Buying your first home is like life’s other firsts: exciting even romantic and a little bit scary as you wade into new waters. You can ease the process and avoid being ripped off by knowing these eight points before you take another move toward home ownership.
1. FAMILIARIZE YOURSELF WITH THE AGENT:
Feel free and open to interview several agents to know what you’re getting in terms of loyalty, knowledge and experience. The right agent is a tremendous help and often a necessity when it comes to finding the right house.
* The best way to find an exceptional agent is through references from family, friends and/or colleagues. Ask to see their activity lists within the past year to determine how active they’ve been. These show every property they sold during the past year. You want an agent who’s experienced in the area where you want to live and is knowledgeable of market conditions.
* Now, there are two types of agents. There is a seller’s agent who works for and gives complete commitment to the seller; a buyer’s agent does the same for the buyer. A buyer’s agent will point out rather than gloss over any flaws with the house or neighborhood, help you negotiate a good deal, explain your other options and be unquestionably on your side.
BY LAW, A REALTOR HAS TO WORK FOR THE SELLER IF NO BUYER AGENCY IS SIGNED!
Tip: The cost will be the same whether you use the seller’s agent or get a buyer’s agent: The two agents will split the commission and that commission is paid by the seller.
2. DON’T STRETCH YOUR MEANS:
Remember to keep in mind to buy only what you can afford. Everyone can agree that a five-bedroom, three-bathroom house in immaculate condition on three lushly landscaped acres with a pool has more curb appeal than a two-bedroom, one-bath on a much smaller lot. There’s nothing worse than winding up with such a big monthly payment that you have nothing left for entertainment, vacation, and retirement.
* A good rule of thumb: Your total monthly debts, including your mortgage, should not exceed 36 percent of your income before taxes.
* Remember that your mortgage payment is only one aspect of what you’ll be paying every month. Make sure to budget for homeowner’s insurance, property taxes, car and school loans, etc..
3. GET INTO A GOOD MORTGAGE:
Mortgages are available from banks, mortgage companies and credit unions. A recommendation would be to find a mortgage broker, who will contact several lenders for you to find competitive rates rather than just walking into a bank that will only disclose their rates.
Get mortgage information from more than one source, and get the same information from each so you can compare the offers. The Federal Trade Commission (FTC) recommends that in addition to finding out the basic interest rate you ask each lender:
* Is the rate fixed or adjustable? When interest rates rise, monthly payments for adjustable-rate loans eventually go up, too.
* What is the loan’s annual percentage rate (APR)? This includes the interest rate, points, broker fees and any credit charges you may have to pay, expressed as a yearly rate.
* What will points be in dollars? Points are fees paid to the lender or broker for the loan. Ask each potential lender for a quote in the dollar amount (rather than just the number of points) so you’ll know how much you will have to pay.
* Is private mortgage insurance (PMI) required? If you make less than a 20 percent down payment, the lender will probably require you to purchase PMI, which protects the lender in case you fail to pay. Find out the exact monthly amount and how long you will be required to carry PMI.
* You will also have to choose between a 30-year or 15-year mortgage. A 30-year mortgage will mean lower monthly payments but a higher interest rate. In the long run, you’ll be paying more for your house because you’ll be making more interest payments. With a 15-year mortgage, the monthly bill will be higher but the interest rate lower; thus you’ll pay less for your house because it will be paid off in a shorter period of time.
* Have each lender provide you with a written statement of all fees connected to the loan. Then, ask each to reduce one or more of the fees. Use the lowest amount of fees to negotiate with the other lenders to see if they’ll reduce their fees.
Tip: If you are a first time home buyer, the FHA loan program is a great mortgage that allows you to put down 3.5% of the total purchase price. In addition to this great opportunity, the U.S. Senate passed a bill February 13, 2009 that increases the first-time home buyer credit from $7,500 to $8,000, and removes the requirement that the credit be paid back if the buyer stays in the home for at least three years. It also extends the expiration date for the credit from July 1 to Dec. 1, 2009. Homebuyers must have purchased a home after Jan. 1, 2009, and before Dec. 1, 2009, to be eligible for the $8,000 credit.
4. GET A PRE-APPROVAL LETTER FROM A MORTGAGE BROKER:
This gives you substantial leverage: Sellers immediately see you as a serious buyer. Not only will you know the exact price range you can afford, you’ll be able to negotiate a better deal and move faster when you see a house you like. Work with your lender to get your pre-approval letter. You’ll need to supply information to verify your income, credit history, debts and assets to determine what you qualify up to. The lender will then issue a letter stating that your mortgage is approved for a certain dollar amount for a certain time period. Don’t confuse pre-approval with prequalification: The latter is a non-binding estimate of how much mortgage you can afford.
Once you get pre-approved for a mortgage, an important item to remember is to avoid taking on any serious new debt and make timely payments on all existing debts. Otherwise you risk degrading your credit rating partway through the buying process.
Tip: If you’re charged a pre-approval fee, always negotiate to have it refunded at the closing.
5. LOCK IN YOUR INTEREST RATE:
Once you get what you think are the best terms possible, ask for a written rate lock. It will include the interest rate, how long the lock-in will last and the number of points to be paid. A lock-in protects you from a rate increase if rates go up during the time your loan is being processed.
6. PLAY IT CLOSE TO THE CHEST:
If you fall in love with a house, keep your feelings to yourself. Don’t let the seller or the seller’s agent know. Handing over that bit of information will empower them to hold out for the asking price. Keep in mind that there’s always another house at the right price.
Tip: Visit at night and on a weekday. Most people look at homes on weekends in the daylight; before you buy, find out what the neighborhood is like at other times. Is it quiet? Noisy? Full of traffic? Also, drive the surrounding few blocks in each direction from the house, to make sure there aren’t unsavory areas or unexpected industrial sites nearby.
Before making an offer, ask the agent for a Comparative Market Analysis (CMA). The CMA lists the addresses of recently sold homes in the same neighborhood, with the date sold, the price and the number of bedrooms and bathrooms. Your offer should be comparable and not necessarily based on the seller’s asking price.
Then, insist that the contract include two types of escape clauses: a financing (or mortgage) contingency and an inspection contingency.
If you make an offer but then are ultimately turned down by lenders, the financing contingency will release you from the contract. You’ll also get back your earnest money (your deposit). If a professional inspection finds damage or structural flaws in the house, the inspection contingency will release you from the contract and your deposit will be returned. Usually you can also opt to use the inspection contingency to negotiate for repairs to the house or for a lower selling price. There are different types of inspection contingencies; work with your agent to put the type you want into the written offer you make on the house.
Tip: Never use an inspector recommended by the seller’s real estate agent!