Buyer 101

How Much to Offer?

Once we determine what other homes have sold for in the area, and how much money you might have to put into repairs or renovations, we can factor in these considerations with how much you’re comfortable spending. In addition to sale prices for other homes, there are several ways you can determine a good amount to offer:

  • The condition of the house. Is the home in move-in condition, in need of paint and other cosmetic improvements, or a fixer-upper that needs some real work?
  • The market. If you are in a buyer’s market” where there are more homes for sale than there are people to buy them ” prices are probably stable or falling. If you are in a seller’s market ” where there are more buyers looking for homes than there are homes for sale” prices are probably moving upward.
  • Your ceiling. If you’ve gotten a credit pre-approval, you know how much you can borrow for your home purchase. Of course, you may not be comfortable paying as much as you’ve been approved to borrow, so think carefully about your financial situation before making an offer.

Then we arrive at how much you are willing to pay for the home. Remember, the advertised price of a house is just a starting point“ it may take quite a bit of negotiating to arrive at a final cost.

Making an Offer

Once you’ve found your dream house, it’s time to get started with the financial and contractual side of the purchase. As your Premier Sotheby’s professional, let me guide you through this process. Purchase contracts vary in length and terms. Because you and the seller have different goals, you can rely on me to bring order and calm to the process. I know what questions you may not know to ask to help you reach a favorable outcome.

Multiple offers on the same home are not uncommon, so you may only get one chance to make an offer that the seller will consider. That’s why it’s important to think carefully about your strategy. We will discuss all of the circumstances which might affect the offer, to get the result you want….An accepted offer!

Fixed-Rate Mortgages

A fixed-rate mortgage keeps the same interest rate for the life of the loan. For most people, especially first time homebuyers, this is the best option because you pay the same monthly principal and interest rate.

A fixed-rate mortgage means the interest rate and the payments remain the same for the entire life of the loan (taxes, of course, may change.) Advantages include consistent principal and interest payments, making this loan stable. In other words, your rate won’t change, so you don’t need to worry about market fluctuations.

Disadvantages include a possibly higher cost. These loans are usually priced higher than an adjustable-rate mortgage. Keep in mind that, on average, most people move or refinance within seven years. If rates in the current market are high, you’re likely to get a better price with an adjustable-rate loan.

30 Year Fixed-Rate Mortgages offer consistent monthly payments for the entire 30 years you have the mortgage. So if the market is good, you can benefit from locking in a lower rate for the full term of the loan.
20 Year Fixed-Rate Mortgages allow you to make a consistent monthly payment throughout the 20 years you have the mortgage. The shorter term means you pay the loan off more quickly, and therefore pay less interest. And you’ll build equity faster than you would with a 30-year loan. (But remember the shorter term means higher payments, when compared to the 30 year fixed-rate mortgage.)
15 Year Fixed-Rate Mortgages provide consistent monthly payments for the 15 years you have the mortgage. By building equity even more quickly than with a 30 year or 20 year loan, and paying less interest, you’ll save money in the long run. It’s an ideal option if you can handle the higher payments and if you’d like to have the loan paid off in a shorter period of time – for instance, if you plan to retire.

For more thorough and up to date information, consult your bank or mortgage broker.

Adjustable-Rate Mortgages

An adjustable rate mortgage (ARM) is one that the interest rate changes over the life of the loan – according to the terms specified in advance. The interest rate fluctuates based on several money market indexes, which cause the cost of funds for lenders to vary. All ARMs are amortized (paid down) over 30 years.

With ARMs:

The initial interest rate is usually lower than with a fixed-rate mortgage.
The monthly repayment would also be lower.
The interest rate may be adjusted (up or down) at predetermined times.
The monthly payment will then increase or decrease.

ARMs are usually priced lower than fixed-rate mortgages so you can increase your buying power and lower your initial monthly payments. If interest rates go down, you’ll enjoy lower payments. Usually an ARM is the best choice for homeowners who plan to relocate (for example, with their company or the military), or for those who are purchasing their first home and plan to be in the property only for three to five years. Remember that, on average, most people move or refinance within seven years.

Conversely, monthly payments could increase if monthly payments if interest rates go up. Keep in mind that ARMs are best for homeowners who aren’t planning on staying with a property for a long period. If you’re on a fixed income, an ARM (especially a short-term ARM) may not be your best choice.

10/1 Adjustable-Rate Mortgages provide a fixed initial rate of the loan for the first ten years of repayment. After 10 years, the rate adjusts every year thereafter for the remaining life of the loan. The loan is amortized over 30 years.

7/1 Adjustable-Rate Mortgages offer an initial rate that is fixed for the first seven years of repayment, then the rate adjusts every year thereafter for the remaining life of the loan.

5/1 Adjustable-Rate Mortgages mean the initial rate remains fixed for the first five years of repayment, and then adjusts every year thereafter.

3/1 Adjustable-Rate Mortgages provide three years at the initial fixed-rate, then the rate adjusts every year for the remaining life of the loan. A good choice if you expect to move or refinance in a relatively short period of time. But a much shorter fixed-rate period means your interest rate (and therefore monthly payments) may begin to fluctuate after three years.

For more thorough and up to date information, consult your bank or mortgage broker.

Getting a Mortgage

It is very important to research your mortgage company before dealing with them. Don’t be afraid to ask any questions you feel necessary and if anything strikes you as odd make sure you comment on it. Make sure you ask for references from satisfied customers.

There are several ways to secure a mortgage. You can get one directly by working with a mortgage broker, mortgage banker, or you can go to a bank, credit union or savings and loan. An Premier Sotheby’s agent can help connect you with a reputable mortgage lender.

Many home buyers choose to arrange financing before shopping for a home and most lenders will “pre-qualify” them for a certain amount. Pre-qualification helps buyers to focus on homes that fit your plans and budget. Nothing is more disheartening for buyers or sellers than a deal that falls through due to a lack of financing.

For more thorough and up to date information, consult your bank or mortgage broker.

Your Credit History

A credit report is used by lenders as one measure of the risk and a borrower’s likelihood to repay. There are numerous types of credit report issues that would cause a lender to reject your application for a loan, including: missed credit card payment(s), default on a prior loan, bankruptcy in the past seven years, or non payment of taxes. Other black marks on a credit report include any judgment (perhaps for non-payment of spousal or child support) or any collection activity.

If you feel that your credit report is wrong, experts say it’s best to take it up with the organization or company claiming you owe them money. But if you’ve been late paying your bills, regroup by paying in full and on time for six months to a year to prove to the lender that the late payments were an aberration.

You can order a copy of your own credit report by calling the three major credit reporting agencies: Experian, Equifax, and Trans Union.

For more thorough and up to date information, consult your bank or mortgage broker.

Interest Rates

Some lenders are willing to negotiate on both the loan interest rate and the number of points. Most established lenders set their rates like large corporations set the prices on their goods. However, it pays to shop around for loan rates and know the market before you talk to a lender. You should always look at the combination of interest rate and points, and get the best deal possible. The interest rate is much more open to negotiation on purchases that involve seller financing. These loans involving seller financing usually are based on market rates but some flexibility exists when negotiating such a deal. When shopping for rates, look for published rates in local newspapers or check the growing number of Internet sites that publish such information.

Locking in a mortgage rate with a lender is one way to ensure that same rate will be available when you need it. Lock-ins make sense when borrowers expect rates to rise during the next 30 to 60 days, which is the usual length of time lock-ins are available. A lock-in given at the time of application is useful because it may take the lender several weeks or longer to prepare a loan application (though automated loan practices are cutting this time dramatically). However, some lenders require borrowers to pay lock-in fees to assure particular rates and terms. Be sure to check that the rates and points are guaranteed and that your lock-in period is long enough. If your lock-in expires, most lenders will offer the loan based on the prevailing interest rate and points. Lenders may have preprinted forms that set out the exact terms of the lock-in agreement. Others may only make an oral lock-in promise on the telephone or at the time of application.

Price discounts and interest rate buy downs are common incentives offered by new-home builders trying to overcome slow sales. “Buy downs” are a financing technique used to reduce the monthly payment for the borrower during the initial years of the loan. Under some buy down plans, a residential developer, builder or the seller will make subsidy payments (in the form of points) to the lender that “buy down,” or lower, the effective interest rate paid by the home buyer. State agencies often offer lower rate loans. But to qualify, borrowers usually must be a first-time home buyer and meet income limits based on the median income level of their county.

For more thorough and up to date information, consult your bank or mortgage broker.

Private Mortgage Insurance (PMI)

Private mortgage insurance, or PMI, insures the lender against a default. It is required when the borrower is making a cash down payment of less than 20 percent of the purchase price.

PMI costs vary from one mortgage insurance firm to another, but premiums usually run about 0.50 percent of the loan amount for the first year of the loan. Most PMI premiums are a bit lower for subsequent years. The first year’s mortgage insurance premium is usually paid in advance at the close of escrow, and there is usually a separate PMI approval process.

Lenders generally turn to a list of companies with whom they regularly work when lining up private mortgage insurance. In most cases, PMI can be dropped after the loan to value ratio drops below 80 percent. The Homeowners Protection Act requires PMI to be dropped when the loan-to-value ratio reaches 78 percent of the home’s original value AND the loan closed after July 29, 1999. For other loans, find out from your lender what procedure to follow to have PMI removed when your equity reaches 20 percent. For homeowners who have improved their properties and believe that their equity has increased as a result of these improvements, refinancing the property at a loan-to-value-ratio of 80 percent or less is another possible way of eliminating PMI payments.

A growing number of private lenders are loosening up their requirements for low-down-payment loans. But private mortgage insurance, or PMI, usually is required on loans with less than a 20 percent down payment.

For more thorough and up to date information, consult your bank or mortgage broker.

Private Mortgage Insurance (PMI)

Private mortgage insurance, or PMI, insures the lender against a default. It is required when the borrower is making a cash down payment of less than 20 percent of the purchase price.

PMI costs vary from one mortgage insurance firm to another, but premiums usually run about 0.50 percent of the loan amount for the first year of the loan. Most PMI premiums are a bit lower for subsequent years. The first year’s mortgage insurance premium is usually paid in advance at the close of escrow, and there is usually a separate PMI approval process.

Lenders generally turn to a list of companies with whom they regularly work when lining up private mortgage insurance. In most cases, PMI can be dropped after the loan to value ratio drops below 80 percent. The Homeowners Protection Act requires PMI to be dropped when the loan-to-value ratio reaches 78 percent of the home’s original value AND the loan closed after July 29, 1999. For other loans, find out from your lender what procedure to follow to have PMI removed when your equity reaches 20 percent. For homeowners who have improved their properties and believe that their equity has increased as a result of these improvements, refinancing the property at a loan-to-value-ratio of 80 percent or less is another possible way of eliminating PMI payments.

A growing number of private lenders are loosening up their requirements for low-down-payment loans. But private mortgage insurance, or PMI, usually is required on loans with less than a 20 percent down payment.

For more thorough and up to date information, consult your bank or mortgage broker.

Inspections

The inspection includes observation and, when appropriate, operation of the plumbing, heating, air conditioning, electrical, and appliance systems, as well as structural components: roof, foundation, basement, exterior and interior walls, chimney, doors, and windows.

Qualified inspection companies will provide a sample report to substantiate that they abide by industry standards. One of the key standards is that ethical inspectors neither perform repairs nor refer clients to repair companies (thus avoiding a conflict of interest). Obviously, inspectors who make repairs on homes they inspect are more likely to “find” defects.

Once you have arranged for a home inspection, plan to accompany the inspector for the entire procedure. You have the right to be there, and leading home inspection companies will encourage your presence. It helps you to better understand the findings in the report, and will reduce post-closing hassles. Don’t forget your list of questions and items of concern. A thorough home inspection covers more than 1,000 items, everything from the foundation to roof and takes two to three hours depending on the size of the property. The report should reflect the condition of about 400 items.

This is a major step in the buying process and there are many potential problems that can be discovered during this period. These include a leaky roof, radon gas, termite damage, a foundation problem, and wall cracks, to name a few. These problems happen all the time. The difference between closing on your dream home and starting the process all over again is what occurs during the negotiations between you and the seller.

As your Premier Sotheby’s Real Estate Professional, I can help make these discussions go more smoothly. You will also have the option of a walk-through before the closing. This is your last chance to make sure that all of the items that you have agreed upon with the seller were completed to your satisfaction.

Insurance

Protecting your new home with insurance is a must. How well you do that depends on the details of your policy. And while you are not legally required to have homeowner’s insurance, mortgage lenders stipulate that you do.

A standard policy will suffice in most instances. It protects against several natural disasters and catastrophic events. However, it will not guard against earthquakes, floods, war, and nuclear accidents. The policy can be expanded to include these disasters as well as coverage for such things as workers’ compensation. In fact, the lender may require that you purchase flood or earthquake insurance if the house is in a flood zone or a region susceptible to earthquakes. You also can increase coverage beyond the depreciated value of personal property such as televisions and furniture by purchasing a replacement-cost endorsement.

Timeline and Paperwork

The closing meeting is where ownership of the home is officially transferred from the seller to you. Most of the people involved with the purchase of your home will attend your loan closing. The closing is a formal meeting typically attended by the buyer and the seller, both real estate sales professionals, a representative of the lender, and the closing agent.

First, the closing agent reviews the settlement sheet with you and the seller and answers any questions. Both you and the seller sign the settlement sheet.

Then, the closing agent asks you to sign the other loan documents. Evidence of required insurance and inspections is also presented (if it wasn’t previously given to the lender).

After that, if everyone agrees that the papers are in order, the buyer submits payment to cover the closing. If the lender will be paying your annual property taxes and homeowner’s insurance for you, a new escrow account (or reserve) is established at this point.

Finally (here’s the best part) you receive the keys to your new home!

After the meeting, the closing agent officially records the mortgage and deed at your local government clerk’s office or registry of deeds. This legal transfer of the property may take a few days after closing. The closing agent usually will not disburse the funds to everyone who is owed money from the sale (including the seller, real estate professionals, and the lender) until the transaction has been recorded. It is at the point of deed recordation that you become the official owner of the home.

Moving in

Six to Eight weeks prior:

  • Purchase or rent moving supplies: tape, markers, scissors, pocketknife, newspaper, blankets, moving pads, plastic storage bins, rope and a hand truck. Free boxes can usually be obtained at a local supermarket, but consider purchasing wardrobe boxes for moving clothes.
  • Have a garage sale to clear out unwanted items and plan accordingly. Consider donating unwanted items.
  • Keep a detailed record of all moving expenses. Your costs may be tax deductible depending on the reasons for your move.

Two weeks prior:

  • Hire a reputable mover or rent a moving truck. Be sure to get referrals or references, check with the Better Business Bureau, get estimates, purchase moving insurance.
  • Two weeks before moving day, contact your telephone, electric, gas, cable/satellite, refuse and water companies to set a specific date when service will be discontinued. Contact utilities companies in your new town about service start dates, including Internet & long distance telephone services.
  • Notify healthcare professionals (doctors, dentists, veterinarians) of your move and ask for referrals and record transfers.
  • Register children for school and ask for school records to be transferred.
  • Notify lawn service, cleaning and security companies when service should be terminated.
  • Advise the post office, publications and correspondents of change of address and date of move.
  • Check your homeowner’s insurance and make arrangements for new coverage.

Moving Day

  • Have tools handy for breaking down beds and appliances.
  • Move valuables (jewelry, legal documents, family photos & collections) yourself – don’t send them with the moving company. Make sure you have a complete Home Inventory of all your possessions.
  • Give every room a final once over. Don’t forget to check the basement, yards, attic, garage and closets.
  • Have the final payment for the movers and money for a tip
  • Don’t forget to check with our Premier Sotheby’s office.  We can provide useful local advice, and/or referrals.