cash, meaning the buyer has waived the financing contingency? If so, then an offer at less than the asking price may be more attractive to the seller than a full-price offer with a financing contingency.
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Are there any requests for seller concessions, such as asking the seller to contribute towards points and/or closing costs? If so, the offer is not really full price.
Question 4: How and what do I negotiate?
Different sellers price houses very differently. Some deliberately overprice, others ask for pretty close to what they hope to get and a few (maybe the cleverest) underprice their houses in the hope that potential buyers will compete and overbid. A seller's advertised price should be treated only as a rough estimate of what they would like to receive.
If possible try to learn about the seller's motivation. For example, a lower price with a speedy escrow may be more acceptable to some who must move quickly due to a job transfer. People going through a divorce or are eager to move into another home are frequently more receptive to lower offers.
Some buyers believe in making deliberate low-ball offers. While any offer can be presented to the seller, a low-ball offer often sours a prospective sale and discourages the seller from negotiating at all. And unless the house is extremely overpriced, the offer probably will be rejectd anyway.
Before making an offer, also investigate how much comparable homes have sold for in the area so that you can determine whether the home is priced right.
Questions 5: What about my down payment, should I put more or less down, if we can afford it?
Various types of loan programs exist. Some require a minimum of 3 percent down payment (FHA Loans) or 5 percent on conventional loans. Veterans can purchase with no money down (VA Loan).
Putting down as little as possible allows buyers to take full adantage of the tax benefits of home ownership. Mortgage interest and property taxes are fully deductible from federal income taxes. Buyers using a small down payment also have a reserve for making unexpected improvements. It may be more prudent to make a larger down payment and thereby reduce the amount of debt that must be financed. Once a buyer puts twenty percent or more as a down payment on their desired home, they will waive the requirement for mortgage insurance.
Generally, unless you put down 20% or more, mortgage insurance is a requirement on all loans, with the exception of veterans guaranteed loans. That means a full years premium for the insurance is collected "up front" at the closing of escrow, plus you will be paying monthly as part of your PITI, principle-interest-taxes-insurance.
Question 6: What is title insurance?
Title insurance is a form of insurance in favor of an owner, lessee, mortgage or other holder of an estate lien, or other interest in real property. It indemnifies against loss up to the face amount of the policy, suffered by reason of title being vested otherwise than as stated, or because of defects in the title, liens and encumbrances not set forth or otherwise specifically excluded in the policy, whether or not in the public land records, and other matters included within the policy form, such as lack of access to the property, loss due to unmarketability of title, etc. The title policy from sets forth the specific risks insured against. Additional coverage of related risks may also be added by endorsements to the policy or by the inclusion of additional affirmation insurance to modify or supersede the impact of certain expceptions, exclusions or printed policy "conditions." The policy also protects the insured for liability on various warranties of title.
In addition, the policy provides protection in an unlimited amount against costs and expenses incurred in defending the insured estate or interest.
Before it issues a title policy the title insurance company performs, or has preformed, an extensive search, examination and interpretation of the legal effect of all relevant public records to determine the existance of possible rights, claims, liens or encumbrance that affect the property.
However, even the most comprehensive title examination, made by the most highly skilled attorney or lay expert, can not protect against all title defects and claims. These are commonly referred to as the "hidden risks." The most common examples of these hidden risks are fraud, forgery, alteration of documents, impersonation, secret marital status, and incapacity of parties (whether they be indivduals, corportations, trusts or any other type). Some other hidden risks include various laws and regulations that create or permit interests, claims and liens without requiring that they first be filed or recorded in some form, so the potential buyers and lenders can find them before parting with their money.
Question 7: What steps should I take when looking for a home loan?
It is strongly recommeded that home buyers are prequalified or pre-approved for a loan as their first step in the process. By being prequalified, a buyer knows exactly how much house they can afford. They can make more informed descisions in the market place. This does not mean they will get the loan because their credit reports, wages and bank statements still need to be verified before a loan commitment or letter of approval is issued by the lender.
Almost all mortgage lenders prequalify people at no charge. Many of them will even do it on the Internet. In order to be pre-approved, an application will be taken. For a fee, your credit report will be pulled, your employment and income will be verified, your checking and savings accounts will also be verified. In other words, all the necessary documentation will be completed in order for you to obtain a loan. The only things remaining will be for you to find a home obtain, an appraisal on it to prove its value to the bank and perform whatever inspectios you may want on the property. Being pre-approved, considerably shortens the time frame to closing.
Question 8: Is it possible to negotiate interest rates?
Compare the mortgage charts published in most newspapers or on the Internet.
Occasionally some lenders are willing to negotiate on both the loan rate and the number of points. This isn't typical among many of the established lenders who set their rates. Nevertheless, it never hurts to shop around, know the market and try to get the best deal. Always look at the combination of interest rate and points and get the best deal possible. This is reflected in what is called the APR or Actual Percentage Rate.
The interest rate is much more open to negoitiation on purchases that involve seller financing. Generally, these are based on market rates but some flexibility exists when negotiating such a deal.
Question 9: Is it better to buy a new home or resale?
Sales price increases in either type of housing are strongly tied to location, growth in the local housing market and the state of the overall economy.
Some people feel that buying into a new-home community is a bit riskier than purchasing a house in an established neighborhood. Future appreciation in value in either case depends upon many of the same factors. Others believe that a new home is less risky because things won't "wear out" and need replacement as quickly.
"Existing home have been appreciating a little more than new homes but every once in awhile they're at the same level and sometimes the new homes prices go up a little quicker" according to the National Association of REALTORS (NAR).
Questions 10: Fixer Uppers - Are they good or bad?
Distressed properties or fixer-uppers can be found everywhere. These properties are poorly maintained and have a lower market value than other houses in the neighborhood. It is often recommeded that buyers find the least desirable house in the best neighborhood. You must consider if the expenses needed to bring the value of that property to its full potential market value are within your budget. Most buyers should avoid run-down houses that need major structural repairs. Remember the movie "The Money Pit?" those properties should be left to the builder or tradesman normally engaged in the repair business.
Question 11: Can you borrow the money to repair?
HUD's Rehabilitation loan program, Section 203(K) is a program designed to facilitate major structual rehabilitation of houses with one to four units that are more than one year old. Condominiums are not eligible.
A 203 (K) loan is frequently done as a combination loan. Your purchase a "fixer-upper" property "as is" and rehabilitate it. Or, you may refinance a temporary loan to buy the property and do the rehabilitation. It can also be done as a rehabilitation - only loan.
Investors are required to put 15 percent down. Owner-occupants have a required down payent of 3 to 5 percent. A minimum of $5,000 must be spent on major improvements.
Major repairs can be: a new heating system, roof, replacement windows, etc. You may then also finance additional repairs and improvements i.e.: new carpeting, kitchen cabinets, appliances, etc. You must of course "qualify" for the total amount you will be borrowing through this program.
Two appraisals are required. These appraisals wil be on the property "as repaired" not "as is." Plans and specifications for the proposed work must be submitted for architectual review and cost estimation. Once approved mortgage proceeds are advanced periodically during the rehabilitation period to finance the construction costs.
We hope you found this information helpful. If you have other questions, please contact us and we will find the answer for you.
