COMMON QUESTIONS FOR HOME BUYERS

Buying a home is a big decision for first time home buyers and even seasoned investors. There is a world of information out there so we compiled some common questions and answer to help get you started.

How much can I afford to purchase?

A good rule to follow is you can afford to buy a home equal in price to two times your gross annual income. The price you can afford to pay for a home will depend on the following:

Your income
The amount of your down payment
Closing costs and cash reserves required by the lender.
Your outstanding debts
Credit history
The type of mortgage you select
Interest rates

Your lenders will analyze your income in relation to your anticipated cost of the home and outstanding debts. From here your lender will determine the loan amount you can qualify for. Your housing expense-to-income ratio is calculating by your projected monthly housing expense, which consists of the principal and interest payment on your loan, property taxes and insurance (PITI).

Homeowner association dues (HOA dues), if you're purchasing a condominium or townhouse, and private mortgage insurance (PMI) are added to the PITI.

Your housing income-to-expense ratio should fall in the 28 to 33 percent range. 28 percent of your gross monthly income is allotted toward PITI. 33 percent of you gross monthly income is allowed for PITI and all long term debt. Some lenders will go higher depending on circumstances. Your total income-to-debt ratio shouldn’t exceed 34 to 38 percent of your gross income.

How do I find out about the condition of the home I'm considering?

We highly recommended you hire an inspector to examine the home you are considering to purchase. Choose an inspector who is a member of the American Society of Home Inspectors.

Some states require sellers to complete a disclosure form revealing every issue known about their property, such as significant defects or malfunctions in the home's systems. The seller should also disclose the presence of environmental hazards, walls or fences shared with neighbors, easements, room additions and repairs made without permits or not up to code, zoning violations, citations, and lawsuits against the seller of the property.

Be on the look for soil problems, flooding, or drainage problems along the foundation if possible.

Those buying a condo have to be told about covenants, codes and restrictions (CC&Rs) or other deed restrictions, if the HOA has authority over the property and ownership of common areas. Ask questions about anything that remains unclear.

How low of an offer can I consider?

Some sellers are very motivated and must sell quickly, however, a very low offer in a normal market might be rejected immediately. In a buyer's market, an offer below list price will usually either be accepted or the seller may submit a counter offer. If the seller has multiple offers, an outright rejection of offers is unlikely.

In a seller's market, offers are usually higher than list price. While it is true that offers at or above list price are more likely to be accepted by the seller, there are other things the seller has to consider.

1. Is the offer contingent? For example does the buyer have to sell their house before entering into a contract to purchase a new one? Even a buyer in this situation offers full price, this offer may not be as attractive as other offers. Even a competing offer a slightly lower price without contingencies can be more attractive to the seller.

2. Is the offer an "as is" offer or does the buyer want the seller to make repairs before the close of escrow or make negotiate a price reduction with the buyer to offset the buyer’s anticipated repair cost?

3. Is the offer all cash, which means the buyer has waived the financing contingency? If so, then an offer at less than the list price may be more attractive to the seller than a full-price offer that is being financed. Keep in mind that financing sometimes fall through for some buyers, so if you lose out on a bid for a property that you really want, keep in touch with the seller’s agent just in case the offer you lost out on falls through. Most often, the seller will rather entertain the second or third place offer instead of putting their home back on the market.

4. Is the buyer asking the seller for concessions at closing, for example is the buyer asking the seller to pay towards closing costs?

How and what do I negotiate?

The price of homes vary depending on the seller. Some sellers overprice, while others ask for close to what they hope to get, and a few savvy sellers underprice their house in the hope that potential buyers will compete and overbid for their home. The ‘advertised’ price should be treated as a rough estimate of what the seller wants.

Try to learn about why the seller is selling and how motivated they are to sell. For example, a lower price with a short escrow may be more acceptable to someone who has to move quickly.

Some buyers like to make low-ball offers, but before you consider making such an offer, know that low-ball offers can sometimes sour a potential sale resulting in the seller not negotiating with you at all. Unless the house is extremely overpriced, the offer will more than likely be rejected.

Always have your realtor investigate how much comparable homes (comps) have sold for in the area so you can determine whether the home is priced right. Comps are usually homes that are similar in features, age, number of rooms, lot size (and lot type depending on the area), and that have sold within the last 6 months (last 12 months depending on market conditions.

Regarding a down payment, should I put more or less down if we can afford to do so?

There are different types of loan programs for you to consider. Some loans require at least a 3% down payment (such as FHA Loans) or 5% for conventional loans. Military veterans can purchase with no money down with a VA loan (in some cases families of deceased veterans can access VA Loans depending on the circumstances).

Making a down payment that’s as little as possible allows buyers to take advantage of the tax benefits of home ownership. However, keep in mind that if you put down less than 20% of the loan you will be required to pay PMI (Private Mortgage Insurance) which will increase your monthly payment until you reach 20% equity on your home. Mortgage interest and property taxes are deductible from state and federal income taxes. Buyers who make a small down payment also have money left over to make unexpected repairs or improvements. Conversely, it may be more sensible for a buyer to make a larger down payment which reduces the amount of the loan. When a buyer puts 20% or more as a down payment, the requirement for PMI will not be necessary.

If mortgage insurance is required, (with the exception of veterans guaranteed loans), a full year’s premium for the insurance is collected during the close of escrow. Additionally, you’ll be paying monthly until the equity as part of your PITI (principle interest taxes insurance).

Other topics

What is title insurance?

Title insurance is a form of insurance that protects an owner, lessee, mortgage or other holder of an estate lien, or other interest in real property. It protects the aforementioned entities against loss up to the amount of the policy, in case there are defects in the title, liens and encumbrances not set forth or specifically excluded in the policy, whether or not in public land records, and other matters stated in the policy form, examples are lack of access to the property, loss because of unmarketability of title, etc.

The title policy sets forth the specific risks insured against. Additional coverage of risks can also be added by endorsements to the policy or by the addition of affirmation insurance to modify or supersede the impact of certain exceptions, exclusions or printed policy "conditions." The policy also protects the insured for liability on various warranties of title.

Additionally, the policy provides protection in an unlimited amount against costs and expenses incurred in defending the insured estate or interest.

Prior to issuing the policy, the title insurance company performs a search, examination, and interpretation of the legal effect of all public records to determine if possible rights, claims, liens or encumbrance exist that affect the property.

Keep in mind that even the most comprehensive title examination, can’t protect against all title defects and claims, also known as "hidden risks." The most common examples of hidden risks are fraud, forgery, alteration of documents, impersonation, secret marital status, incapacity of parties, and inadequate or lack of powers of fiduciaries. Other hidden risks include laws and regulations that create or permit interests, claims and liens without requiring they first are filed or recorded so that the buyers and lenders can find them before closing.

Since the cost for title insurance is usually sharply reduced when taken simultaneously with the issuance of a purchase money mortgage, the risk is such that an informed buyer shouldn’t take. In fact, several states have adopted rules that requires a notice to home buyers regarding the availability of title insurance similar to that being obtained by their purchase money mortgages.

What steps should I take when I shop for a home loan?

It’s recommended that buyers get prequalified or pre-approved for a loan as their first step in the home buying process. With a prequalification, a buyer knows exactly how much house they can afford and calculate what their monthly mortgage payment will be. A pre-qualification does not mean the buyer will get the loan necessarily. The buyer’s credit report, income, and bank statements still need to be verified by the lender before the lender will commit to lending the money to the buyer.

There usually is not a charge to a buyer to get pre-qualified for a home loan. Most buyers can get pre-qualified online in a matter of minutes once they fill out an application. The lender will pull the buyer’s credit report, verify their employment and income, and their checking and savings accounts will also be verified. Once the buyer finds a home they like, they will need to obtain an appraisal on it to show the lender its value and perform whatever inspections they want on the property.

Can I negotiate interest rates?

The answer is yes. Some lenders are willing to negotiate both the loan rate and the number of points. Some lenders, those who are more established, set their rates. Buyer should know it never hurts to shop around to know the lending market and try to get the best deal. Buyers should always look at the combination of interest rate and points to get the best deal possible. Good deals usually have a lower APR (Actual Percentage Rate), but this also depends on the conditions of the loan overall.

In the cases where the seller is financing the loan, interest rates are usually negotiable. The rates in these cases are based on market rates.

Is it better to buy new construction or a home that has been lived in?

Some people feel that buy a new-home community is riskier than purchasing a home in an established area. Future price appreciation in both cases depends on many of the same factors. It is safe to say that a new construction home has less risk because things won't "wear out" and need replacement as quickly.

New homes typically come with a short term warranty (such as one year) and sometimes also come with a longer term (10 years for example) home warranty purchased by the developer as an incentive for the buyer, which can add peace of mind when purchasing a new home.

Should I buy a fixer upper?

Fixer-uppers are properties that are have not been maintained and have a lower market value than other homes in the neighborhood. One strategy is for a buyer to purchase the least desirable home in a good neighborhood. Buyer’s should consider if the expenses needed to bring the property’s value to its full market value is within their budget. Unless the buyer knows what they are doing, they should avoid purchasing a home that are is run down that it need major repairs.

Can I borrow the money to repair a fixer upper?

The Department of Housing and Urban Development has a rehabilitation loan program (Section 203(K)) is a program designed to enable major structural rehabilitation of houses with one to four units that are more than a year old. Condominiums are not eligible for this program.

A 203(K) loan is frequently made as a combination loan. A buyer purchases a "fixer-upper" property and makes the necessary repairs. Another choice buyers have is to refinance a temporary loan to buy the property and do the rehabilitation, or can also be done as a rehabilitation-only loan.

Buyers are required to put down 15%. Owner-occupants have a required down payment of 3-5%. At least $5,000 must be spent on major improvements.

Major repairs can be the following (as examples): a new heating system, new roof, windows replacement, new plumbing, new electrical, etc. Buyers can also finance additional repairs and improvements, for example new carpets , kitchen cabinets, appliances, etc. Buyers must "qualify" for the total amount they’ll be borrowing through this program.