Mortgage Basics

Today, buying or selling a home is one of the largest projects many people will take on in their lifetime. The complicated process can be made easier with the help from our staff.

When shopping for a new home we advise that you prepare yourself before starting the search. Money and valuable time are not to be wasted and following our guide will make your home search experience more pleasurable. You don’t need to spend any money until you’re ready, and some will find that home ownership is not right for them.

Once you are informed, we suggest implementing your real estate search, and eventually the mortgage process, with the help of a professional assistant. The small cost of working with professionals will payoff in the end as you won’t suffer the mistakes and errors of a first time home buyer.

Should You Rent or Buy a Home?

Finding a Real Estate Agent

Factors Beyond Price

Tactics for Negotiating with the Seller

Basics of Financing a New Home

Should You Rent or Buy a Home?

The advantages of buying a home compared to renting a home are abundant:

Owning a house, as opposed to renting, is not only benefiting financially, but it also gives you a place to really call home. Obviously, it presents you with the responsibility to maintain your own property, but it also gives you the freedom to do as you wish with the property.

In most cases, the money a landlord spends on rent can differentiate depending upon the amount a homeowner spends on a mortgage. However these elements seem incomparable when you consider tax deductions, the many benefits you receive when owning your own home, and the real savings offered.

A monthly mortgage payment in many cases is fixed during the life of the loan, while your monthly rent may increase at your landlord’s will or, at minimum, along with inflation.

New home buyers should also consider appreciation (the dollar value increases your home value over time). Over the life of your home ownership, your new home may appreciate tens of thousands of dollars which will eventually become yours when you sell it!

Landlords take a percentage of your monthly rent payment to pay for their own mortgage along with the other expenses that they incur while maintaining the rental. Don’t forget they rent the property in order to make a profit, including eventual property appreciation they will gain when they resell the home or apartment.

If you purchase a home you pay the expenses incurred to maintain your home, and also gain the in tax savings and property appreciation.

Whether to rent or to buy a home is a difficult question. The rewards are more benefiting if you are ready to own your own home.

The Internal Revenue Service allows home owners to deduct mortgage interests, property taxes and some of the other expenses incurred in owning your home when filling out their annual tax returns. Home owners also have a tax benefit when they sell their homes: the current tax law allows, in certain cases, the exclusion from taxable income of up to $250,000/person in capital gained from the sale or exchange of the property used as a primary residence.

If you currently own a home you should consider selling it first. When you get to the negotiating table for your new home you will be in a stronger position if the new purchase is not contingent on the sale of your current home.

Relocating your residency may become stressful, and in order to avoid the pressure and the rush of having to purchase a home you may want to consider renting for a short period of time.

Know where your down payment will be coming from. Savings account, sale of current home, or a gift as a source of payment. Don’t forget that conventional lenders will only allow you to use 5% of the down payment from a gift. Lenders verify the aging of your deposits to insure that your down payment is not composed of more than 5% gift funding.

Finally, consider getting yourself pre-approved for a mortgage. Most home sellers will take an offer more seriously if they know you have already been pre-approved for a mortgage. In fact many realtors won’t begin to show you homes until you have a pre-qualification letter from a lender.

Finding a Real Estate Agent

Real estate agents can offer considerable amount of advantages to your home search. They have access to the Multiple Listing Service (MLS) which lists all of the homes for sale in your area. They may also have some homes available in their agency which have not yet been added to the MLS.

With time and money a factor, a real estate agent’s experience should be valuable to both. Real estate agents knowing the local market values of other homes that have been recently sold in the area, and the advantages and disadvantages of the home you’re selecting will improve your position when negotiating.

And at no cost to you the real estate agent’s commission is built in to the price of the home and paid for from the eventual sale. In the event that you search for a home without an agent, in most cases, you will not save the cost of the agents commission as normally since it’s built in to the selling price of the home.

Mistakes can be costly and having your own real estate agent can prevent them!

There are three types of real estate agents:

1. Seller’s Agents – who represent the seller

2. Buyer’s Agents – who represent the buyer

3. Dual Agents – represent both buyer and seller

Usually real estate commissions range between 5% and 7% and perhaps higher for raw land and commercial properties.

Take some time in selecting your real estate agent. Visiting open houses or, asking your friends and relatives if they know of someone they would refer you to are all ways to seek a suitable agent. If you have already selected the area you prefer, you may find that one realtor has a stronger presence in this area compared to another realtor.

Once you have targeted a specific agent, ask the real estate agent what area of town they specialize in? How much experience do they have? How many homes they have sold in the last year in your price range? Are they a Realtor? Realtors are members of the National Association of Realtors and have agreed to conform to their code of ethics. Try to find someone you can be open with, as you will need to tell them all of your likes and dislikes when viewing prospective homes.

When & Where To Search for Your New Home

Homes look their best in the spring and summer therefore prices may be a bit higher. However in the fall and winter when leaves have fallen and gardens are no longer in bloom sellers are generally more flexible when negotiating since they know they will have to wait until spring for their home to look its best.

Some think they should wait for mortgage interest rates to drop. However, this plan doesn’t always work because home sellers also follow the interest rates and may ask a higher price when they know the lending market is advantageous to the buyer.

Remember the more open you are to the areas and plans in a given town this will better your chances to find what you’re looking for.

Have your agent research the Multiple Listing Service (MLS) based on the specifications you’ve outlined for your new home. Take a look in real estate books found at the supermarket, the classified ads of the local newspaper, and the internet as many realtors list homes for sale on their websites.

House Hunting Strategy

Get a map and select your preferred area of town you’re interested in. Look in these areas first and then expand these areas in the event you don’t find what you want.

Save time by speaking to your agent or the seller before visiting prospective homes. Simple conversation may save you a visit to an inappropriate home. Have your agent give you the addresses of the prospective homes they have found on the MLS and do a drive by. A visual is worth a thousand words and you may save time once you’ve seen the outside. Viewing the outside may decide whether you are interested enough to tour the inside along with your real estate agent.

Express your likes and dislikes to your real estate agent that way they can focus better on your real desires before going forward.

If you pay multiple visits to the same home try to go at different times of the day. Things may seem different in the daylight then they would in the evening and vise versa. Try to visit during the week and again on the weekend to see the changing character of the neighborhood. Pay particular attention to noise in the area and don’t forget traffic on the street front.

Before And After Negotiating

Before beginning negotiations you need to know the local market. Know the selling price for every comparable home in the area over the preceding year, and ask your realtor to prepare a list for you.

Don’t tell the seller more than you have to! Why you’re looking and when you need to move in by can be big negotiating advantages to the seller. This information can be easily given away to the seller by casual friendly conversation.

Find out why the home is for sale. How long has it been on the market? How long has the current owner owned the home? How much did they pay for the home? Have they made any improvements? How much does the current owner owe on their mortgage? Who built the home and what is their reputation?

Make note of any flaws the home may have and have your realtor insure that they will be remedied. Once the purchase process begins appraisers will visit the home and may point out anything that you may have missed which the seller must remedy prior to the actual sale.

Price of The Home

Housing prices are different from prices of almost everything else. Many things are factored into the eventual selling price, and the final price is determined by the home seller and buyer. Appraisers can give an estimate of a home’s value however, the final price can only be determined by you and the seller.

The seller’s asking price may not be a good indicator of a homes real value. Some sellers are realistic about the value of their homes and others are not. Some need to sell quickly while others can wait.

You can make a low offer if you think the selling price is out of line, however you should be prepared to site examples of similar homes which sold for the price you’re offering to support your bid.

On the other hand if the home is priced low, move quickly before another buyer has an opportunity to put a sales agreement in place.

Once you have a sales contract for the home in place the seller is legally bound to sell you the property for the contracted price. However, you aren’t bound to pay this price until all of the contract contingencies have been removed. The seller isn’t obligated to reduce the price if problems are found during subsequent inspections but you are free to walk away from the deal.

Have as many professional inspections done as reasonably possible. The cost of inspections is relatively inexpensive when compared to the savings you may realize by having problems corrected prior to the sale or by reducing the selling price.

return to top of page

Factors Beyond Price

When buying a home you can negotiate more than just the price. You can include any conditions you consider important; these conditions are called contingencies. Be careful to be reasonable. If you’re not, the seller may decide not to sell you the home.

In your offer you should specify exactly what is being purchased. The home, the fixtures, and the appliances should all be documented in the offer. Specify the amount of your deposit, which is normally refundable if your conditions are not met and the sale does not go through. A financing contingency must be included if you will be getting a loan. Also you should specify that you have the right to perform all reasonable inspections and finally the closing date.

A liquidated damages clause allows the seller to keep your deposit in the event you default on the purchase agreement. It doesn’t mean the seller can keep your deposit in the event inspections find something that you want corrected, but the seller is unwilling to pay for the correction.

The duration of your offer should be for one day maximum two. This prevents the seller from shopping your offer to other potential buyers.

Include a home warranty in order to cover any problems you may find after the fact. It’s worth the money so you can sleep soundly.

Avoid unusual conditions that make your offer less attractive. Often sellers will be accepting of your conditions in the beginning of negotiations, however after the agreement is made they tend to fight over small issues.

Tactics for Negotiating with the Seller

Buying your home will exercise your patience and will often payoff if you can muster it. If you sense the seller needs to move quickly don’t rush. Allow the house to be on the market for a while.

The longer the home goes unsold the more pleased the seller will be to finally receive an offer. Be aware though if the house is a great deal it may not stay on the market long and you risk potentially losing the home to another buyer.

You can also make your offer immediately. If you move quickly the seller may not have been made other offers that they would consider in conjunction with yours.

Your negotiating strength lies in how long the home has been on the market, how quickly the seller needs to sell, and how willing you are to walk away from the home if your offer is not accepted.

Don’t forget that the seller may likely make a counter offer to your offer if they consider it unacceptable. You can always challenge their counter offer with what you think would be another suitable price. For example, you could ask to have some appliances included if you accept their new price.

Have a signed agreement prior to performing any of your inspections in order to avoid spending money on a house you may never purchase.

The Basics of Financing a New Home

The funds used to purchase a home come from two sources, you and your lender.

Conventional lenders have two limits on the amount of money they will provide.

Loan-To-Value (LTV) limit. This is the amount of money the investor will lend. It is expressed as a percentage of the house’s value. LTV varies depending on your credit and employment history, the loan program.

Loan Amount Limit. Conforming loans can not be higher than $417,000. Loans higher than this amount are called Jumbo loans and have different programs available than conforming loans. Conforming loans are favored by lenders as they are easily sold on the secondary mortgage market.

Mortgage interest rates usually follow the bond market and you should not find large variances in interest rates between one lender and another. Variances appear in the total cost of the loan which includes all of the fees added to the closing cost of the loan. Fees like origination fees, document review fees, and processing fees may vary widely from one lender to the next. In order to properly compare one loan offer to another you will need to have “Good Faith Estimates” from both lenders. This is the only way to compare apples to apples.

Lenders prefer borrowers that have a large down payment, income sufficient to make the monthly mortgage payments, a good credit history and credit score, and sufficient cash reserves in the event you fall on hard times.

Lenders use two ratios to evaluate your borrowing power. Your front end ratio and your back end ratio.

Your front end ratio is the percentage of your income to be used for housing expenses.

Your back end ratio is the percentage of your income used to pay all of you monthly reoccurring debts (like car loans, credit cards) including housing expenses.

Every lender has different ratios which they consider acceptable. Conforming loans have the guidelines of 28% front end ratio and 36% back end ratio. These ratios are only exceeded when the individual lender considers other factors which may outweigh the exceeded ratio and they believe the loan will be able to be sold on the secondary mortgage market.

Lenders can make money from borrowers in three different ways. Origination fees are fees lenders charge to setup the loan. Interest rate spread is the difference between the interest rate the lender offers you, the borrower, and the actual cost of the funds. The lender may also service the loan, in which case they earn a fixed monthly fee for sending notices and collecting payments related to the mortgage.

With many lenders you may be able to negotiate on the origination fee and interest rate spread. For example, you may be able get a loan with a 6% interest rate and pay one percentage point origination fee or get a 5.5% loan for two percentage points origination fee.