Local Buying Tips
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. Let your CENTURY 21® professionals guide you through this process. Purchase contracts vary in length and terms from state to state, and within a state, from locality to locality. Because you and the seller have different goals, rely on your CENTURY 21 agent's experience and expertise. He or she can bring order and calm to the process and will 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. In most cases it is better to have your real estate professional negotiate the offer. If you have any personal interaction with the homeowner, don't give out any information about your move, your current housing status, financial status or your feelings about their property - positive or negative. This could hurt you in future negotiations.
How Much?
Find out what other homes have sold for in the area, how much money you might have to put into repairs or renovations. These considerations factor in with how much you're comfortable spending.
Also, it helps to know the features that help or hurt resale. In some areas, a swimming pool actually detracts from a home's value and makes it harder to sell. In neighborhoods with two-car, attached garages, a single-car or detached garage may affect the home sale and future value.
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.
Next, decide how much you are willing to pay for a 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.
Lease Options
A lease option is an arrangement between you and a seller to exercise the option to buy a house after you have rented it for a specific period. A portion of your rent would be applied toward the purchase if the option is applied. This is referred to as rent credit, which most institutional lenders will accept as part of the down payment if rental payments exceed the market rent and if a valid lease-purchase agreement is in effect, a copy of which must be attached to the loan application. Read any lease option arrangement carefully for details on transferring the option and other important concerns.
For information on lease options, contact your real estate agent (some even specialize in such transactions) or read up on lease options at the public library or on the internet. If you have a real estate attorney, ask if he or she has any prepared information you can review.
The All-Cash Offer
Though most buyers don't buy a home with all cash, anyone considering such a move may be wondering how. Because all cash buyers sidestep the time-consuming loan qualification process, the deal can close very quickly. The all-cash buyer's primary advantage is completely avoiding mortgage interest. Buyers also save money that would be spent on loan origination fees, required appraisal, some closing costs and various other charges imposed by the lender.
At the same time, all-cash buyers should consider potential pitfalls of the transaction. Buyers who want to use the home as their primary residence lose out on many of the tax advantages available to homeowners with conventional loans.
If you can afford to pay cash but are concerned about price appreciation, you may be better off obtaining some financing. Also, look at other investments that are paying off and determine if spending cash on a home is worthwhile.
Mortgage Options
Unless you have enough money to pay for a house yourself, you'll need a mortgage. A mortgage is a loan you take out to finance the purchase of your home. It is also a legal contract stating that you promise to make a monthly payment until your loan is paid off.
Today, there are hundreds of different programs to choose from, but don't let that overwhelm you. Most loans are variations of a fixed-rate mortgage and adjustable-rate mortgage. Knowledge of how these mortgage programs work will help you to understand the majority of available loan options. You may qualify for a new loan without even selling your current home. It's simple to run the numbers for yourself on our Affordability Calculator.
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.
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.
New Construction Loan
If you are working with a builder in a sub-division or development you may be able to obtain a standard mortgage loan. But if you're hiring contractors, electricians, plumbers, and painters, you will probably need a construction loan, which provides funds to pay subcontractors as work progresses.
Assumable Loans
Assumable loans permit one borrower to take over a loan from another borrower without any change in the loan terms. Such loans still exist but they aren't very common or popular (for buyers) in a low-interest-rate environment. Plus, today new assumable loans are almost always adjustable rate mortgages. To find out if a loan is assumable, look to the loan agreement to determine if it is assumable by someone else, then talk to the lender about specific requirements based on the value of the home.
Home equity mortgage
A home equity mortgage, like a second mortgage, lets you tap into a percent of the appraised value of your home, minus your current mortgage balance. Like a line of credit, you will not be charged interest until you actually make a withdrawal against the loan, although you will be responsible for paying closing costs.
Of particular importance: make sure you understand the terms of the loan. If, for example, your loan requires that you pay interest only for the life of the loan, you will have to pay back the full amount borrowed at the end of the loan period or risk losing your home.
Reverse Annuity Mortgages (RAMs)
A reverse annuity mortgage is a special type of loan available only to older homeowners with full or nearly full equity in their homes. Such owners can borrow against the equity they have built up over the years, but no repayment is necessary until the borrower sells the property or moves elsewhere. If the borrower dies before the property is sold, the estate repays the loan (plus any interest that has accrued). These loans have become increasingly popular. If you believe you qualify for such a loan, be sure to have the document reviewed by an attorney or financial advisor.
Home equity line of credit
A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer's largest asset, many homeowners use their credit lines for major expenses such as education or medical bills.
With a home equity line, you will be approved for a specific amount of credit, and this is the maximum amount you may borrow at any one time under the plan. The interest rates on these loans are usually variable.
Bridge Loan
A bridge loan is short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short-term (up to one year) with relatively high interest rates and are backed by some form of collateral such as real estate or inventory. Bridge loans are also known as interim financing, gap financing or a swing loan.
As the term implies, these loans "bridge the gap" between times when financing is needed. They are used by both corporations and individuals and can be customized for many different situations. For example, let's say that a company is doing a round of equity financing that is expecting to close in six months. A bridge loan could be used to secure working capital until the round of funding goes through. For an individual, bridge loans are common in the real estate market. As there can often be a time lag between the sale of one property and the purchase of another, a bridge loan allows a homeowner some flexibility.
Wrap-Around Loans
A wrap-around mortgage is a loan transaction in which the lender assumes responsibility for an existing mortgage. A seller will usually incorporate a late charge to encourage the buyer to make monthly loan payments on time.
A wrap-around is attractive to lenders because they can leverage a lower interest rate on the existing mortgage into a higher yield for themselves. Usually, but not always, the lender is the seller. In general, only assumable loans are wrappable.
Fanny Mae
Federal National Mortgage Association, commonly referred to as "Fannie Mae" is a congressionally chartered secondary-mortgage market company that buys loans from private lenders. Because the firm is so big and has been involved in purchasing packages of loans from lenders for 25 years, it has enormous influence on the mortgage market.
Fannie Mae's [Community Home Buyers Program] allows first-time buyers with little cash to obtain 95 percent financing. Participants may put down as little as 3 percent of their own money, with the remainder permitted in the form of a gift from family members, a government program or nonprofit agency. Mortgage insurance is required on all loans above 80 percent loan-to-value ratio when borrowers do not use their own funds for at least 5 percent down.
The program is administered through participating lenders, and there are income limits in different states. However, the income restriction is waived when borrowers participate in the Fannie Neighbors program. Fannie Neighbors also has lower income requirements for borrowers who want to buy in designated central cities. Fannie Mae's Community Home Buyers program has an income cap of 120 percent of the area's median income. In addition, the borrower must attend a seminar on home ownership and the home buying process. It is not geared only for first-time homebuyers, unlike many of the other low-down -payment programs on the market.
Fannie Mae is expanding the availability of low-down-payment loans in an effort to help more people nationwide qualify for a mortgage. Two new programs will help potential buyers overcome two of the most common obstacles to home ownership, low savings and a modest income.
To address many first-time buyers' struggles to save the down payment, Fannie Mae developed Fannie 97. The program provides 97 percent financing on a fixed-rate mortgage with either a 25- or 30-year loan term through Fannie Mae's Community Home Buyers Program.
Fannie Mae's Start-Up Mortgage assists buyers with a 5 percent down payment who are at any income level. Yet applicants do not need as much income to qualify and less cash for closing than with traditional mortgages. Borrowers receive a 30-year, fixed-rate mortgage with a first-year monthly payment that is lower than the standard fixed-rate loan. Freddie Mac, Fannie Mae's counterpart, also offers low-down-payment loan programs.
For a list of participating lenders, call Fannie Mae at (800) 732-6643 .
Alternative (A,B,C,D) Loans
Traditional lenders who offer conforming loans are extremely competitive. They must offer desirable terms or lose their share of the market. Meanwhile, hopeful home buyers who were rejected often turn to mortgage brokers and specialized mortgage lending businesses. Alternative lending sources not only offer a variety of loan products but also are more willing to deal with higher debt-to-income ratios, credit problems and other credit challenges.
In cases where negative information on a credit report may be due to disappear in the next few years, or a borrower expects their income to increase significantly, non-conforming loans without excessive prepayment penalties can be excellent. The borrower can obtain a conventional loan as soon as they qualify, yet enjoy the benefits of home ownership and establish equity in the meantime. Many homebuyers engaged in this process look at these unconventional loans as a penalty while others are grateful for a second chance.
Easy-Qualifier Loans (No-Doc Loans)
Generally, lenders will not make loans to unemployed persons because someone without an income would seemingly have no way of making monthly mortgage payments. However, there are home loans for which lenders require very little loan documentation as long as the borrower puts down a sizable down payment, generally 25 percent or more. These "no-doc" loans are common among self-employed people who say they earn a certain amount of money but whose income tax returns show that their earnings are much lower. Borrowers should check directly with lenders when seeking a no-doc loan.
Negative Amortization
Negative amortization occurs when the monthly payments on a loan are insufficient to pay the interest accruing on the principal balance. The unpaid interest is added to the remaining principal due. When home prices are appreciating rapidly, negative amortization is less of a possibility than when prices are stable or dropping, particularly for the borrower who has made a small cash down payment to begin with. The combination of negative amortization and depreciation in home prices can result in a loan balance that is higher than the market value of the home. Adjustable rate mortgages with payment caps and negative amortization are usually re-amortized at some point so that the remaining loan balance can be fully paid off during the term of the loan. This could necessitate a substantial increase in the monthly payment. Most ARMs have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount. If the loan balance exceeds this amount, the borrower has to start paying off the excess.
Balloon Mortgage
A Balloon Mortgage is a loan in which the entire unpaid principal becomes due and payable on a given date, five, ten, or any number of years in the future. The borrower must pay up, refinance, or lose the property. Interest rates on balloon mortgages are lower than for fixed-rate mortgages. So the monthly mortgage payments will be lower than the monthly payments for conventional mortgages.
Low-Cost Loans
There isn't really such a thing as a low-cost loan. The term "no-cost" loan is misleading because borrowers are actually paying a higher interest rate in exchange for not having to pay fees or closing costs up front when the loan is secured. While some lenders may promote "no-cost" loans, regulators have tightened restrictions on this. Advertised "no-fee" loans may actually cost the borrower more because these costs are rolled into the new note through higher interest or more principal.
A typical no-fee loan is one in which the points charged and all fees are included in the loan principal, meaning that the borrower does not pay these expenses at the close of escrow, but instead ends up paying them over the life of the loan. The loan is called a no-fee loan because the borrower is not charged any fees up front.
A "no-points" loan is one that the lender does not charge points (one point is equal to 1 percent of the loan amount). But there are other fees involved in no-point loans, as with most loans.
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 banker or you can go to a bank, credit union or savings and loan. A CENTURY 21® 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.
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.
APR
The Annual Percentage Rate (APR) is the relative cost of credit as determined in accordance with Regulation Z of the Board of Governors of the Federal Reserve System for implementing the federal Truth-in-Lending Act*. The APR is the actual yearly interest rate paid by the borrower, figuring in the points charged to initiate the loan and other costs. The APR discloses the real cost of borrowing by adding on the points and by factoring in the assumption that the points will be paid off incrementally over the term of the loan. The APR is usually about 0.5 percent higher than the note rate.
Points
A point is calculated as one percent of the loan amount. Points that you get charged are additional to the interest rate that is charged on the loan and the point charges varies from lender to lender. A lender often makes his fees by charging points or by negotiating a lower interest rate.
*According to Charles O. Stapleton III, Thomas Moran and Martha R. Williams, authors of "Real Estate Principles," 3rd Ed., Dearborn Financial Publishing, Chicago; 1994.
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 at(800) 311-4769 , Equifax at (800) 685-1111 and Trans Union at (312) 408-1050 . Please note that every time your credit report is ordered, there are points deducted which could lower your overall score.
Negative Credit Rating
There is no fast and easy way to repair damaged credit that took months or years to occur. The law allows negative information to appear on an individual's credit record from seven to 10 years. Credit problems are the main reason would-be home buyers are denied a loan. The first step to clearing up your credit is to get a copy of your credit report to make sure that the negative credit information is indeed accurate. Some states now have mandatory timelines to respond to your inquiry or remove the blemish.
For a copy of your report, contact one of the three major credit reporting agencies: Experian at (800) 311-4769 , Equifax at (800) 6... and Trans Union at(312.... The bureaus should provide instructions on how to read the report and how to dispute any inaccuracies it contains. Please note that every time your credit report is ordered, there are points deducted which could lower your overall score.
If your credit report is correct, take care of any outstanding delinquent obligations first. Lenders usually won't consider any borrower who has had a delinquent payment in the past year.
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.
How to apply for a mortgage
Your chances of obtaining a mortgage really depend on all the information that will be contained in the credit report. So, it's a good idea to get your credit report, before you apply for a mortgage, and correct errors. If there are any inaccuracies you don't know about, this could cost you thousands of dollars in extra interest or even cause a denial of credit.
When you apply for a mortgage, the lender will want a lot of information about you (and, at some point, about the house you'll buy) to determine your loan eligibility. Here's what you'll need to provide:
- The name and address of your bank, your account numbers, and statements for the past three months
- Investment statements for the past three months
- Pay stubs, W-2 withholding forms, or other proof of employment and income
- Balance sheets and tax returns, if you're self-employed
- Information on consumer debt (account numbers and amounts due)
- You'll sign authorizations that allow the lender to verify your income and bank accounts, and to obtain a copy of your credit report. If you've already made an offer on a house or condo, you'll need to give the lender a purchase contract and a receipt for any good-faith deposit that you might have given the seller.
Once you apply, your lender will verify all the information you've provided. This is a loan approval process and it can take one to eight weeks, depending on the type of mortgage you choose and other factors that will affect your approval such as fulfillment of contract contingencies.
As your mortgage application is processed and finalized, your lender is required by law to give you several documents. Within three business days of applying for the loan, the lender must inform you of the mortgage's effective rate of interest, or annual percentage rate (APR). If relevant, the lender must also give you consumer information on adjustable rate mortgages. In addition, the lender is required to give you an itemized good-faith estimate of your closing costs and a government publication that explains those costs.
Since the home that you're purchasing will serve as collateral for the loan, the lender will order a market value appraisal of the property. The lender will not lend you more than a certain percentage of the value of the property. If your down payment will be less than 20 percent of the value of the property, your loan will require private mortgage insurance, and the lender will obtain insurer approval. If the lender has not already done so as part of a pre-approval process, it will verify your employment and bank accounts as well as obtain and evaluate your credit report.
Want more information? Visit Century 21 Mortgage® to contact an expert.
