Learn why as a home buyer you should know the questions that you need to ask and have answered “prior to” purchasing your home…
1) Q: What is the difference between a pre-qualification and a pre-approval?
A: A pre-qualification is often done by mortgage lenders based on your stated income and expenses and it gives you a dollar amount that you qualify for when you go home buying.
A pre-approval is a more formal approach that will provide you that same information but it will actually use documentation that you provide along with your credit standing to give you a more accurate picture of your home buying power.
In short a pre-approval gives you more negotiating power than a pre-qualification when you place an offer contract on a home.
2) Q: What is the importance of a good credit score and how can I go into my home purchase having a great handle on my credit?
A: A good score generally starts at around 700 and the higher you go after that point the better. You get into the great or excellent range once you score 750 or higher and that would put you in position to get the best rate in most transactions that involve credit.
You can attain mastery of your credit in the most effective way possible by gaining a real understanding of the 5 credit factors at this time.
3) Q: What is an escrow account and how will it affect my home buying decision?
A: An escrow account is used by mortgage lenders and mortgage servicers to hold funds of borrowers that are then used to pay property taxes and insurance. In a sense it acts as a savings account for a borrower that allows for the payment of their property taxes and hazard (homeowners) insurance so that they won’t have to make the payment directly to the taxing authority or insurance company.
If you put less than 20% down on your home purchase many lenders will also collect mortgage insurance on a monthly basis from you and that too would be a part of your monthly payment. If you have an FHA loan the insurance is called a “mortgage insurance premium” and if you had a conventional loan the insurance would be called “private mortgage insurance.” They both serve the same purpose as they will protect the lender against loss if you default on the mortgage loan.
Your monthly payment of the insurance will normally be based on “your credit standing”, your home location and your loan amount, therefore it is imperative that you use the mastery of your credit factors mentioned above–in as effective a way as possible “prior to” your home purchase.
4) Q: Why are the cash flow and other personal finance statements so important prior to my home purchase?
A: A personal cash flow statement (budget) allows you to know your inflow and outflow of cash on a monthly basis. A personal income statement allows you to know that information on an annual basis and finally a personal balance sheet allows you to know what you own and what you owe so that you can determine your net worth at a particular point in time.
By knowing this information upfront you put yourself in a better position for making decisions that are good for you and your family whether it be a home purchase or any other major financial obligation.
5) Q: What are closing costs and who will pay them at closing?
A: Closing costs as it relates to a home purchase are the costs associated with your mortgage as a result of your home purchase and they vary from lender to lender and your particular state or country.
Common closing costs include title charges, attorney fees, transfer taxes, intangible taxes, mortgage application fee, appraisal fee etcetera depending on the lender and your locale.
As to who will pay, that is normally negotiable and also depends on your locale.
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6) Q: Why do I need a down payment to purchase a home?
A: A down payment allows you the opportunity to lower your loan amount and shows the lender, seller and others that you have “skin in the game” and therefore are more serious about your purchase offer. If you put little or nothing down you are in most cases more likely to walk away from the loan obligations when times get tough. If you have “skin in the game” so to speak–you are less likely to do so.
Even though you may qualify for a 100% loan if your credit score is high enough or you may receive down payment assistance it is important from a psychological point of view to not only put money down but to have an established emergency fund.
By doing the above I have found that homeowners find ownership more rewarding and they tend to be able to weather financial storms that come their way.
With little or no down payment I have seen purchasers walk away from their obligations due to frustration and hopelessness. The key is to do all you can on the front end to prevent getting into a situation where you will be forced to walk away or find yourself in a hopeless situation.
7) Q: Is A Home Warranty A Worthwhile Investment?
A: The choice of whether or not you should get a home warranty can often be a difficult one.
It is imperative that you have the home properly inspected, you know the age of the home along with the age and working condition of the appliances, plumbing and HVAC systems.
Home warranties generally cover appliances, heating and air conditioning and plumbing.
Whether or not a Home Warranty policy is appropriate for you will depend on your personal situation—from finances to your risk tolerance level and most importantly the condition of the property (including appliances) that you are considering for purchase.
It is also important that you choose a desirable home location with strong schools that is situated in an area that has the amenities and businesses that you frequent or desire. Furthermore, you must be aware of environmental concerns and other demographic data of concern in the area that could affect your quality of life.
To learn more about Home Warranties click on this link.
8) Q: Are there down payment assistance programs available to help purchase a home?
A: There are many programs available at the local and state level. There are also targeted home buyer incentives for police/firefighters, educators, and nurses available in many areas of the United States.
HUD also offers low down payment options on some of its inventory of homes.
If you are not currently working with an agent or you want to learn more you can contact our office directly by email at email@example.com—or call us at 770-719-4550 and/or log on to Atlanta area down payment assistance programs to learn more.
9) Q: What should I be concerned about if I purchase my home as a lease purchase?
A: Many Lease-Purchase homes are often advertised by sellers in local newspapers, on for sale signs, the internet and other media and potential home buyers often seek them out in their strong desire to own their own home.
Let’s look at the potential lease-purchase from a buyer’s and seller’s perspective.
As a purchaser if you did not initiate the lease-purchase offer or someone who represents (i.e. agent, attorney etc,) you did not initiate it, the offer will more than likely not be in your best interest.
This is usually what occurs when a potential home buyer sees a lease-purchase ad in the various media and respond to it. They usually have no idea of the home buying or financial planning process and want to own a home at all costs.
They will be easy prey for a savvy home seller and/or their representative because they are not fully aware of the process and they are not in proper position to negotiate the terms and price.
Sellers and/or their representatives normally will structure the sales contract in a manner that will maximize the terms and sales price to their benefit and minimize the terms and sales price to your (purchaser’s) benefit.
Those are some of the reasons I dislike lease-purchases from the buyer’s perspective. In addition at the end of the lease purchase you will be locked in to that specific property at the specific price that you agreed to, regardless of market conditions.
If prices of homes have risen or fallen you are locked in. The purpose of a lease purchase is normally to buy the purchaser time so that they can get their credit to a level where they can qualify for a loan at a good rate.
Once you qualify for a loan at a good rate you have the potential to purchase ANY property, so why limit yourself to one particular house.
Most lease purchases offered through Multiple Listing Services where you have to deal with real estate agents are usually for one year and usually not more than two, as real estate agents are concerned about their commission and will normally not accept an offer beyond that period.
Other seller’s who offer lease purchases without the assistance of an agent may offer a longer lease-term than three years but they will more than compensate for the longer term by structuring the terms and sales price in their favor.
If you must purchase a lease-purchase it is imperative that you draft the terms and sales price yourself or with the assistance of a competent real estate agent or other professional. A better option if you feel you really want the property and don’t want to lose out may be a lease option purchase where you are not locked in to that purchase and you can opt in or opt out.
Again structuring the terms and purchase price is key so make sure you utilize competent professionals.
An even better option (and one that I really like) for you may be to continue renting and get your credit score and reports to a level where you qualify for an FHA or Conventional loan at prevailing market rates (competitive interest rate) and then purchase the home of your choice with no lease purchase premium included or a lease option fee included.
Again make sure you, have a low debt load, you are pre-approved as opposed to pre-qualified, you have a six month emergency fund or other compensating factors at work and you are properly positioned to purchase.
By being ready, willing, and able to purchase you and your agent should be able to negotiate a better deal in most cases than if you were to go the lease-purchase or lease option route.
10) Q: What is The Complete Home Buying Process when I purchase my home?
A: It starts with preliminary home buyer pre-qualification to post-closing in my opinion and based on the way our company operates. A professional real estate agent should be concerned with more than just your ability to purchase a home—they should also be concerned with your ability to maintain and keep your new home.
Therefore, “preliminary pre-qualification” is a vital step. Don’t skip this step, many homeowners have skipped this step in the past to their own peril (loss of house, financial difficulty etc.).
The home buying process begins well before you decide to place an offer on a home. The preparation that you put into buying a home on the front end will pay great dividends on the back end if you do it the proper way.
I often have the potential home buyer pull their credit from the three major credit bureaus and have them obtain their credit scores as well.
This gives the consumer confidence that they are in control of their own financial destiny.
Although they may not see it now this will help them start to take control of there financial affairs if they are not doing so already. Assuming their credit and credit scores are satisfactory we move on to the next step.
A quick front end and back end ratio analysis is then performed.
If their credit and credit score situation is unsatisfactory they correct them (usually within 12 months) and we then move to the next step.
Assuming you have no bankruptcies, judgments or other public record data on your report it can normally be cleaned up within 12 months if you have the right cash flow and are disciplined in paying off outstanding debt and paying your revolving and installment accounts in a timely manner.
While working with buyer’s I try to implement a comprehensive strategy in their home buying pursuit.
It is important to begin at the cash flow (budget) analysis point and move forward from there. I look at their total financial situation so I can be of the most benefit to them (assuming they agree to the complimentary service).
From there we can see if there is discretionary income available after all variable and fixed expenses have been paid.
I then perform personal balance sheet, income statement and net worth analysis to get an even better look at their financial situation so I can be of the most benefit to them (again assuming they agree to the complimentary service). Front and back end ratio analysis would then be performed again.
I then analyze all of this based on family size, future goals (retirement, college, etc.) financial needs and wants and other factors that may be present in their situation.
I then decide if they qualify based on their down payment saved, emergency fund, cash flow situation and their ability to reach their goals based on what they stated above.
I also look at other factors (compensating) and non-compensating as well—such as a future financial windfall, other household income that will not be included on the loan application, expected increase in family size, child going to college and any other factor that could potentially have a negative or positive effect on their home purchase.
Assuming all of the above turns out to be positive I inform them of the home buying process in greater detail.
I then inform them of the advantages of getting pre-approved as opposed to pre-qualified (more negotiating power).
Once they are pre-approved we begin the home search and once a home is found to their liking we put an offer contract on that property (along with earnest money deposit).
After negotiation and a final sales price and terms are agreed to the buyer performs an inspection (usually a professional inspector is hired) based on the time limits specified in the offer.
If there are problems of concern to the purchaser we counter the offer and negotiate until a final sales price is agreed to. Once all contingencies are met the contract moves forward and the closing occurs.
Be aware that not all real estate agents will be concerned with your “preliminary pre-qualification” but you should be—you have to live with the choice and decision you make well into the future, so it is important that you get this step right.
Once the contract is accepted you make formal application for the loan (unless buying with cash) and once you receive the loan commitment letter (a contract between you and the lender—make sure you understand what you are signing) and the process moves forward.
Once the inspection is complete and repairs are negotiated the contract continues to move forward. If no agreement is reached the contract may become null and void.
Assuming the contract moves forward and closing approaches after you receive your mortgage commitment, the attorney will submit a title insurance binder along with other legal paperwork required by your lender. Once everybody has signed off approval a closing date can be set.
Most Real estate closings are often exciting and stressful at the same time.
There are many legal papers being shuffled back and forth, as well as checks for large sums of money being exchanged among parties.
It is highly recommended that you do a final walk through of your soon to be new home prior to closing.
The final walk through allows you to reconfirm the condition of the house prior to closing.
This normally happens a day or two before closing. Don’t skip this step because this is usually your last chance to verify that there has been no change or damage to the property, all agreed on repairs have been made, appliances you expect to be there are still there and that the seller’s personal belongings have been removed.
Don’t assume anything.
A lot can happen between having your offer accepted and getting to the closing table. If possible it is not a bad idea to do another walk through several hours before closing just as an added security and peace of mind effort.
Make sure that you bring photo identification to the closing. This is required since 9/11.
Be sure to save all of your closing paperwork in a safe place.
You will need some of it for your taxes as interest, points, and now MIP or PMI is now deductible on your tax return. The deed and abstract should be placed in either a fireproof box and/or safe deposit box.
The documents are very important and due care should be utilized to safeguard them.
They are an inconvenience to replace and will cost you valuable time and money. Also file your homestead exemption by April 1st of the year after closing in the County in which the property is purchased.
In Georgia you will save on your property taxes (must be owner occupied residence) and it is worth the effort if you are an owner/occupant.
At closing, the seller gives the title to the buyer in exchange for the purchase price that is stated in the contract. The seller also delivers a deed, title evidence, and a property survey if required. The buyer brings insurance, termite letter, cashier’s check etcetera.
You will be required to sign final mortgage papers, IRS Form 1099, a form known as the HUD-1 statement or Uniform Settlement Statement and other closing documents. The attorney will explain the purpose of each of these.
In addition what the seller or buyer brings to closing will vary depending on your locale, so be aware that state laws vary on buyer and seller responsibilities. In addition, who brings what will vary based on how closing costs were negotiated.
In most cases, there are no warranties after closing
The only defects that you can make notice of or complain about are defects that you can prove were known and/or hidden defects that were not disclosed or could not have been found out about through a reasonable investigation.
Post Closing is critical. Utilize a cash flow budget. Stay in touch with your agent. Your deed and mortgage will be registered and filed at the county recorders office.
On a day when you have time it may be wise to go to the recorder’s office a month or more after closing to ensure that the deed and mortgage was properly recorded. In some areas you may be able to verify that the deed and mortgage was properly recorded by doing an online search.
The above home buying process assumes 1st time buyer with no house to sell!
Also remember that all home buying situations are different and may require a more detailed offer and closing than that listed above.
Use the above home buying process as a guide only as each situation will be unique.
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11) Q: After the purchase of my home, will preparing my taxes be difficult?
A: If you have prepared your own taxes in the past you may feel comfortable continuing to do your own taxes.
However, there are some nuances that are unique to home ownership that you must be aware of. However, if you get up to speed on the current home ownership issues in the current tax code, you may put yourself in position to continue preparing your own taxes.
For income tax preparation you can utilize the tax professional of your choice or if your tax situation is not very complicated after your home purchase—you can choose among the following:
If you live in metro Atlanta—you can possibly get free tax preparation if you meet income eligibility and family size guidelines through the United Way VITA program.
12) Q: What are covenants, conditions and restrictions or CCR?
A: CCR is short for covenants, conditions and restrictions, CCR refers to rules that signing parties of a property contract must adhere to concerning the purchase or use of a property.
For instance, a CCR is a no-pets rule for tenants of an apartment. You’ll find the term in real estate documents including deeds and homeowner’s association or even in rental agreements.
13) Q: What is a CMA and how will it be used by real estate agents to benefit me and my family?
A: Real estate agents conduct a CMA, or comparative market analysis, to help their clients determine an offer or listing price at which to buy or sell a home, respectively.
A CMA involves doing a comparison of on-the-market or recently sold homes in the same geographic area and with similar characteristics of the property that you are considering for purchase.
As a home buyer you would use the information derived from the CMA so that you would not “over-pay” for the property. As a seller you would use the information for “marketing your property at an appropriate price” so that you would not over-list the property.
You can contrast a CMA with a “property appraisal” which is ordered by your lender and provides a more detailed analysis of property value as the lender wants to ensure that the loan that they would be making to you would at least be based on the value of the property. An appraisal is performed by a licensed appraiser and would have CMA data along with other data of the characteristics of the home that would provide the lender more certainty that the loan that they provide is based on a realistic value of the property.
14) Q: What is earnest money?
A: An EMC, or earnest money contract, is the paperwork that accompanies an earnest money deposit that a buyer makes to a seller as a show of good faith in a property transaction.
Specifically, the EMC usually includes, at a minimum, the earnest money deposit amount that is normally submitted in the form of a personal check.
The earnest money contract would also include any contingencies that would allow a buyer to back out of the sale–such as a failed home inspection or failure to obtain financing at a reasonable rate of interest.
In many states and countries “earnest money is part of a standard offer contract” and would be submitted at the time an offer is placed on the home.
15) Q: What are REO’s?
A: Real-estate-owned (REO) properties are defined by two things:
- Those that have been repossessed by a lender after the property underwent the foreclosure process (including “friendly foreclosures” and “short sales” that did not materialize) and
- The ones that failed to sell at a foreclosure auction
Lenders may choose to put a REO property up for auction again or work with a broker to sell it.
Most liens are removed after a foreclosure property sale, but certain liens may remain and they could include the following:
- Any lien recorded on title prior in time to the foreclosing mortgage.
- First Mortgage (if the foreclosing mortgage is a second or third mortgage)
- HOA or COA assessment liens (in certain states)
- Mechanic’s Liens (in some states)
- Government liens such as state and federal tax liens, city or county liens, US Government liens.
- IRS liens (IRS may buy the property within 120 days after sale at the price paid at foreclosure sale)
- Code Enforcement Liens, Environmental Liens, and Utility Liens
- Child Support Liens
It is important that you purchase home buyer title insurance to protect against “liens” and potential “clouds” in the title of any home you close on!
It is also important that you are aware of FHA, VA and other government backed foreclosed homes that may be available in your area. Always keep in mind many foreclosed homes are not the bargain that you might expect–therefore be sure to do your research up front–not “after” you purchase the foreclosed property.
In addition, a home inspection by a certified (ASHI GAHI CABO ICC FREA) inspector prior to closing will help ensure that you do not make a purchase with costly hidden defects or other needed repairs that you may not have anticipated.
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About the author
Thomas (TJ) Underwood is a licensed real estate agent in the state of Georgia and has tackled topics ranging from real estate to retirement planning in his more-than-a-decade-long career as a writer and blogger.
During his stint at TheWealthIncreaser.com, he’s been featured by Yahoo Finance, Trulia, and other leading online digital companies. You can connect with him on TheWealthIncreaser.com to find out what he’s been writing about lately or tap further into his expertise if you have a financial question of concern.
GLOSSARY OF REAL ESTATE TERMS…
Thomas (TJ) Underwood
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