Purchasing a home is one of your most important financial decisions. Whether it is your first buying experience or you are an experienced buyer, make your decisions very carefully.
What Are Your Reasons For Purchasing a Home?
Is this your first home? Do you need a larger home? Are you looking for an investment property? Would you like a larger lot with a pool? Do you want a different location? Do you want to be closer to your employment? Answering these questions will assist you and your real estate agent to select the right property.
Has Your Income Increased?
Owning a home is an excellent investment. Whatever your reasons for purchasing a home, it is the least risk to build equity or to obtain a greater return on your initial investment.
Preparation for Purchasing Your Home
Before you start looking for a home, it is a smart idea to do some preparation.
Build Your File
Your file should consist of all your financial documents. You will need them to secure financing for your property. The documents that you will need are:
- Financial statements
- Bank accounts
- Investment records
- Credit cards information
- Automobile loans
- Current pay stubs
- Two years of tax returns
- Copies of any leases for investment properties
- 401 K statements, life insurance policies, stocks, bonds and mutual funds.
Check Your Credit
Your credit score will have an impact on what type of loan you can obtain and what amount. We recommend that you or your lender check your credit with an experienced lending institution so that you can determine what you can afford. Your credit ratings can be researched from three credit reporting agencies.
Equifax www.equifax.com 800-685-1111
Experian www.experian.com 800-397-3742
Trans Union www.transunion.com 877-322-8228
We will recommend experienced, knowledgeable lenders in our area.
Your Finances
It is not a good time to make any career changes or large purchases. You will want to approach your property purchase from a position of financial stability.
Types of Mortgages
Fortunately for buyers, there are a variety of mortgages to choose from. It is in your best interest to investigate each of them to determine which is the best for your situation. You probably won’t qualify for all of them. In fact, you may only qualify for only one of them. You may save some money if you do your homework before signing on the dotted line.
- Fixed rate mortgage
- Adjustable rate mortgage
- The convertible ARM
- FHA and VA loan
Fixed Rate Mortgage
You plan on living in your home for many years.
You are not a risk taker and prefer the stability of knowing how much your payment will be each month. Most home loans are for a period of 30 years. If you want a payment that you can count on for that long period of time, a fixed rate mortgage may be what works best for you. Once your loan amount and interest rate are calculated and locked in, a fixed rate mortgage will guarantee that you will have the same payment over the life of the loan. Making an extra payment to principal will allow you to pay your loan off sooner. This may not always be the best choice if the interest rates are very high at the time you take out your loan. With a fixed rate mortgage, you’ll be stuck with that high interest for the life of the loan. If the interest rates are very low, you’ll come out a winner with interest rates that will stay low no matter how high interest rates go in the future. The following are the advantages and disadvantages of the varying lengths and terms of fixed rate mortgages.
15 Year Fixed Rate
Pay off the loan in half the time of a 30 year loan.
Equity builds up more quickly than in a 30 year loan.
Payments may be higher.
20 Year Fixed Rate
Pay off the loan in 2/3 the time of a 30 year loan.
The overall interest paid is considerably less than for a 30 year loan.
30 Year Fixed Rate
The most common choice , especially for first time buyers, as it is the easiest of the fixed rate loans to qualify for.
Monthly payments are lower than for the 15 and 20 year loans. This can be helpful if you do not have a lot of padding between the amount you can afford to spend and the monthly payment for your desired property.
More desirable if you plan on staying in the home for years, since equity builds more slowly than for shorter term loans.
For interest rate purposes, this term provides the maximum interest deduction.
Adjustable Rate Mortgage (Arms)
If you are more comfortable in taking a risk with your money or if interest rates are very high at the time you take out your loan , an adjustable rate mortgage (ARM) may be the solution for you. You may also choose this type of loan if your planned ownership is short term or if you expect your income to increase to cover any potential rise in interest rate.
Generally, the interest when you take out your loan will be lower than a fixed rate mortgage. Please note that this is true initially, not necessarily long term.
Typically, ARM interest rates are tied to a specific financial index , such as Certificate of Deposit index, Treasury or T-Bill rate, Cost of Funds Indexed Arms or COFi, or LIBOR (London Interbank Offered Rate) and your payment will be based on the index that your lender uses plus a margin, generally two to three points. Get the formula used by your lender in writing and make sure you understand what it means.
Fortunately, the amount an ARM can increase is limited. There are caps on how much your lender can increase your rate, both for a period of one year or and for the life of the loan. Plan ahead and have your lender calculate what the maximum payment would be if your rate went to the highest amount allowed by the cap for your particular mortgage. If you are not confident you’ll be able to pay that amount on a monthly basis, perhaps you should reconsider this type of loan.
Convertible ARM’s
If neither the fixed rate or the adjustable rate mortgage seems like the best option, perhaps the convertible ARM will be the right for you. This alternative combines the initial advantage of an ARM with a fixed rate after a predetermined number of years. Obviously, this type of mortgage has more advantages when the initial interest rate is low and the future rate is not guaranteed.
Government Loans
Another mortgage option available to some people is a government loan, providing that you meet the qualifications for these loans.
VA Loan: Veterans may qualify for a loan from the Veterans Administration. There is a limit on the amount you can borrow, so this option works best for those buying a lower priced home.
FHA Loan:
The Federal Housing Association offers loans to lower income Americans. Look for the phrase FHA approved when looking at ads for homes.
Selecting a Real Estate Agent
Purchasing a home requires making many important financial decisions, understanding issues and completing paperwork. It helps to have an expert in your corner when making such a large purchase. We can guide you through this process, and provide you with access to property listings.
Here are some points to consider when selecting a real estate professional:
- Look for a full time agent, one who has experience completing transactions similar to yours.
- Are they familiar with the area in which you are interested?
- Ask how much time the agent will have for you and if they are available at night and on weekends.
- Ask about their credentials and education. A good agent will continually strive to improve and gain knowledge of the latest real estate trends and hold the highest designations in their respective fields of expertise.
- Does the agent return your calls promptly?
- Ask for a list of properties they have sold or a list of references.
- Choose an agent who listens attentively to your needs and concerns. Pick an agent with whom you feel comfortable.
Time to Go Shopping
Once those preparations are completed, it is time to find the right home.
Take a Drive
Know the neighborhoods, complexes or subdivisions that interest you. Drive around and get a feel for what it would be like to own a property in those areas.
Narrow Your Search
Select a few properties that interest you the most and have your real estate agent arrange appointments to visit them. Ask about the potential long term resale value of the properties you are considering.
Time To Buy
Once you have selected the property you want to purchase, your real estate agent can help you make an offer that the seller will accept. A good agent will investigate the potential costs and expenses associated with the new property. An agent can also help you draft your offer in a way that gives you the advantage over another offer.
Escrow, Inspection and Appraisal
The Initial Agreement and Deposit
An effective agreement is a legal arrangement between a potential purchaser and the property’s seller.
Keep written records of everything. It will be very useful to transcribe all verbal agreements including counter offers and addendum and to convert them into written agreements to be signed by both parties. We will assist you in drafting all the paperwork for your purchase and make sure that you have copies of everything. Now that you have chosen your offer, you and the seller will be given a timeline to mark every stage in the process of closing the real estate contract. Meeting the requirements on time ensures a smoother flow of negotiations so that each party involved is not in breach of their agreements. During the process we will keep you constantly updated so you will always be prepared for the next step.
The Closing Agent
An escrow company will be selected as a closing agent. The escrow agent will hold the deposit in escrow and title will research the complete recorded history of the property to ensure that the title is free and clear of encumbrances by the date of closing and that all encumbrances are properly added to the title. Some properties are subject to restrictions which limit various activities such as building or parking restrictions. There may be recorded easements and encroachments that limit the rights to use your property.
How To Hold Title
You may wish to consult an attorney or tax advisor on the best way to hold title. Different methods of holding title have different legal, estate and tax implications, especially when selling or upon death of the title holder.
Inspections
Once your offer is accepted by the seller, you will need to have a licensed property inspector inspect the property within the timeframe that was agreed upon in the effective contract to purchase.
Appraisal and Lending
It is imperative that you keep in close communication with your lender who will let you know when additional documents are needed to approve your loan application and fund your loan. If the agreement is conditional upon financing, then the property will be appraised by a licensed appraiser to determine the value for the lending institution, via a third party. This is done so that the lending institution can confirm their investment in your property is accurate. Appraisers are specialists in determining the value of properties, based on a combination of square footage measurements, building costs, resent sales of comparable properties, operating income, etc. When you are within two weeks of closing, double check with your lender to be sure the loan will go through smoothly and on time.
Association Approval
If the property that you are purchasing is conditional upon an association approval, request the rules, regulations, and other important documents form the seller as soon as you have an effective agreement to purchase. Make sure that the application documents and processing fees are submitted to the appropriate person at the association by the required time. Fill out all the information completely and legibly so there is no delay in processing the application.
Property Insurance
If you are obtaining a loan, you will be required by your lender to purchase a certain amount of insurance on the property. The value will depend on the lending institution and the purchase price of the property. You may be able to save hundreds of dollars a year on homeowners insurance by shopping around for insurance.
Consider a higher deductible. Increasing your deductible by just a few hundred dollars can make a big difference in your premium.
Ask Insurance Agent about Discounts. You may be able to get a lower premium if your home has safety features such as dead-bolt locks, smoke detectors, an alarm system, storm shutters or fire retardant roofing materials. Persons over 55 years of age or long term customers may also be offered discounts.
Insure Your house Not The Land Under It. After a disaster, the land is still there. If you do not subtract the value of the land when deciding how much homeowner’s insurance to buy, you will pay more than you should. We will recommend experienced knowledgeable insurance agents for every property type.
Moving In
Closing Day
If you have come this far, then this means that it is almost time for a congratulations, but not yet. Do not forget to tie up these loose ends.
Final Walk Through Inspection
More of a formality than anything else, the final inspection takes place a few days before closing. You will visit the property to verify that all is in working order. Everything should be the same as when you last viewed the property, no extra items left behind, and that everything included in your purchase is still at the property.
Home Services and Utilities
We will provide a list of useful numbers for the activation of home services and utilities after the closing occurs.
Be Prepared
We are ready to assist you at this last stage should an unforeseen glitch pop up, something at the property breaks down or with some other minor detail. No Need to worry! We have encountered these problems before so we know how to handle them efficiently and in a stress-free manor.
Closing
The escrow officer will furnish all parties involved with a settlement statement, which summarizes and details the financial transactions enacted in the process. You and the sellers will sign this statement, as well as the escrow agent, certifying its accuracy. If you are obtaining financing, you will have to sign all pertinent documentation required by the lending institution. If you bring funds to the transaction you can elect to either have the funds wired electronically into the escrow agent’s account, or bring a certified bank check in the amount specified on the settlement statement. The seller should arrange to have all property keys and any other important information at the home.