Your Buying Agent | Why a REALTOR®? | My Commitment | Buying Tips | The Process | Your Ideal Home

 

1. How to Avoid Home Buying Mistakes
2. Mistakes to Avoid When Buying a Home
3. Mistakes to Avoid Prior to Home Ownership
4. Buyer's Checklist
5. Choosing A Lender
6. Closing the Transaction
7. Consider the Contract
8. What is Escrow
9. Finding Financing
10. Find the Right Mortgage
11. Homeowner Tips
12. How Much Can You Borrow?
13. Title Insurance
14. What You Want, What You Need
15. Art of Negotiation
16. The Offer
17. Relocation Timeline
18. Role of A Title Company
19. What to Offer
20. Traditional Loan Process
21. Put it in Writing
22. Appraisal Basics
23. Mortgages and Credit Reports
24. Down Payments
25. Homeowners Insurance
26. 12 Ways to Save Money on Homeowners Insurance
27. PMI Cancellation
28. Private Mortgage Insurance
29. PMI vs FHA MIP
30. Title Insurance
31. Title Insurance FAQ
32. Title Insurance Protection
33. Issuance of Title Insurance Policy
34. Flood Insurance
35. Finding the Best Real Estate Professional
36. How to Buy Your First Home... the Easy Way!
37. How Much Home Do I Qualify For?
38. Which Mortgage Should I Choose?
39. The Nine Most Common Mistakes to Avoid When Obtaining a Home Mortgage
40. 5 Secrets to Buying the Best House for Your Money
41. A Few Points About Interest Rates
42. Limit the Deadline to Your Advantage
43. Counter-Offer Strategies
44. How to Use Contingencies
45. Demand Inspections and Disclosures
46. How To Stop Paying Rent
47. 5 Buyer Secrets
48. What You Should Know About Home Inspections
49. Reduce Your Tax Burden Through Home Ownership
50. Feeling a Little Cramped? Moving Up
51. Historic Charm or Modern Conveniences?
52. A Helpful Punch list for New Home Buyers
53. Make Moving Easier

 

How To Avoid Home Buying Mistakes

1. Not doing your homework. Enter the market well-prepared by researching location, school district, deed restrictions and taxes.

2. Trying to make a shrewd investment. Focus on finding the best place for you and your family to live rather than trying to predict the real estate market.

3. Choosing a poor location. Consider what part of town you would like to live in and avoid homes located on busy streets.

4. Overlooking an inferior floor plan for an attractive exterior. Choose a great floor plan over a great exterior because you'll spend far more time inside the house than outside.

5. Overlooking how the home will function for your family. Consider features that are most important to your family and choose a home that will meet those needs.

6. Not having the home properly inspected when buying a resale. Hire a state-licensed, professional inspector to evaluate the home's true condition, which could save you thousands of dollars in repairs and maintenance.

7. Not having the home properly inspected when buying a new home. Research the number of homes sold, homeowner satisfaction, years in business, industry recognition and warranties offered.

8. Not getting what you want because you're impatient. If it's a used home, allow time to negotiate and get the best deal possible. Refusing to rush the process could save you $5,000 on the purchase price.

9. Waiting for a better time to buy based on the market and interest rates. History shows that those who purchased homes and kept them for three to five years or more did better than those who didn't. Waiting is one of the biggest mistakes a home buyer can make.

10. The biggest home buying mistake is not buying at all. Buying a home will give you a place to call your own and allow you to take advantage of tax breaks and build equity.

Avoiding common mistakes can make the home buying process simpler and less stressful.

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Mistakes to Avoid When Buying a Home

A great way to make the home-buying process flow smoothly is to educate yourself and learn from mistakes others have made - this can make the difference between buying the home of your dreams and buying a "lemon."

Not getting pre-qualified or pre-approved
If you receive pre-qualification or pre-approval from a reputable lender, your negotiating position is strengthened. It shows agents and sellers you are serious about buying a home.

Not seeking guidance from real estate professionals and inspectors
These people are trained in buying, selling and inspecting. Find someone you respect and trust and allow them to help – it will benefit you in the end.

Choosing an agent haphazardly
Don’t jump from agent to agent just because you saw their name on a sign outside of a house you like. Interview at least three agents and choose the one you feel most comfortable with and who will focus on your needs.

Not getting enough information about the properties
Obtain market statistics and sales records for the area you are considering buying a home in so you know how things (prices, conditions, list-to-selling price ratios) stack up in your neighborhood.

Not looking at enough houses for sale
The more you see, the more you’ll learn about what you want and what each house is worth.

Not making the correct price comparison
Don’t assess the value of a house only on the asking price. Your real estate agent should compile reports that reflect and compare the selling price of similar houses recently sold.

Forgetting to calculate all the costs
When calculating the maximum price you can afford, don’t forget to include hidden costs, i.e. courier costs. Calculate a reasonable price range and look for a house that is priced closer to the lower end of your range.

Not asking enough questions
Don’t be afraid to ask questions! You’re not supposed to know everything about buying a home. Remember, this is potentially the biggest purchase you will make in your life – don’t get caught in a "lemon" because you didn’t ask enough questions!

Fear of losing a specific house
Don’t fall in love with the first home you see. New listings come onto the market all the time. The best deal may still be around the corner.

Not looking past the interior decorating or cosmetic improvements
Don’t choose a house because you like the interior decorating – that is not what you are buying and it will probably go with the seller when he moves. Check out the actual structure of the house!

Not checking out every nook and cranny before purchasing
Go through the house with a fine-tooth comb. You don’t want to find out after you’ve bought the house that the roof is leaking. Open cabinets, turn on every switch, notice details, move stuff away from the walls, look in the attic, turn on faucets.

Not making a low offer
Pay only what you can afford. The seller can always make a counter-offer, and you can counter-offer again until you settle on a suitable price, or you can simply walk away.

Being pushed into buying a certain home
Don’t make a decision until you feel you’ve seen enough to pick the best one.

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Mistakes to Avoid Prior to Home Ownership

1.   Spending more than you make.  This can lead to real   danger in not being able to afford to purchase.  Create a budget you can live with and cancel credit cards you do not use before applying for a loan.

2.   Not Saving Enough for Down Payment and Closing Costs. Be sure to include these items when working on your home buying budget.  It will be difficult to come up with thousands of dollars if you have not planned ahead.

3.   Failure to Understand Cost to Own and Maintain a Home.  You must understand the expenses involved in ownership and plan your budget to include these items.  All homes are different and the costs vary depending on the type of home and construction.

4.   No Knowledge of Mortgage Products.  Investigate the types of mortgages available and find one that fits your needs.  No two are alike and the costs can vary greatly.  Shop lenders for the best rates and terms.

5.   Failing to Seek Professional Help.  If you find you are in financial trouble and getting deeper in debt, seek professional counseling to improve your credit history and ability to purchase a home.

6.   Failing to Control Your Home Purchase.  This is your home and be sure you are in charge of the location, style, and price you can pay.  Never let family, friends, or a Real Estate Agent sell you on something you do not want.

7.   Indecision.  Know what you want in regards to your future.  If you are unsure, now may not be the right time for you to buy a home.

8.   Purchasing a Home Before You Are Ready.  Buying a home is a major commitment.  If you are not prepared for the responsibility of ownership and the financial obligation it creates by all means rent.

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Buyer's Checklist

There is no way to guarantee a "smooth" path from an approved contract to the settlement table, but doing your part is at least half the job. Expect minor problems and delays along the way. On the seller's side, title problems are a common cause of postponed settlements. On your side, bureaucratic snags such as extensive credit checks and slow appraisals can bog things down. In many cases, there isn't much you or the seller can do but wait.

While you're waiting for completion of all the processes now in motion, you should:

• Apply for homeowners insurance on your new home.
• Get an exact accounting settlement cost, and make sure the money and necessary documents will be there at closing.
• Select a date for the final walk-through of the house.
• Contact utility companies about starting service in your name.

Insurance on your new home
Your lender will require you to take out a homeowners insurance policy, something you would want to do anyway. The lender wants to cover the amount of its mortgage loan so it can recover the money in the event of a loss. However, it's up to you to see that your insurance coverage remains adequate by getting property protection, liability insurance and/or any additional coverage you think is necessary.

The final inspection
The house you're buying must be handed over to you in the condition specified in the contract. To verify this, schedule a walk-through of the house shortly before settlement, several days in advance is best, to allow time for the seller to correct any last-minute problems.

Take along a simple device, such as a plug-in nightlight, to test all electrical outlets. Turn on the furnace and air conditioning, flush toilets and turn on faucets, put the washing machine and dryer through a cycle. In short, put the house through its paces.

If anything needs fixing or further cleaning, tell the seller immediately. Neither you nor the seller wants to postpone the settlement, but make it clear you won't go to closing until a second walk-through is satisfactory.

What happens at closing
The closing is where ownership of the home is officially transferred from the seller to you. Your closing officer works for the title company and coordinates the document signing and the collection and disbursement of funds. Your main role at the closing is to review and sign the documents related to the mortgage loan and to pay the closing costs.

Most parties involved with the purchase of your new home will attend your closing. The closing is a formal meeting typically attended by the buyer(s) and the seller(s) (and their attorneys if they have one), both real estate sales professionals, and, of course, the closing officer. The meeting is typically held at the title company's office.

What to bring to closing
For things to go smoothly, each party should bring certain documents and be prepared to pay the necessary fees. Many closing costs can be paid by personal check, but ask the closing attorney or closing officer. A certified or cashier's check may be required. Find out to whom checks should be made payable.

The seller and his attorney are responsible for preparing and bringing the deed and the most recent property-tax bill. They also will bring other documents required by the contract. This can include the property insurance policy, termite inspection, documents showing the removal of liens and a bill of sale for personal property.

Make sure you have adequate funds for the down payment and other settlement costs, arrange for your attorney to represent your interests at the meeting, bring the loan commitment, inform the lender of the meeting time and place and have your driver's license ready as proof of identity. Finally, it's a good idea to bring a copy of the purchase contract to refresh your memory.

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Choosing a Lender

Despite an excess of loans and lenders, comparison shopping has been eased by the development of computer-loan origination systems and mortgage-reporting services - firms that survey major lenders in metropolitan areas every week or so and publish information sheets on who is offering what loans on what terms.

Shop for lenders offering the best deals. Check with several mortgage companies and use one or more reporting services. Rely on your own efforts, lots of telephone calls and possibly some old-fashioned legwork. If there isn't a reporting service covering your area, begin the search at your own bank or savings and loan.

Sources of Mortgage Money:

Independent Mortgage Companies make just over half of all home mortgages, including most VA-guaranteed and FHA-insured loans.

Savings Institutions: Savings and loan associations and savings banks originate close to a quarter of home mortgages. Most are conventional loans - those not guaranteed by the VA or FmHA, or insured by the FHA.

Commercial Banks are active in residential lending. Banks also are a major supplier of loans for mobile-home buyers.

Mortgage Brokers act as intermediaries. A broker keeps tabs on the mortgage market through ties to local, regional and national lenders, and can refer a prospective borrower to a mortgage banker, savings institution or a commercial bank. Brokers don't lend money and can't approve loans.

Credit Unions make close to one-third of all first-mortgage loans, but you must be a member.

Public Agencies: State and local finance agencies make below-market-rate financing available to eligible low- and moderate-income first-time buyers through the sale of tax-exempt bonds.

Employers and Unions: Don't overlook your employer as a source of assistance. An employer may subsidize the interest or even act as a lender. Unions are another possibility. The AFL-CIO offers what it calls "Union Privilege." Unions that sign on can make first-time home loans available to eligible members for as little as three percent down.

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Closing the Transaction

The sale is formally ended at the closing table. In most transaction, the closing lasts less than an hour and often occurs at the title company office. Your REALTOR® and the buyer's agent may be present, and a title company officer or escrow agent will preside.

Basic documents
The sale actually consists of two transactions: 1) transferring the property to the buyer and 2) paying off the existing mortgage on your home (or allowing the buyer to assume your mortgage). To transfer the property, the title company will present documents proving that you have the title. Proceeds of the sale may be disbursed at closing or shortly thereafter, once all paperwork and verifications has been processed. When you give your house key to the new owners, the sale is completed.

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Consider the Contract

A valid real estate contract must be in writing and be freely offered by the buyer and accepted by the seller. All parties to the contract must be legally competent to do business. Money or other valuable consideration needs to be exchanged for title to the property.

Keep in mind that if things go wrong, the buyer could require you to sell your home to him/her or pay damages. Be familiar with the terms of any contract you give to a would-be purchaser.

Consider the contract as a whole. Is it slanted in favor of the buyer? If so, consult an attorney about making changes. Analyze the document as a series of paragraphs or clauses, each written to benefit one party or the other.

Key Elements of the Contract

Price and terms
If a low offer comes your way, remain cool until you've examined the terms. Nothing evokes a more emotional response than a low bid. Be realistic and objective because many properties don't bring full price. Don't use price alone as a reason not to counter or negotiate. A first offer may reveal what's most important - price or terms - to this particular buyer, giving you the key to begin bargaining.

Condition of home and inspection
The purchaser should have your home inspected for soundness of construction and state of repair. Include all mandatory and voluntary disclosure statements concerning the property's condition, such as known defects in the contract.

Be careful what you guarantee. You cannot be sure the roof won't leak, the heating system won't go out or any other number of such assurances. Once the property is sold, you are no longer responsible for it.

Response deadline
You'll be asked to respond to an offer within a specified timeframe. Try to get as long a response time as possible. Other offers may come up and you'll want to buy time to review them and perhaps use one offer to increase another.

Settlement date and occupancy
If you have another home under contract, seek a settlement date that will enable you to take your sales profits to the next closing. Be realistic; the buyer of your home will probably need at least 30 to 50 days to arrange financing and close.

Finalizing
Everything in the offering contract is negotiable. When everyone has agreed to the terms, initialed the changes and signed the contracts, you've got an agreement binding on all parties. All that remains is removing contingency clauses, arranging financing and clearing title.

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Escrow Info

What is an Escrow?
An escrow is a deposit of funds, a deed or other instrument by one party for the delivery to another party upon completion of a specific condition or event. It is an independent neutral account by which the interests of all parties to the transaction are protected.

When opening an escrow, the buyer and seller of a piece of property establish terms and conditions for the transfer of ownership of that property. These terms and conditions are given to a third, impartial party known as the escrow holder. The escrow holder has the responsibility of seeing that the terms are carried out.

The escrow is a "storehouse" for all monies, instructions and documents necessary for the sale of your home. This includes the buyer providing funds for a down payment, and the seller depositing the deed and any other necessary papers.

Why Do I Need an Escrow?
An escrow will provide you with a guarantee that no funds or property will change hands until ALL of the terms and conditions have been followed. The escrow holder has the responsibility to watch over the funds and/or documents and then pay out the funds and/or transfer the title only when all requirements of the escrow have been completed.

How Does the Escrow Process Work?
The buyer, seller, lender and/or borrower cause escrow instructions to be created, signed and delivered to the escrow officer. The escrow officer will then process the escrow, in accordance with the escrow instructions. When all conditions required in the escrow are met, the escrow is "closed."

Prior to close of escrow, the buyer deposits the funds required with the escrow holder. The buyer instructs the escrow holder to release the money to the seller when:

• The deed records
• A policy of title insurance is prepared and delivered to the buyer

The escrow holder acts for both parties and protects the interests of each within the power of the escrow instructions. Escrow cannot be completed until the instructions have been fully satisfied and all parties have signed escrow documents. The escrow holder takes instructions based on the terms of the purchase agreement and the lender's requirements.

The duties of the escrow holder include:

• Managing the funds and/or documents in accordance with instructions
• Paying all bills as authorized
• Responding to requests from the principals
• Closing the escrow only when all terms and conditions have been met
• Distributing the funds accordingly

How Do I Open an Escrow?
Generally, the seller's real estate agent will open the escrow. As soon as you complete the purchase agreement, the selling agent will place the buyer's initial deposit, if any, into the escrow account at a title company or into the real estate broker's account.

What Do I Need to Do Before My Appointment to Sign Escrow Papers?
All parties signing the documents must bring proper identification. Bring either a valid driver's license, state identification card or current passport with you to the title company. This item is needed to verify your identity by a notary public. This is a routine, but necessary step for your protection.

What's the Next Step After I've Signed the Closing Escrow Papers?
After both parties have signed all the necessary instructions and documents, the escrow officer will return the buyer's loan documents to the lender for final review. After the review is completed, the lender is ready to fund the buyer's loan and informs the escrow officer.

How Long is an Escrow?
The length of an escrow is determined by the terms of the purchase agreement and can range from a few days to several months.

What is an "Escrow Closing"?
An escrow closing is the climax of the transaction. It signifies legal transfer of title from the seller to the buyer. Generally, the Grant Deed of Trust is recorded within one working day of the escrow holder's receipt of loan funds. This completes the transaction and signifies the "close of escrow." Once all the conditions of the escrow have been satisfied, the escrow officer informs you or your agent of the date escrow will close and takes care of the technical and financial details. The final closing papers are disbursed upon close of escrow, when the escrow officer verifies with the County Records Office that the documents have recorded and legal transfer has occurred.

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Finding Financing

Once a contract becomes binding, you probably will have to arrange for financing. Depending on the terms of the contract, the purchase of the home may be contingent on your being able to get financing at certain terms by a certain date.

Lenders
The REALTOR® might provide you a list of lenders. Most home buyers get loans through savings institutions and mortgage bankers and, to a lessor extent, from commercial banks, credit unions, or other private sources. In some cases, the seller may be willing to offer financing. Sellers often can offer a loan to a buyer at a competitive interest rate and attractive terms. Check on specifics.

Types of loans
In general, three broad categories of loans are available:

1. Private versus government loans - Most mortgage loans are made by savings institutions, banks and mortgage companies. On government (FHA and VA) loans, the government does not actually loan the money but rather guarantees (or insures) to repay the lender if you default for some reason. Generally, a lender will require you to buy mortgage insurance, particularly if you make a low down payment. This insurance may be paid at closing or added to the loan amount. VA loans require no mortgage insurance, but only qualified veterans may apply for them. Mortgage insurance protects the lender, to a degree, in the event of default.

   Government loans have important advantages - they generally require a lower down payment than conventional loans and often have a lower interest rate or points. One the down side, government loans limit the amount you can borrow, often take longer to process, and sometimes have higher closing costs.

    

2. Fixed rate versus adjustable rate - On a fixed rate mortgage, the interest rate stays the same over the life of the loan, usually 15 or 30 years. That means your payment will not change except for adjustments for taxes and insurance.

   Adjustable rate mortgages go by a variety of names, but basically these loans have interest rates or monthly payments that can go up or down over time. These mortgages typically start out with a lower interest rate, lower monthly payments, and lower fees and points than fixed rate mortgages. They often appeal to first-time home buyers, younger couples who expect their incomes to grow in the coming years, and people who might not have much cash for down payment and closing costs.

   If you consider an adjustable rate mortgage, ask the lender to explain the terms fully. Ask about the interest rate cap; the maximum rate you will be charged no matter how high rates go in the market. Don't confuse rate cap with payment cap. When the payment is not enough to cover interest, the excess interest is added to your principal balance, so your debt increases instead of decreases. Also ask about the index that will be used to calculate future interest rates and how index charges will affect your mortgage.

    

3. Assumable versus new loan - Some loans, particularly FHA and VA loans as well as some adjustable rate mortgages, are assumable. That means a buyer can assume an existing loan usually on the same terms as the previous owner.

   Assuming a loan may save some costs and time. As the buyer, you may pay the lender a fee at closing for processing the assumption.

The true price of financing
When shopping for a loan, don't judge the loan by the interest rate alone. Compare several items in the entire loan package, including:

• Points on a low-interest-rate loan can be double those for a loan with a higher interest rate, causing you to pay more up front and in cash.
  
• Total fees charged by the lender. Some lenders will absorb the cost of many services, while other do not, so ask in advance.
  
• Term. In general, the longer the life of the loan and the more fixed the payment, the more you can expect to pay over the life of the loan. For example, a 30-year, fixed-rate loan will cost more in interest than a 15-year, fixed-rate loan.
  
• Penalties. Ask what penalties will be charged if you pay off the note early. A prepayment clause could require you to pay a penalty if you pay off the loan early, such as refinancing the loan at a later time.

Loan approval process
When you apply for a loan, the lender will ask about your finances. You will already have most of the facts and figures in the financial information you compiled earlier. The process can take several weeks.

From the lender's viewpoint, approving the loan is only part of the risk; the other part is the property itself. The lender may require an appraisal to verify that the home is worth the loan as well as a physical survey to discover any encroachments on the property. Repairs may be required. Insurance must be purchased. Verifications of employment, deposits, and other matters must be obtained. Loan documentation and conveyances instruments must be drawn and approved. In addition, the title company must research the title and arrange for paying off any liens, taxes, and other costs. All these conditions and other conditions must be satisfied before a transaction can close.

Hazard insurance
As another protection, the lender may require insurance protecting the home against hazards such as fire and storms. (Flood insurance will most likely be required if the house is in the flood plain and would be a separate policy.) Hazard insurance may be included in a homeowner's policy that covers other risks such as theft and liability. Even if not required by a lender, it is probably a good idea for you to seriously consider all types of insurance. Discuss these issues with your insurance agent.

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Find the Right Mortgage

Time spent shopping for a mortgage is time well spent. Before you rule out one loan or another, give some thought to your particular needs and wishes. Prequalifying before house hunting puts you ahead of the game. You already know the standard of mortgages for which you qualify. The message is simple: Shop for a loan, not a lender. Hunt for the best loan - interest rate, points, processing costs, etc. Don't pay much attention to who's originating the loan or where it is.

First, you should review the major kinds of mortgages you may encounter. This list doesn't explain them all, but it does contain those you will most likely see.

Fixed-Rate Mortgage (FRM)
This is the standard mortgage model. It is the oldest and most easily understood type of mortgage. Its primary attraction is that the interest rate and the amount of payment remain fixed for the life of the loan, typically either 15 or 30 years. However, if rates fall, the holder cannot benefit from the new, lower rate except by refinancing.

Adjustable-Rate Mortgage (ARM)
With this kind of mortgage, the interest rate you pay rises and falls along with other rates charged throughout the economy. Therefore, you, the borrower, assume the risk of rising rates, and you stand to benefit should rates fall.

An essential question to ask about an ARM is whether there are limits on how much your rate can be raised, both at each review and over the whole term of the loan. Without limits, known as "caps," you'll have no way to predict how much your rate (and thus your monthly payments) might change.

Convertible Option
FRM and ARM represent the primary options available to home buyers today. The convertible mortgage represents something of a compromise between the two. It is designed for those who want the advantages of the ARM, but also want to limit the risk of rising rates. Under this arrangement, the buyer starts out with an ARM, but has the option of converting to a FRM at specified points during the loan term. You may want to ask the lender these questions: When can you convert? How often can you consider the option? Are there any up-front fees involved? Will you have to pay more for an ARM with the conversion feature than for an ARM without it? Are there additional fees due if and when you decide to convert? Find out the lender's conversion rate.

Graduated Payment Mortgage (GPM)
A fixed-rate GPM starts out with low payments, usually below that of a fixed-rate and possibly that of an ARM, but rise gradually (usually over five to ten years), then level off for the remaining years of the loan.

Growing-Equity Mortgage (GEM)
This option is designed for borrowers who want to pay off their mortgage as soon as possible. Therefore, the interest rate remains fixed, but the amount of the monthly payment increases according to a prearranged schedule, with the higher payments going to reduce the principal balance. This mortgage can be appealing to someone who is expecting regular income growth and wants to build equity quickly.

Fifteen-Year Mortgage
Like the GEM, the fifteen-year mortgage enables borrowers to repay their loan more quickly, which means they build equity faster and pay less interest over the life of the mortgage.

Biweekly Mortgage
Another option for people who want to repay their loans sooner is the biweekly mortgage. Instead of making a single mortgage payment each month, borrowers who choose this option make two equal payments monthly.

Federal Housing Administration Insured Loans (FHA)
Should one fail to pay, FHA insures mortgage loans made by approved lending institutions. The FHA insures a variety of mortgages, including FRMs, ARMs, GEMs and GPMs. Down payments are low - 5 percent or less. The FHA doesn't set the interest rate on loans it insures, so you'll need to shop around for the best rate.

The FHA limits the amount it will insure to whichever is less: 95 percent of the local average home price or 75 percent of the loan limit set by the Federal Home Loan Mortgage Corporation, a large buyer and reseller of mortgages.

Veterans Administration Guaranteed Loans (VA)
VA loans have most of the advantages of FHA loans, and then some, but they also have eligibility restrictions. They are available only to veterans of the armed services, those currently in the service and their spouses. VA loans are typically half a percent or more below market rates, and they can be obtained with no money down.

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Homeowner Tips

You've done it. You've bought a home and now own part of The Dream. In the process you've also acquired many responsibilities and concerns. There are mortgage payments to make, records to keep and maintenance work to complete. Below are a few tips for the new owner.

Mortgage payments
Every month you'll receive a statement from your lender reminding you that your mortgage payment is due, or, if you have a coupon book, you'll have to remember to send your payment on time.

Some lenders can automatically deduct monthly payments from your checking account. This saves time and postage costs. It can also prevent the possibility of missing a payment. Ask your lender about this service.

Furnishing and renovating
You've just moved in. Most of your belongings are still in boxes. But you've decided the first thing you want to do is redo the first-floor bathroom, buy new furniture for the living room and strip the wallpaper from every wall in the house.

Stop. Put your hands in your pockets, seal your wallet, tie yourself to a chair. Don't do anything major right away.

Acquiring a home requires some adjustment. Your mortgage payment may be higher than the rent you've been paying, so give yourself time to get used to the new cash regimen. Too many new buyers realize too late that they had no idea how much it costs to run a home.

The message here is simple common sense. Go for a slow, smooth transition. You'll probably be living in this house for a good while; don't try to do everything at once, even if you can afford it.

Papers to keep
Keep a copy of every document you signed at the closing. It's especially important to keep a copy of your settlement form. It will be useful when you file taxes and if you sell your home. For example, the real estate taxes and loan discount points you paid as part of your closing costs are tax deductible. So, when you file taxes, refer to the settlement form to get these amounts.

In addition to the closing documents, keep all insurance records, such as homeowners and title insurance. You would need to have access to your homeowners policy if, for example, someone were to sue you because they were injured on your property. You would refer to your title insurance policy if you were to find a flaw in the title after you bought the house.

It's a good idea to keep these important records in a safe place. You may want to store them in a safety deposit box or a bank vault in addition to keeping a copy at home.

Home maintenance
Your mortgage requires you adequately maintain your property and not allow it to deteriorate. As a homeowner, you can't afford to sit back and postpone maintenance. You can extend the life of appliances and fixtures and avoid expensive repairs by performing routine maintenance yourself.

It's a good idea to set up a budget for your home's regular maintenance and unexpected repairs. You may want to budget 1 percent of the purchase price of your house to cover annual maintenance and repairs. You also may want to stick to a regular savings plan to cover essential bills, emergency repairs and large, periodic expenses such as property taxes and homeowners insurance.

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How Much Can You Borrow?

How much you can borrow will depend on your income, down payment, job stability, existing debts, credit references and payment history. Lenders usually use the following two qualifying guidelines to decide how much of a loan you can manage:

• Your monthly housing expenses - mortgage payment, property taxes, insurance, etc. These expenses should be no more than 28 percent of your monthly gross income.
  
• Your monthly living expenses and any long-term debts - utilities, car and school loan, child support, health and car insurance, etc. These expenses should be no more than 36 percent of your monthly gross income.

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Title Insurance

How do I obtain title insurance and what does it cost?

Let the title company, attorney or agent handling the closing of your property know that you want to purchase an Owner's Title Insurance Policy. When choosing a title insurer, look for a company with experience, as well as the financial strength to protect you. In most states, the insurance commission or some other governmental body controls the premiums for title insurance policies. You only pay the premium once. The cost depends upon the purchase price of the property, and your policy amount must be equal to the purchase price.

How long does my coverage last?

Once purchased, title insurance remains in effect for as long as you own your property. Title insurance adds security and peace of mind to homeownership.

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What You Want, What You Need

Here are some suggestions to help you prepare for your search.

Needs and wants list
Make a list of your needs and wants. Do you need an extra bathroom, a garage, a fenced backyard, lower utility bills? Do you want a fireplace, a short drive to work, a lakeside view, or maybe minimal yard work?

Once your list is made, go back over it and decide what is most important to your lifestyle. It may be privacy, creativity, or recreation. Decide which items are musts and which you are willing to give up. Assign each item a priority so that you will know what to look for as you begin house hunting.

Location
Deciding where you want to live may be the single most important factor in choosing a home. Location affects your day-to-day living. Location to employment centers, shopping centers, schools, major traffic arteries, and other attractions are important. Evaluate location carefully. Location of a property is one of the most significant influences on value.

Your choice of location may be limited somewhat by the price you can afford. Even so, make sure you consider such things as:

• prices of properties and property taxes,
  
• distance to work, schools, shopping, and entertainment,
  
• proposed changes in land use such as commercial shopping centers and roads, and potential hazards such as flooding and noise from a nearby airport or highways.

Type of home and lot
A single-family detached home is attractive to a lot of people because it typically provides more living space and land area than other types of living units. Typically the detached structure permits you greater freedom (less restrictions) on remodeling, expanding, painting, and altering the appearances of the structure.

If you don't like spending leisure time on yard work, consider garden or patio homes. These homes are set on small lots. Many garden home developments share common garden areas.
A condominium is another option. Condos and patio homes often offer shared greenbelts or membership in private recreational facilities such as swimming, golf, and tennis.

New vs. older homes
In selecting the type of home you want, consider new versus preowned homes. Preowned homes usually have established yards, and usually the neighborhood or subdivision is built-out. On the other hand, older homes may require more maintenance and need some repairs.

New homes are not without problems. Although they require less maintenance in the first few years, you may have to put in landscaping and call the builder back to correct faults. If buildings are still active in area, you may have to endure nearby construction.

Finally, consider size and style. You may already have in mind a wood-and-glass contemporary lodge with sun decks or a two-story Victorian mansion with a cozy attic. Or you won't know what you like until you see it. Either way, your REALTOR® will listen to your preferences and help you find the right home for you.

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Art of Negotiation

Everything is negotiable when buying a house. For some reason, most buyers either don't believe it or don't like it. Here's a partial list of what's negotiable when you buy a home:

• Price
• Financing
• Closing costs (except where specified by financing or law)
• Occupancy (When can you get the key and move in?)
• Painting (Will the seller repaint a portion of or the entire house?)
• Repairs (Will the seller repair the roof, plumbing, windows, etc., and what kind and quality of repairs will be made?)
• Yard (Will the seller remove unwanted trees, bushes - put in desired landscaping?)
• Fixtures (Which lights, fans, appliances, etc. stay and which go?)
• Wall coverings (Do the drapes stay or go?)
• Furniture (Will the seller include certain pieces?)
• Prepaid taxes and insurance (Will the seller credit you with these?)

Negotiation gives the buyer incredible power in making a favorable transaction. It can also place him or her in a position of immense weakness. Negotiation can determine whether you get the home of your dreams…or whether those dreams end up being a nightmare.

Ultimately, how you fare when buying a home is going to be a direct result of your knowledge. The more you know, the better position you'll be in to negotiate.

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The Offer

When a buyer makes an offer to purchase your home, your REALTOR® will contact you promptly. The REALTOR® will scrutinize the document, review it with you carefully, and answer your questions. The written offer is important because it lays out all the terms of the proposed transaction and will become a binding contract if you sign it. The offer states the price the buyer is willing to pay and the financing terms, such as assuming your loan or arranging a new loan.

The offer may be contingent on the buyer's selling a home first, or obtaining an inspection. Ask the REALTOR® how these terms affect you and whether the offer is reasonable and in line with the market. The offer describes the property, states who pays for which closing costs, and specifies dates of closing and possession. Along with making the offer, the buyer may place some earnest money with the escrow agent as a sign of good faith. The earnest money will be kept in an escrow account and applied to the buyer's down payment or closing costs when the sale closes.

Your options
In reviewing the offer, you have three options: accept, reject, or make a counteroffer. A counteroffer is a rejection of a buyer's offer with a simultaneous offer from you to the buyer. In making your decision, carefully review the figures compiled earlier to determine your net proceeds. Because the terms and estimated closing costs may be quite different from earlier calculations, you will want to discuss the possibilities with your REALTOR®. You are also encouraged to seek the advice of an attorney and a tax adviser.

Seller's Disclosure
In most residential sales, a seller will deliver a Seller's Disclosure Notice to a buyer on or before the effective date of a contract to purchase the property. The notice is required by law to be delivered. It provides important information about the seller's knowledge of the condition of the property. Complete the notice to your best knowledge and belief. Your REALTOR® will most likely ask that you complete the notice at the time the listing is first taken. Copies of the completed notice will be made available to the prospects looking at your property.

Lead-Based Paint Disclosure
If your property was built before 1978, federal law requires that before a buyer is obligated under a contract to buy the property, the seller shall: 1) provide the buyer with a lead hazard information pamphlet (as prescribed by EPA); 2) disclose the presence of any known lead-based paint or hazard; 3) provide the buyer with a lead hazard evaluation report or records available to the seller; and 4) permit the buyer to conduct a risk assessment or inspection for the presence of lead-based paint or hazards. A contract for the sale of property built before 1978 must contain a statutorily prescribed Lead Warning Statement to the buyer. Your REALTOR® will provide you with the forms necessary to comply with their law and will suggest procedures to follow in order to comply.

Accepting the offer
Once you and the buyer agree on terms and sign the contract, the buyer will generally have to find a lender and apply for a loan. Your REALTOR® may monitor the loan process, which could last several weeks. During this time, your REALTOR® will also be busy coordinating other arrangements to prepare for the final sale.

Title search
As part of the process, the title company may order a survey of your property and research the title to your home, making sure the chain of title is clear. Clearing the title may require paying off liens - that is, any monetary claims - against your property. Examples are mechanic's liens, unpaid state and federal tax liens, court judgments, and probate considerations (if a co-owner has died). The product of the title search can be in the form of title insurance, abstract of title, or certificate of title, depending on what is commonly used in your area.

Inspection and repairs
If the buyer requires inspections of your home, your REALTOR® may coordinate the scheduling of inspectors. A buyer may hire an inspector to review many items in the property such as the structural components, mechanical items, electrical systems and plumbing systems. The inspector will report to the buyer the items that the inspector finds to be in need of repair. Most likely the buyer will provide a copy of the inspection report to you and may ask you to complete certain repairs. Do not be surprised when the inspection notes some items in need of repair. An inspector is trained to see items and defects that are not obvious to you and your REALTOR®. No matter how new or well maintained a home is, an inspector may very well find some items in need of repair.

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Relocation Timeline

About one month away from your move, you'll want a detailed checklist to make sure nothing is forgotten. 

Four weeks to go:

• Call moving companies for a free estimate. Cost will vary depending on distance, weight and optional services.
• Look through your house to determine items to be discarded or donated to charity. Have a garage sale!
• Inform schools of transfer. Make arrangements for enrollment/registration in new schools if necessary.
• Most homeowner's policies do not provide adequate coverage for moving. Check with your agent and consider purchasing additional coverage from a moving company.
• Begin collecting boxes with covers if you plan to pack your belongings. You can purchase packing materials through moving companies or contact local grocery stores for extra boxes. Be sure to stock up on packing tape!
• Begin consuming perishable and frozen food items to minimize waste.

Three weeks to go:

• Begin packing!
• Notify the post office of your new address and send change of address cards to friends, family, subscriptions and any billing companies.
• Make necessary travel arrangements including interim housing and car rental. Be sure to record confirmation numbers.
• Collect medical records and prescriptions from physicians. Ask for recommendations for doctors in your new area.
• Place legal, medical and insurance records in a safe and accessible place.

Two weeks to go:

• Arrange to disconnect utilities/services in your current residence and coordinate installation of utilities/services in your new home.
• Close/transfer bank accounts and open accounts in your new city.
• Take pets to the vet for immunizations. Ask for advice on moving animals.
• Draw a map of your new home and where the furniture will be arranged.
• Return library books and any borrowed items.
• Be sure to cancel newspaper subscriptions and/or any special services you have (i.e., landscaping/lawn service, snow plow, etc.).

One week to go:

• Prepare car for the trip. Check the oil, tires, brakes, etc.
• Drain water from hoses.
• Drain gasoline and oil from any lawn or power equipment.
• Remember to pick up items sent to the cleaners or for repairs.

Days before:

• Defrost and clean out refrigerator
• Pack your luggage and separate any items you will need in the first days in your new home (i.e., a current telephone directory - you may need to refer to it for calls to residents or businesses in your former hometown). Label these boxes "Load Last."
• Reconfirm travel arrangements.
• Reserve ample parking space for the movers and provide clear paths inside the house.

The Big Day!

• Be on hand to answer any questions.
• Go over your inventory with the driver.
• Be sure to point out all FRAGILE items to the movers.
• Check, double check and triple check to see if anything is left behind!
• Do not leave the house until the movers are gone.

A Few More Moving Thoughts:

Moving your computer - Make copies of all your files and software. If possible, pack your computer, monitor, and printer in their original boxes. If not, ask a moving company for boxes made especially for computers.

Packing supplies - have 1.5" packing tape, thick markers, packing pellets, scissors, labels, tissue paper, newspaper and blankets on hand.

Inventory - Review inventory list.

Pack photographs between sheets and blankets in boxes for added protection.

At your destination consider hooking up the TV and VCR to occupy children until the truck is unloaded.

Enjoy your new home!

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Role of A Title Company

Now that you've decided to buy a home, what happens between now and the time you legally own it? The next step is to obtain title for the property from the title company. A title gives the owner the right to possess and use the property. But before receiving title, the title company will need to complete the following:

Earnest money: To show the seller and his agent you are a serious buyer, you will be asked to give the title company a deposit called earnest money. If the sale goes through, the earnest money is applied toward the down payment. If the sale falls through, the earnest money will not be given back unless it is stated in the offer to purchase that it is refundable.

Title search: A title search is a thorough check of the records concerning the property. It is performed to verify the seller's right to change ownership. A title search will uncover any demands, faults, liens and other privileges or restrictions on the property.

Document preparation: Appropriate forms are prepared for settlement.

Settlement: Many events happen during settlement. The seller signs the deed, the buyer signs the new mortgage, the old loan is paid off and the new loan is established. The seller, real estate professionals, attorneys, surveyors and others performing services for the parties are paid. Title insurance policies are then delivered to the buyer and their lender.

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What to Offer

A REALTOR® can help you find your perfect home, but only you can decide how much you are willing to offer for it. The REALTOR® can supply you with information about the selling prices and marketing time of other houses in the area.

Once you have determined the amount you are willing to offer, the REALTOR® will help you prepare a written offer. In most transactions you will offer to deposit earnest money with the escrow agent. Earnest money manifests your sincerity in making a reasonable offer and abiding by the terms of the written contract.

Contract forms
Your REALTOR® will help you prepare an offer using standard forms. The offer, if accepted, will become a binding contract. This document is the most important paper you will sign because it lays out all the terms of the transaction. It will contain such things as:

• a legal description of the property,
  
• any property that will be transferred with the home, (blinds, curtains, fireplace screens, etc.)
  
• the price,
  
• financing conditions and contingencies,
  
• amount of earnest money deposit,
  
• name of the escrow agent and title company,
  
• proration of insurance, taxes, and interest,
  
• fees to be paid and who pays for which,
  
• rights to inspect the property and for repairs to be made,
  
• dates of closing and possession, and
  
• what happens if either party defaults on the contract.

 

Inspections and warranties
Before signing the contract, take precautions to protect yourself against unseen defects in the home. An inspection by a qualified inspector or other professional can provide you with unbiased opinions about the condition of components and systems in the property such as the foundation, mechanical systems, plumbing systems, appliances, etc.

 

If you can, accompany the inspector at the time the inspection is conducted. When ordering the inspection, ask the inspector the approximate time needed to complete the inspection so you can reserve sufficient time from your schedule. Be sure to ask the inspector to detail the scope of the inspection. Not every inspector inspects every component in a house. For example, does the inspector inspect foundations, air conditioning and heating units, roofs, swimming pools, septic tanks, etc.? The cost of home inspection depends on the size of the home, but the price could prove to be worth it. It's also a good idea to get a termite and other wood destroying insect inspection.

 

You may also want to investigate the possibility of buying a residential service contract. Such a contract is an agreement with a residential service company that certain items will be repaired by the company if such items fail to function after you move in. If you buy a new home, the builder may offer a warranty as well. Whether you buy a residential service contract or receive any other warranty, find out how claims will be processed and how any necessary repairs will be made.

Seller's options
The REALTOR® working with you will present the contract to the seller's agent or seller. The seller has three options: accept, reject or make a counter offer. A counter offer is a rejection of the offer with a simultaneous offer from the seller to the buyer. If a seller makes a counter offer to you, you then have three options: accept, reject, or make another counter offer. Whoever makes an offer or counter offer is giving the power of acceptance to the recipient of the offer or counter offer.

Binding contract
Once you and the seller unequivocally agree to the written terms and both of you sign, the document becomes a binding contract.

As part of the contract you may have the right to have the property inspected and certain repairs may be required to be completed. Be sure that you pay close attention as to when certain items must be completed. Otherwise, you may waive some contractual rights. For example, the contract may provide for you to deliver a copy of the inspection report to the seller within a specified time and to deliver a list of the items you require to be repaired. If you fail to provide the information within the specified time, the contract may provide that you waived certain rights.

The contract may also set out other contingencies that have to be satisfied. We cannot address all conditions and contingencies. Read the contract carefully, know its terms and comply with its requirements timely.

If repairs are required, the contract will specify who will bear the cost of the repairs, who will arrange for the repairs, and when the repairs must be made. Before you close, be sure that the condition of the property meets the required condition specified in the contract.

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Traditional Loan Process

You've found the mortgage you want and you're ready for the next step - the loan application. The process costs anywhere from $100 to $500 and is usually non-refundable. Lenders levy the fee to cover the costs of running credit reports and filling out mortgage-insurance applications.

What to expect

• You will need raw material, and lots of it, for the application: income and balance-sheet figures and evidence, copies of past income-tax returns and the title to your car. Take the paperwork you gathered during the prequalifying process with you.
• Be prepared to provide the name and phone number of someone who can verify your financial information - most likely your employer's personnel office. If you have substantial non-salary income from investments, you'll be asked to substantiate this through an accountant, stockbroker, trust officer or similar source.
• Application forms are usually filled out during the interview with the help of a loan officer, but you could fill them out at home and return them.
• In addition to the application fee, you may be asked to pay a "loan origination fee" or "prepaid point" - typically 1 percent of the loan amount - when you apply, before approval is made.
• Find out what will happen to your origination fee if the lender decides not to approve your loan. Will the 1 percent origination fee be refunded? Get the answer in writing before you pay.

From the time you submit the completed loan application - and appraisal and credit reports are received - the lender has up to 30 days to approve or reject your request and inform you of the decision. Make sure you haven't been forgotten. During the process, remind the loan officer of your settlement date and check on the progress.

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Put it in Writing

Put negotiations in writing. Don't reveal your strategy, and don't make oral offers. You want to buy the house, but don't hand over money until you're sure the seller is legally capable of conveying a good title and meeting other conditions. The seller, in turn, doesn't want to deliver the deed until you've paid for the property. Now what? Present the seller with a written contract setting out the commitments and promises that you and the seller need to agree on and fulfill to make the sale. A well-drawn contract should protect all parties.

The first contract you submit should be comprehensive; everything of any importance should be included. Once it is accepted by the seller, it may be too late to add or change anything. Your contract should include:

• Offering price
• Down payment
• Legal description of the property
• Method of conveying the title
• Fees to be paid and who will pay them
• Amount of deposit
• Conditions under which the seller and buyer can void the contract
• The settlement date
• Financing arrangements
• A list of appliances, furnishings and personal property being sold with the home

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Appraisal Basics

An appraisal of real estate is the valuation of the rights of ownership. The appraiser must define the rights he intends to appraise.

The appraiser does not create value, the appraiser interprets the market to arrive at a value estimate. As the appraiser compiles data pertinent to a report, consideration must be given to the site and amenities as well as the physical condition of the property. An appraiser may spend only a short time inspecting the property, however, this is only the beginning.

Considerable research and collection of general and specific data must be accomplished before the appraiser can arrive at a final opinion of value.

Due to the many types of value, such as Fair Market Value, Insurance Value, Tax Value and Value In Use, the need to precisely define the purpose of the appraisal is essential.

Appraisal Methods

An appraisal is an opinion of value or the act or process of estimating value. This opinion or estimate is derived by using three common approaches, all derived from the market. They are:

1. Cost Approach to value is what it would cost to replace or reproduce the improvements as of the date of the appraisal, less the Physical Deterioration, the Functional Obsolescence and the Economic Obsolescence. The remainder is added to the Land Value.
2. Comparison Approach to value makes use of other "bench mark" properties of similar size, quality and location that have been recently sold. A comparison is made to the subject property.
3. Income Approach to value is of primary importance in ascertaining the value of income producing properties and has little weight in residential type properties. This approach provides an objective estimate of what a prudent investor would pay based upon the net income the property produces.

Then, after thorough analysis of all general and specific data gathered from the market, a final estimate or opinion of value is correlated.

Why should appraisals be ordered?

To settle an estate:
Taxing authorities such as the IRS often require appraisals to establish the value of an estate when a death occurs. Generally, the survivors want a conservative value estimate that limits their tax liability as much as possible. Most estate appraisals are ordered by attorneys, not by the survivors.

To establish the replacement cost for insurance:
Appraisals obtained for establishing the loss risk in case of fire are often limited to providing an estimate of the replacement or reproduction cost of the improvements. The insurable value may not be representative of market value and usually does not include the value of the land. Insurance agents may order appraisals when their standard cost service manuals are not adaptable to an atypical home or structure. Or property owners may order appraisals to contest the annual appreciation increases mandated by some insurance companies, especially when the increase in the insurance coverage results in an unrealistic Premium.

To establish just compensation for condemnation: The appraiser may represent either the landowner or the condemning authority. Usually, the government entity that needs the land for public use orders an appraisal and offers to purchase the land for the value indicated by the appraisal. If the landowner feels that the amount offered by the condemning authority is not enough, then the landowner may also order an appraisal. If the parties cannot agree on a price, then the matter will be settled in court with each appraiser testifying on behalf of their respective value estimates. The appraisers are not advocates for their client; they are expert witnesses trying to support their value estimates.

Often landowners do not consider ordering another appraisal from an appraiser of their choice. Usually, they try to settle with the authority by negotiation rather than incur the expense of an appraisal. It is obvious that the landowner's negotiating position would be enhanced if a supporting professional appraisal report were available.

To contest high property taxes
If property owners feel that their property is assessed too high, then they may order an appraisal from a qualified appraiser to contest the assessment. In certain parts of the country this practice is common, but many property owners are not aware that this avenue of reducing their tax burden is available. The return on investment is easy to perceive when the cost of an appraisal is compared to several years of lower taxes. Sometimes these assignments include an appearance in front of the equalization board to argue the landowner's case. The appraiser, however, must be careful not to base the appraisal fee on the dollar amount of the appraised value, which could be a violation of the USPAP.

When to Order an Appraisal

There are many reasons to obtain an appraisal. The most common reason is for Real Estate and Mortgage Transactions, but we have compiled a list of other reasons you may need to order an appraisal:

• to obtain a loan.
• to lower your tax burden.
• to establish the replacement cost of insurance.
• to contest high property taxes.
• to settle an estate.
• to help you make one of the largest financial decisions in your life.
• to provide a negotiating tool when purchasing real estate.
• to determine a reasonable price when selling real estate.
• to protect your rights in a condemnation case.
• to allow you to obtain a qualified appraisal report.
• because a government agency such as the IRS requires it.
• you are involved in a lawsuit.

Home's Market Value

In the real world, very few individuals order appraisal reports to establish an offering price or to substantiate a purchase price. At the point that an offer to purchase (in a typical residential transaction) is made, the price has been set by other parties, not the purchaser. The price has been determined by the seller, who wishes to obtain the highest price possible, or the agent, who receives a percentage of the price as compensation and often represents the seller in the transaction.

The real estate agent will typically perform a comparative market analysis (CMA). The appraisal laws in most states allow real estate agents to perform CMAs without an appraiser's license or certification. A CMA is a necessary part of the agent's preparation for a listing and consists of examining sales of properties in the area to arrive at a listing price. The reliability of the CMA depends upon the agent's experience and the characteristics of the property. The agent will suggest a selling price to the seller based upon the analysis. However, neither the seller nor the agent are bound by the results of the analysis, and the agent is not required to follow any formal procedure in completing the CMA. If a seller wishes to list the property at a price higher than the price suggested by the agent, then the agent may be forced to accept the listing at that price or risk losing a commission.

Purchasers believe that they are getting a good deal if they make an offer lower than the listed price. But how far above the market value was the property listed? 10%, 15%, maybe even 20% above the fair market value? A negotiated price of 10% less than the listed price on a property that was listed at 20% above its value is not a bargain. The agent cannot tell the purchaser that the offered price is higher than the value, or even higher than their own CMA. In most states, they must submit the offer to the seller.

The seller of a property may want to order an appraisal before listing the property. Of course, the cost of the appraisal is always a deterrent, especially if the seller knows that a buyer will pay for it when applying for a loan. But the appraisal is often justified. The seller could lose a sale if the property appraised for less than the sale price when appraised by the appraiser.

Appraisal To Obtain Loan

Usually, individuals applying for a loan are only interested in obtaining the loan and unfortunately are not worried about the prudence of buying the property at the agreed price. In fact, many purchasers will try to encourage appraisers to increase the appraised value so that they can purchase the home regardless of its value.

The majority of real estate appraisals are requested by mortgage companies to validate the property's purchase price for loan purposes. Except for periods of very low interest rates when everyone is refinancing, most loans are for the purchase of real estate and ordered after a sale price is negotiated. Purchasers mistakenly assume that mortgage companies are looking after their interests in the purchase transaction.

The law states that if the mortgage company orders the appraisal, the appraiser is responsible only to the mortgage company. We expect mortgage companies to be prudent and they should be, but being prudent is protecting their interest, not necessarily the purchaser's. The mortgage company's position:

• It has two sources of repayment: the purchaser's income and the property.
• The responsibility to repay the loan is not based upon the property's value, so the purchaser is obligated to pay the note even if the property value declines to zero.
• The loan may be insured or guaranteed by a government agency.
• The government does not promise to pay the purchaser's debt if the property value is wrong.
• If the loan is greater than 80% of the value, a portion of the loan may be insured by a private mortgage insurer.
• There is no decrease in risk for the purchaser regardless of the loan-to-value ratio. The investment by the purchaser is the same, a mixture of personal cash and a loan that must be repaid.

Helping the Appraiser

Once you have selected an appraiser, be prepared to answer questions and provide requested information.

• What is the purpose of the appraisal?
• When is the required completion date of the appraisal?
• Is property listed for sale and if so, for how much and with whom?
• Is there a mortgage? If so, with whom, when placed, for how much, type of mortgage [FHA, VA etc.], interest rate, and any other types of financing.
• What personal property, such as appliances, are included ?
• If it is an income­producing property, provide a breakdown of income and expenses for the last year or two and a copy of leases.
• Provide a copy of deed, survey, purchase agreement or other pertinent papers pertaining to the property.
• Provide a copy of current real estate tax bill, statement of special assessments, balance owing and on what [sewer, water, etc.].

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Mortgages and Credit Reports

Many home buyers are very worried about how their credit report will affect their ability to buy a home. We even heard one story that an applicant was denied a mortgage because he had returned a rented videotape late!

Of course, that could never happen. Most people will not need to worry about the effects of their credit history during the mortgage process. However, you can be better prepared if you get a copy of your credit report to review before you apply for your mortgage. That way, if there are any errors you can take steps to correct them before you make your application.

If you have had credit problems, be prepared to discuss them honestly with a mortgage professional and come to your application meeting with a written explanation. Responsible mortgage professionals know there can be legitimate reasons for credit problems, such as unemployment, illness or other financial difficulties. If you had a problem that's been corrected, and your payments have been on time for a year or more, your credit may be considered satisfactory.

ABC's of Mortgage Credit

The mortgage industry tends to create its own language and credit rating is no exception. BC Mortgage lending gets its name from the grading of one's credit based on such things such as payment history, amount of debt payments, bankruptcies, equity position, credit scores, etc.

We have compiled a guide to help you estimate your credit grade. This is only a guide as many companies have exceptions that may result in more strict or more lenient guidelines.

A General Guide to Credit Grades

    Credit Debt   Max    Mortgage     Revolve     Install
    Score  Ratio  LTV   30  60  90  30  60  90  30  60  90
A+   670   36     95    0   0   0   2   0   0   1   0   0  
A-   660   45     95    1   0   0   3   1   0   2   0   0
B    620   50     85    2   1   0   4   2   1   3   1   0  
C    580   55     75    4   2   1   6   5   2   5   4   1  
D    550   60     70    5   3   2   8   8   4   7   6   2  
E    520   65     60    6   4   3   10  10  6   10  8   3    

   
    Bankruptcy/Foreclosure  
A+   None Allowed Within 10 years  
A-   Minimum 2 Years, Re-Established Credit
B    Minimum 2 Years, Some Lates  	  
C    Minimum 1 Year  
D    Discharged  
E    Possible Current    

The figures shown here are estimates. When trying to figure your credit grade, keep in mind the following principles:

• Other Things Being Equal-When your have derogatory credit, all of the other aspects of the loan need to be in order. Equity, stability, income, documentation, assets, etc. play a larger role in the approval decision.
• Worst Case Scenario-When determining your grade, various combinations are allowed, but the worst case will push your grade to a lower credit guide. Mortgage Lates and Bankruptcies are the most important.
• Going Once, Going Twice-Credit patterns are very important. A high number of recent inquiries and more than a few outstanding loans may signal a problem. A "willingness to pay" is important, thus late payments in the same time period is better than random lates as they signal an effort to pay even after falling behind.

Credit Guide Scoring?

In a nutshell, credit scoring is a statistical method of assessing the credit risk of a loan applicant. The score is a number that rates the likelihood an individual will pay back a loan. The score looks at the following items: past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit, number of inquiries.

Credit scoring will place borrowers in one of three general categories.

• First, a borrower with a score 680 and above may be considered an A+ loan. The loan will involve basic underwriting, probably through a "computerized automated underwriting" system and be completed within minutes. Borrowers falling into this category may have a good chance to obtain a lower rate of interest and close their loan within a couple of days.
• Second, a score below 680 but above 620 may indicate underwriters will take a closer look at the file in determining potential risks. Borrowers falling into this category may find the process and underwriting time no different than in the past. Supplemental credit documentation and letters of explanation may be required before an underwriting decision is made. Loans within this FICO scoring range may allow borrowers to obtain "A" pricing, but loan closing may still take several days or weeks as it does now.
• Third, borrowers with a score below 620 may find themselves locked out of the best loan rates and terms offered. Mortgage professionals may divert these borrowers to alternate funding sources other than FNMA and FHLMC. Borrowers may find the loan terms and conditions less attractive than the "A" loans, and it may take some time before a suitable funding source is located.

As more companies utilize credit scoring, the loan approval and closing time will be compressed for most consumers. In the future, a high FICO score may be your ticket to a speedy and competitively priced mortgage loan.

Credit Reporting Agencies

Equifax
PO Box 105873
Atlanta, GA 30348
(800) 685-1111

National Consumer Assistance Center
PO Box 2002
Allen, TX 75013
Consumer Credit Questions
888 EXPERIAN (888 397 3742)

Trans-Union
PO Box 390
Springfield, PA 19064
(800) 916-8800
(800) 851-2674

How to Correct Errors

You have the right, under the Fair Credit Reporting Act, to dispute the completeness and accuracy of information in your credit file. When a credit reporting agency receives a dispute, it must reinvestigate and record the current status of the disputed items within a "reasonable period of time," unless it believes the dispute is "frivolous or irrelevant." If the credit reporting agency cannot verify a disputed item, it must delete it. If your report contains erroneous information, the credit reporting agency must correct it. If an item is incomplete, the credit reporting agency must complete it.

For example, if your file showed that you were late in making payments on accounts, but failed to show that you were no longer delinquent, the credit reporting agency must show that your payments are now current. Or if your file showed an account that belongs only to another person, the credit reporting agency would have to delete it. Also, at your request, the credit reporting agency must send a notice of correction to any report recipient who has checked your file in the past six months.

For those items in your credit profile which you feel deserve further explanation (such as an account that was paid late due to the loss of job, military call-up, or unexpected medical bills), you may send a brief statement to the appropriate credit reporting agency. The information will be placed on your credit profile and will be disclosed each time your credit profile is accessed.

Credit Profile

A Credit Profile refers to a consumer credit file, which is made up of various consumer credit reporting agencies. It is a picture of how you (as an individual) paid back the companies you have borrowed money from, or how you have met other financial obligations.

There are usually five categories of information on a credit profile:

• Identifying Information
• Employment Information
• Credit Information
• Public Record Information
• Inquiries

What is NOT included on your on a credit profile:

• Your race
• Your religion
• Your health
• Your driving record
• Your criminal record
• Your political preference
• Your income

Credit Report Access

The Fair Credit Reporting Act (FCRA) outlines specifically who can see your credit profile. Businesses must have a "legitimate business need," and a "permissible purpose," as stated in the federal law to obtain your credit file. Otherwise, only you, and only those who you give written permission, can access your credit files. Your neighbors, friends, co-workers, and even your family members cannot have access to your credit profile unless you authorize it. Some examples of those who can access your credit files are:

• Credit grantors
• Collection agencies
• Insurance companies
• Employers

Any company that receives a copy of your credit profile will be listed under the "Inquiry" section of your report.

The Fair Credit Reporting Act (FCRA) is the federal law regulating credit reporting companies like Equifax, Experian, and Trans Union. It has been in effect since 1971. A revised FCRA became effective October 1, 1997. This law protects consumers' rights, such as the right to review and contest information in their credit profiles. It also specifically defines who can access the information in a credit profile, and how you are notified of this activity.

Credit Questions & Answers

Why do we need credit reporting?
Credit reporting is needed because it provides the information that helps consumers make purchases, secure loans, pay for college educations, and manage their personal finances. Credit reporting makes it possible for stores to accept your checks, banks to offer credit and debit cards, businesses to market products, and corporations to better manage their operations to benefit the world's economy.

What is a credit inquiry?
An "inquiry" is a listing of the name of a credit grantor, or authorized user who has accessed your credit file. Each inquiry is posted to the credit file so you know who has obtained a copy of it. Credit grantors post an inquiry before offering you a pre-approval credit card application. These are listed as "promotional" inquiries on your credit file because only your name and address were accessed, not your credit history information. They are NOT sent to credit grantors or businesses for reasons of credit reporting. They are listed for your informational purposes only.

What is the Fair Credit Reporting Act?
The Fair Credit Reporting Act (FCRA) is the federal law regulating credit reporting companies like Equifax, Esperian, and Trans Union. It has been in effect since 1971. A revised FCRA became effective October 1, 1997. This law protects consumers' rights, such as the right to review and contest information in their credit profiles. It also specifically defines who can access the information in a credit profile, and how you are notified of this activity. You may obtain a copy the FCRA from the Federal Trade Commission.

How does divorce affect consumer credit?
A divorce decree does not supersede the original contract with the creditor, and does not release you from legal responsibility on any accounts. You must contact each creditor individually and seek their legal binding release of your obligation. Only after that release can your credit history be updated accordingly.

Should I use one of those companies that promise to help correct my credit?
It's your choice. However, beware of companies that promise to remove accurate information from your credit file. Accurate information cannot be removed from a credit file. There is nothing they can do for you that you cannot do for yourself by contacting the credit reporting agencies directly. Only time will heal a delinquent credit history.

What if an item on my credit profile is correct, but I disagree with it being reported?
For those items in your credit profile which you feel deserve further explanation (such as an account that was paid late due to the loss of job, military call-up, or unexpected medical bills), you may send a brief statement to the appropriate credit reporting agency. The information will be placed on your credit profile and will be disclosed each time your credit profile is accessed.

FICO Scores

 

FICO® scores were developed by Fair Isaac & Company, Inc. for each of the credit repositories. The scores are: (Equifax) Beacon®, (Experian formerly TRW) Experian/FICO and (TransUnion) Empirica®. They are simply repository scores meaning they only consider the information contained in a person's credit file; they do not consider a persons income, savings or amount of a down payment for a mortgage.

The scores were designed to assess risk. They are useful in directing applications to specific loan programs and to set levels of underwriting, i.e. streamline, traditional or second review. The scores are objective, consistent, accurate and fast.

Many people in the mortgage business are skeptical about the accuracy of FICO scores. Scoring has only been an integral part of the mortgage process in the past few years; however, the scores have been in use since the 1950's by retail merchants, credit card companies, insurance companies and banks for consumer lending. The data from large scoring projects emphasizes the accuracy, the predictive quality of the scores. Large portfolios have been scored for mortgage servicing and investment groups, and again, they demonstrate that FICO scores work.

The scores were developed from each repository's database using actual loan performance. A sample of over 750,000 consumers per repository was used. The repositories have each made great strides to increase the accuracy of their respective database through computer technology and internal monitoring. There is a new standard reporting format for credit grantors to use when sending electronic information to the repositories; this is the critical first step to providing accurate data.

The scores use a multiple scorecard design. Each repository uses 10 individual scorecards, and the models at each repository are the same. This increases accuracy and optimizes the predictive variables for each subpopulation. (For example, a borrower with two 30-day late payments will be scored against a population with some minor delinquencies.) This feature may cause a borrower with delinquencies to score in the same range as a borrower without delinquencies. Scorecards are reviewed and updated every twenty-four months.

The actual scoring process is proprietary, and the algorithms are copyrighted. We can share the predictive variables, the portion of the credit file considered and the weight as provided by Fair Isaac. They are:

• Previous credit performance (35%)
  Trade line information specific to payment history
• Current level of indebtedness (30%)
  Current balance compared to the high credit
• Time credit has been in use (15%)
  Opening date
• Types of credit available (15%)
  Installment loans, revolving accounts, debit accounts
• Pursuit of new credit (less than 5%)
  Inquiries

FICO has changed the way it factors credit checks, inquiries. These changes should minimize the "negative" effects that aggressive rate shopping or the normal mortgage process can have on a mortgage applicant. In the new Beacon version, the deduping process has been expanded beyond seven days. One variable counts the number of days within 365 days of scoring. If there has not been an inquiry, the deduping mechanism is not activated. If there is a consumer originated inquiry within the past 365 days from mortgage or auto related industries, these inquiries are ignored for the first 30 calendar days from scoring; then, multiple inquiries within the next 14 days are counted as one. Each inquiry will still appear on the credit report.

Scores should not change significantly because the variable in the model using inquiries contributes less than 5% of the predictive power of the model. According to Equifax statisticians, an average of 5% of the credit reports in the Equifax consumer credit reporting database (over 200 million consumer files) will see a change in score due to this. Fewer than 5% of those will see a change significant enough to effect a loan decision.

In order to get a score a borrower must have the following conditions in his/her file:

• No "Deceased" indicator on the credit file
  
  
• At least one undisputed trade line that has been updated in the last six months
  
  
• One trade line open at least six months

Scores range from 350 (high risk) to 950 (low risk). A scorecard of 660 will be 660 on Beacon 96, Empirica and Experian/FICO if the data on each file is the same. However, each repository is likely to contain different data.

Every score is accompanied by a maximum of four reason codes. Reason codes identify the most significant reason that a consumer did not score higher. They are not red flags. Consumers with scores in the 800 range get reason codes just as consumers with scores in the 500 range. The reason codes may be used in describing to the consumer the reason for adverse action. Scores are not part of the credit file and are not covered by the Fair Credit Reporting Act. Scores, if disclosed to the consumer, must be related to the credit file - using the reason codes - since the score has no meaning in itself; the meaning or risk level is assigned by the lender and the investor.

When applicants have erroneous information reported, document the inaccuracies. The easiest way to do that is to have your credit-reporting agency upgrade the merged in-file to an edited mid-range report or to a Residential Mortgage Credit Report.

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Down Payments

What Makes Low Down Payment Loans Possible?

Simply put, mortgage insurance protects the mortgage company against financial loss if a homeowner stops making mortgage payments. Mortgage companies usually require insurance on low down payment loans for protection in the event that the homeowner fails to make his or her payments. When a homeowner fails to make the mortgage payments, a default occurs and the home goes into foreclosure. Both the homeowner and the mortgage insurer lose in a foreclosure. The homeowner loses the house and all of the money put into it. The mortgage insurer will then have to pay the mortgage company's claim on the defaulted loan.

For this reason, it is crucial that the family buying the home can really afford it, not only at the time it is purchased, but throughout the time period of the loan.

Although the cost of the mortgage insurance is paid by the home buyer, or borrower, the mortgage insurer works directly with the mortgage company. Mortgage insurance is available to commercial banks, savings & loans and mortgage bankers, all of whom offer mortgage loans to home buyers.

Remember that mortgage insurance is not the same as credit life insurance, also called mortgage life insurance. This type of policy repays an outstanding mortgage balance upon the death of the person who took out the insurance policy.

The Secondary Market

The mortgage company's decision to use mortgage insurance is driven by the requirements of investors in the mortgage market. Because of the losses that could occur, major investors require mortgage insurance on all loans made with low down payments.

The three primary investors in home loans are Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Government National Mortgage Association (Ginnie Mae). By purchasing and selling residential mortgages, Fannie Mae and Freddie Mac help keep money available for homes across the country.

Unlike Fannie Mae and Freddie Mac, Ginnie Mae does not actually buy mortgages. It adds the guarantee of the full faith and credit of the U.S. Government to mortgage securities issued by mortgage companies.

The Two Choices: Government Insurance and Private Insurance

Now that we have explained how mortgage insurance works and why it is necessary, let's look at the basic kinds of mortgage insurance. Low down payment mortgages can be insured in two ways -- through the government or through the private sector. Mortgages backed by the government are insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) or the Farmers Home Administration (FmHA).

Although anyone can apply for FHA insurance, the other two government mortgage guarantee programs are much more targeted. The VA program is limited to qualified, eligible veterans and reservists. This program is very specialized, so contact your mortgage professional for the details. The FmHA insures loans for the construction and purchase of homes in rural communities.

Obtaining conventional financing is the alternative to obtaining a home loan backed by the government. Conventional mortgages are all home loans not guaranteed by the government, including those guaranteed by private mortgage insurers.

Although government and private insurance are based on the same concept of allowing families to get into homes with less cash down, there are many differences between the two. Often, your mortgage professional will play an important role in suggesting and deciding which insurance is selected.

Home buyers must make a down payment of at least 5% of a home's value to be considered for private mortgage insurance. However, under some special programs, the down payment requirement allows the buyer to use a gift or grant to cover 2% of the 5% down payment required by private mortgage insurers. The gift or grant may come from a friend, relative, community group or other organization.

Private mortgage insurance is available on a wide variety of home loans and there is no pre-set limit on the loan amount. Although differences such as these may affect whether the mortgage company prefers to work with government or conventional mortgages, your mortgage professional will discuss which one would be better for your situation.

With the wide variety of loans available, home buyers have the freedom to choose the type of loan that best suits their needs. Early on in the home buying process, it is a good idea to meet with several companies to compare the types of mortgages they offer and shop for the best price and terms. Best of all, working with a mortgage insurer can be very easy, whether your loan is insured by the FHA or a private mortgage insurance company, because your mortgage professional handles all of the arrangements.

By making lending money to home buyers safer, mortgage insurance helps more families get into homes of their own.

Down Payment Loans and Gifts

Loans and gifts can help with your down payment but you can not use this strategy for all loan programs. The most popular program for this tactic is the Federal Housing Administration or FHA. FHA allows 100% gift funds for your down payment. The gift can be from any relative or can be collected through new innovative programs, like the Bridal Registry where couples receive money into an account that can be used for the down payment.

Another popular tactic, which can be used in a wider range of programs, is to borrow from your 401K program. If you have a 401K program with your employer, you can withdraw without a penalty for your down payment and pay it back over a specified period. There are some drawbacks, the payment will be used in qualifying and your 401K account will not continue to grow as fast. Even with these drawbacks, it is often a smart move if this is your only option.

Down Payment - Grant That Is Never Repaid By The Homebuyer!

There are national non-profit organizations dedicated to assisting homebuyers with their down payment and closing costs.

Buyers can receive a free gift under these programs. Gift amounts vary with each program but are generally available in amounts of 3% with some programs, all the way up to $22,500 with others. Buyers never have to repay these gifts.

It's easy to receive a free gift from these programs, however qualification guidelines do vary with each program. Each program requires that buyers must qualify for any eligible loan program with their lender (there are many programs that qualify).

While this is the ONLY qualifying requirement of some programs, others have requirements such as requiring that the buyer complete a Home Ownership Counseling Course or provide 1% of their own funds into the transaction. In addition some programs have income/asset restrictions, recapture clauses, reserves required, or geographic boundaries. Each program can provide you with their specific requirements and/or limitations

These programs generally participate with FHA, Conforming, and Non-Conforming loan products. Most of these programs do not underwrite the loan or add any cost in the form of points, fees, etc., they simply provide the gift for the down payment and/or closing costs.

These downpayment assistance programs can be used for Single Family (1-4 unit) homes, Manufactured/Modular Homes, Condominiums, Townhouses, Existing or New Construction, Rehab and Non-Conforming.

Qualifying for a Low Down Payment Loan

To be considered for a low down payment loan, you generally need to have:

• Sufficient income to support the monthly mortgage payment
• Enough cash to cover the down payment
• Sufficient cash to cover normal closing costs and related expenses (explained below)
• A good credit background that indicates your payment history or "willingness to pay"
• Sufficient appraisal value,