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If you're like most people, purchasing a home is
the biggest investment you'll ever make. If you're considering
buying a home, you're likely aware of the complexity
of the endeavor. Because of the numerous factors to
consider when purchasing a home, it's important to prepare as
best you can. Some common home-buying principles and caveats are
presented here for your consideration. By keeping them in mind,
you'll help create a successful and more enjoyable experience.
These Top Ten lists are by no means exhaustive. Since your
home could cost you 25 to 40 percent of your gross income,
it's important to conduct research, ask questions and study the
process carefully.
Buying a home
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Looking for a home without being pre-approved.
As a potential buyer competing for a property, you'll
have a better chance of getting your offer accepted by being
as prepared as possible. Consider this hierarchy of preparedness:
The benefits available at each level
can be easily understood when viewed from the seller's
perspective. Imagine you're a seller in receipt of multiple
offers to purchase your property. A complete stranger
(buyer) is asking you to take your property off the
market for at least the next two to three weeks while
they apply for a loan. As the seller, lets consider
the type of buyer you'd prefer to deal with.
-
Neither pre-qualified nor
pre-approved
This buyer provides no evidence that they can afford
to purchase your property. You may wonder how serious
they are since they're not at least pre-qualified.
Pre-qualified
This buyer has met with a mortgage broker
(or lender) and discussed their situation. The buyer
has informed the broker regarding their income,
expenses, assets and liabilities. The broker may
also have seen their credit report. The buyer provided
you with a letter from the broker stating an opinion
of what the buyer can afford.
- Pre-approved
This buyer has provided a broker written evidence
of income, expenses, assets, liabilities and credit.
All information has been verified by a lender. As
a result, much of the paperwork for this buyer's loan
has been completed. This buyer will probably be able
to close quickly. They provide you with a letter (pre-approval
certificate) from the lender. You're as certain as
possible that this buyer can close.
As a potential buyer, you can see that
being pre-approved will give you the best chance of
getting your offer accepted. This is critical in a competitive
situation.
- Making verbal agreements. If you're asked to sign
a document containing instructions contrary to your
verbal agreements--don't! For example, the seller verbally
agrees to include the washing machine in the sale, but the written
purchase contract excludes it. The written contract will override
the verbal contract. More importantly, your state may require
that contracts for the sale of real property be in writing.
Do not expect oral agreements to be enforceable.
- Choosing a lender just because they have the lowest rate. While
the rate is important, consider the total cost of
your loan including the APR
, loan fees, discount and origination points. When
receiving a quote from a lender or broker, insist that the discount
points (charged by the lender to reduce the interest rate) be
distinguished from origination points (charged for services
rendered in originating the loan). The cost of the mortgage,
however, shouldn't be your only criterion. Have confidence
that the company you select is reputable and will deliver the
loan with the terms and costs they promised. If in the final
hours of the transaction you determine that the lender
has suddenly increased their profit margin at your expense,
you won't have time to start again with a different lender. Ask
family and friends for referrals. Interview prospective
mortgage companies
-
Not receiving a Good Faith Estimate.
Within three business days after the broker or lender receives
your loan application, you must receive a written statement
of fees associated with the transaction. This is both the
law and the best way to determine what you'll pay for your
loan. Bring the Good Faith Estimate (GFE) with you when you
sign loan documents. You should not be expected to pay fees
which are substantially different from those contained in
your GFE.
-
Not getting a rate lock in writing.
When a mortgage company tells you they have locked
your rate, get a written statement detailing the interest
rate, the length of the rate lock, and program details.
-
Using a dual agent--i.e., an agent who
represents the buyer and the seller in the same transaction. Buyers
and sellers have opposing interests. Sellers want to receive
the highest price, buyers want to pay the lowest price. In
the standard real estate transaction, the seller pays the
real estate commission. When an agent represents both buyer
and seller, the agent can tend to negotiate more vigorously
on behalf of the seller. As a buyer, you're better off having
an agent representing you exclusively. The only time
you should consider a dual agent is when you get a price break.
In that case, proceed cautiously and do your homework!
-
Buying a home without professional inspections.
Unless you're buying a new home with warranties on most
equipment, it's highly recommended that you get property,
roof and termite inspections. This way you'll know what
you are buying. Inspection reports are great negotiating
tools when asking the seller to make needed repairs. When
a professional inspector recommends that certain repairs
be done, the seller is more likely to agree to do them.
If the seller agrees to make repairs, have your inspector
verify that they are done prior to close of escrow. Do not
assume that everything was done as promised.
-
Not shopping for home insurance until you
are ready to close. Start shopping for insurance as soon
as you have an accepted offer. Many buyers wait until the
last minute to get insurance and do not have time to shop
around.
-
Signing documents without reading them. Whenever
possible, review in advance the documents you'll be signing.
(Even though some specifics of your transaction may not
be known early in the transaction, the documents
you'll sign are standard forms and are available for review.)
It's unlikely that you'll have sufficient time to read
all the documents during the closing appointment.
-
Not allowing for delays in the transaction.
In a perfect world, all real estate transactions close
on time. In the world we live in, transactions are often delayed
a week or more. Suppose you asked your landlord to terminate
your lease the day your purchase transaction was scheduled
to close. A day or two before your scheduled closing date,
you discover your transaction is delayed a week. In a perfect
world, no one is inconvenienced and your landlord is willing
to work with you. More likely, however, your landlord is inconvenienced
and angry. Will you be thrown out? Will you have to find interim
housing for a week or more? The eviction process takes a little
time, so the Sheriff won't immediately remove you, but this
type of stress-producing episode can be avoided. How? Terminate
your lease one week after your real estate transaction is
scheduled to close. That way, if there is a delay in closing
your transaction, you have some leeway. This approach might
cost a little more, then again, it might not.
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Refinancing your home
-
Refinancing with your existing lender without
shopping around. Your existing lender may not have the
best rates and programs. There is a general misconception
that it is easier to work with your current lender. In most
cases, your current lender will require the same documentation
as other companies. This is because most loans are sold on
the secondary market and have to be approved independently.
Even if you have made all your mortgage payments on time, your
existing lender will still have to verify assets,
liabilities, employment, etc. all over again.
-
Not doing a break-even analysis. Determine
the total cost of the transaction, then calculate how
much you will save every month. Divide the total cost by the
monthly savings to find the number of months you will
have to stay in the property to break even. Example: if
your transaction costs $2000 and you save $50/month, you break
even in 2000/50 = 40 months. In this case you'd refinance
if you planned to stay in your home for at least 40 months.
Note: This is a simplified break-even analysis.
If you are refinancing considering switching from an
adjustable to a fixed loan, or from a 30-year loan to a 15-year
loan, the analysis becomes much more complex.
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Not getting a written good-faith estimate
of closing costs. See item number four above.
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Paying for an appraisal when you think
your home value may be too low. Have the appraisal
company prepare a desk review appraisal (typically at no charge)
to provide you with a range of possible values. Your mortgage
company's appraiser may do this for you. Do not waste your
money on a full appraisal if you are doubtful about the value
of your home.
-
Using the county tax-assessor's value as
the market value of your home. Mortgage companies
do not use the county tax-assessor's value to determine whether
they will make the loan. They use a market-value appraisal
which may be very different from the assessed value.
-
Signing your loan documents without reviewing
them. See item number nine above.
-
Not providing documents to your mortgage
company in a timely manner. When your mortgage company
asks you for additional documents, provide them immediately.
They are doing what's necessary to get your loan approved
and closed. Delays in providing documents can result in a
costly delays.
-
Not getting a rate lock in writing.
When a mortgage company tells you they have locked your
rate, get a written statement which includes the
interest rate, the length of the rate lock and details about
the program.
-
Pulling cash out of your credit line before
you refinance your first mortgage. Many lenders have
cash-out seasoning requirements. This means that if you pull
cash out of your credit line for anything other than home
improvements, they will consider the refinance to be a cash-out
transaction. This usually results in stricter requirements
and can, in some cases, break the deal!
-
Getting a second mortgage before you refinance
your first mortgage. Many mortgage companies look
at the combined loan amounts (i.e., the first loan plus the
second) when refinancing the first mortgage. If you plan on
refinancing your first loan, check with your mortgage company
to find out if getting a second will cause your refinance
transaction to be turned down.
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Getting a home-equity loan/line
-
Not knowing if your loan has a pre-payment
penalty clause. If you are getting a "NO FEE" home-equity
loan, chances are there's a hefty pre-payment penalty included.
You'll want to avoid such a loan if you are planning to sell
or refinance in the next three to five years.
-
Getting too large a credit line. When
you get too large a credit line, you can be turned down for
other loans because some lenders calculate your payments based
upon the available credit--not the used credit. Even when
your equity line has a zero balance, having a large equity
line indicates a large potential payment, which can make it
difficult to qualify for other loans.
-
Not understanding the difference between
an equity loan and an equity line. An equity loan
is closed--i.e., you get all your money up front and make
fixed payments until it is paid if full. An equity line
is open--i.e., you can get numerous advances for various amounts
as you desire. Most equity lines are accessed through a checkbook
or a credit card. For both equity loans and lines, you can
only be charged interest on the outstanding principal balance.
Use an equity loan when you need all the money up front--e.g.,
for home improvements, debt consolidation, etc. Use an equity
line when you have a periodic need for money, or need the
money for a future event--e.g., childrens' college tuition
in the future.
-
Not checking the lifecap on your equity
line. Many credit lines have lifecaps of 18 percent.
Be prepared to make payments at the highest potential
rate.
-
Getting a home-equity loan from your local
bank without shopping around. Many consumers get
their equity line from the bank with which they have their
checking account. By all means, consider your bank, but shop
around before making a commitment.
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Not getting a good-faith estimate of closing
costs. See item number four above.
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Assuming that your home-equity loan is
fully tax-deductible. In some instances, your home-equity
loan is NOT tax deductible. Do not depend on your mortgage
company for information regarding this matter--check with
an accountant or CPA.
-
Assuming that a home-equity loan is always
cheaper than a car loan or a credit card. Even after
deducting interest for income tax purposes, a credit card
can be cheaper than a credit line. To find out, compare the
effective rate of your home-equity line with the rate on your
credit card or auto loan.
Effective rate = rate * (1 - tax
bracket)
Example: The rate of the home-equity line is 12 percent,your
tax bracket is 30 percent, your effectiverateis: .12 * (1 - .3) = .12 * .7 = .084 = 8.4
percent.
If your credit card is higher than 8.4 percent, the equity
loan is cheaper.
-
Getting a home-equity line of credit when
you plan to refinance your first mortgage in the near future.
Many mortgage companies look at the combined loan amounts
(i.e., the first loan plus the second) when refinancing
the first mortgage. If you plan on refinancing your first,
check with your mortgage company to find out if getting a
second will cause your refinance to be turned down.
-
Getting a home-equity line to pay off
your credit cards when your spending is out of control!
When you pay off your credit cards with an equity line, don't continue
to abuse your credit cards. If you can't manage the plastic,
tear it up!
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