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Choosing a Realtor
Deciding
what you need and want
What can you afford?
The Offer
Finding Financing
Closing the deal |
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Choosing a REALTOR®
Buying a home is one of the largest purchases and biggest decisions
of your life. The first thing to do is to find a REALTOR® you
trust. Ask your friends and relatives who have bought homes recently
for their recommendations. Or, you can use the find-a-REALTOR®
search to locate a REALTOR® in your area.
Before working with a REALTOR®, you should know that the duties
of the REALTOR® depend on whom the REALTOR® represents.Many
REALTORS® specialize as buyer's agents, representing clients
who are searching for their next home. These agents can save you
time and money by researching properties based on your criteria,
helping you secure the best mortgage rates, counseling you on the
offer amount and terms most favorable to you, and negotiating on
your behalf. For buyers, there's really no downside to hiring a
REALTOR® because the seller generally pays buyer's-agent commissions.
Many buyer's agents have earned the Accredited Buyer Representative
(ABR®) designation from the National Association of REALTORS®
Real Estate BUYER'S AGENT Council.
If you choose not to use a buyer's agent, you could negotiate directly
with the listing agent representing the owner. All brokers must
treat you honestly and fairly regardless of whom they represent.
If you choose to have a REALTOR® represent you, you should enter
into a written contract that clearly establishes the obligation
of both parties and specifies how your REALTOR® will be compensated |
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Deciding What you Need and Want
Needs and wants list
Before you start looking, make a list of what you want and need. Once
your list is made, go back over it and decide what is most important--which
items are musts and which you are willing to give up. Assign each
item a priority so that you will know what to look for as you begin
house hunting.
Location
Deciding where you want to live may be the single most important factor
in choosing a home. Location to employment centers, shopping centers,
schools, major traffic arteries, and other attractions are important
and have significant influences on value.Your choice of location may
be limited somewhat by the price you can afford. Even so, make sure
you consider such things as:
- prices of properties and property taxes;
- distance to work, schools, shopping, and entertainment;
- proposed changes in land use such as commercial shopping
centers and roads, and potential hazards such as flooding
and noise from a nearby airport or highways.
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Type of Home and Lot
A single-family detached home typically provides more living
space and land area than other types of living units and permits you
greater freedom (less restrictions) to remodel, expand, paint, and
alter the appearance.If you don't like spending leisure time on yard
work, consider a condo or garden (patio) home. Condos and garden homes
often offer shared greenbelts and garden areas or membership in private
recreational facilities such as swimming, golf, and tennis.
New
vs. older homes
Pre owned homes usually have established yards, and the neighborhood
or subdivision is usually built-out. On the other hand, they may require
more maintenance.New homes are not without problems. Although they
require less maintenance in the first few years, you may have to put
in landscaping and call the builder back to correct faults. And if
buildings are still active in the area, you may have to endure nearby
construction.You could already have your dream home in mind. Then
again, you might not know what you like until you see it. Either way,
your REALTOR® will listen to your preferences and help you find
the perfect home. |
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What Can you Afford?
There are typically three major areas of concern when deciding what
you can afford: down payment, qualifying for a loan, and closing costs.
Down payment
A conventional loan typically requires a down payment. It is not uncommon
for buyers to place a down payment of 10% to 20% of the purchase price.
For example, on an $80,000 home, a down payment of $8,000 to $16,000
in cash may be warranted . Government-backed loans, insured by the
Federal Housing Administration (FHA) and the Veterans Administration
(VA) are particularly useful to first-time buyers and often require
5% or less as a down payment. Generally, a higher down payment means
better loan terms and a lower interest expense on the mortgage.
Qualifying
for a loan
A lender will determine how much they think you can afford. But remember,
just because the lender says you can afford one price doesn't mean
that's what you should spend. Be wise and thoroughly examine how much
you should spend on a home.Be prepared to provide the lender with
a two- to five- year financial history that contains the following:
- Income--gross monthly income as well as employment history,
education, and any secondary income such as bonuses, dividends,
and child support. The lender may require a letter from
your employer, W-2 forms, or, if you are self-employed,
recent tax returns.
- Assets--current checking account balances, savings accounts,
stocks and bonds, certificates of deposit, other property,
insurance policies, and pension funds.
- Credit--debts on cars and appliances, debts on all credit
cards, and history of debt repayment. Your lender may ask
for a credit report, so you may want to clear up any known
negative terms in advance.
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Your REALTOR® can help you determine what price range and monthly
payment you can afford. The monthly payment typically consists of
principal, interest, taxes and insurance--PITI, for short.
Closing Costs and Other Costs
Purchasing a home involves a number services, and with
them, fees. You should expect fees for appraisal, survey, inspections,
hazard insurance, loan origination (lender's administrative costs),
credit report, document preparation, title search and insurance,
recording fees, notary, attorney, and escrow. You will pay for some
fees and the seller will pay for others. The costs will vary depending
on each transaction. Most lenders will provide you with a good-faith
estimate of such costs. Your REALTOR® can also help you estimate
what those costs might be.
An item often confusing to first-time buyers is points. Points
are interest collected in advance. One point equals 1% of the loan
amount. For instance, three points on a $70,000 loan amount would
be $2,100. By collecting points (interest) in advance, the lender
increases his rate of return on the loan. So, if market interest
rates are at 8.5% for a 30-year loan with no points a lender might
offer you an alternative loan at 8% if you pay some points.
And don't forget about utilities and maintenance. These costs will
vary depending on the home you choose, but it's a good idea to budget
for them in advance.
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The Offer
What to offer
A REALTOR® can help you find your perfect home, but only you can
decide how much you are willing to offer for it. Ask your REALTOR®
about the selling prices and marketing time of other houses in the
area.Once you have determined the amount you are willing to spend,
your REALTOR® will help you prepare a written offer. In most transactions
you will offer to deposit earnest money with the escrow agent, showing
your sincerity in making a reasonable offer and abiding by the terms
of the written contract.
Contract forms
Your REALTOR® will help you prepare an offer using standard forms.
The offer, if accepted, will become a binding contract. This document
is the most important paper you will sign because it lays out all
the terms of the transaction. It contains:
- a legal description of the property,
- any property that will be transferred with the home, (blinds,
curtains, fireplace screens, etc.)
- the price
- financing conditions and contingencies
- amount of earnest money deposit
- name of the escrow agent and title company
- proration of insurance, taxes, and interest
- fees to be paid and who pays for which
- rights to inspect the property and for repairs to be made
- dates of closing and possession
- what happens if either party defaults on the contract
- Inspections and warranties
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Before signing the contract, take precautions to protect yourself
against unseen defects in the home. An inspection by a qualified
inspector can provide you with unbiased opinions about the condition
of the foundation, mechanical systems, plumbing systems, appliances,
etc. If you can, accompany the inspector at the time the inspection
is conducted. It's also a good idea to get a termite and other wood-destroying
insect inspection. You may also want to have your REALTOR® request
that the seller furnish you with a one-year residential service
contract as part of the deal. This is common practice with the purchase
of existing homes (after the first year, you'll have the option
of renewing coverage at your expense) and ensures that certain items
will be repaired by the company if they fail to function after you
move in. If you buy a new home, the builder may offer a warranty
as well. Whether you get a residential service contract or receive
any other warranty, find out how claims will be processed and how
any necessary repairs will be made.
Seller's options
The REALTOR® working with you will present the contract to the
seller's agent or seller. The seller has three options: accept,
reject or make a counteroffer--a rejection of the offer with a simultaneous
offer from the seller to the buyer. If the seller makes a counteroffer,
you then have the same three options. This process goes on until
a suitable price is agreed upon by both parties.
Binding contract
Once you and the seller agree to the written terms and both of you
sign, the document becomes a binding contract. Be sure that you
pay close attention the terms. Otherwise, you may waive some contractual
rights. The contract may also set out other contingencies that have
to be satisfied, so read the contract carefully and comply with
its requirements. If repairs are required, the contract will specify
who will bear the cost of the repairs, who will arrange for the
repairs, and when the repairs must be made. Before you close, be
sure that the condition of the property meets the required condition
specified in the contract. |
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Finding Financing
Once a contract becomes binding, you'll probably have to arrange for
financing. Depending on the terms of the contract, the purchase of
the home may be contingent upon you finding the right financing.
Lenders
Most home buyers get loans through savings institutions and mortgage
bankers and, to a lesser extent, from commercial banks, credit unions,
other private sources, or even the seller. Sellers often can offer
a competitive interest rate and attractive terms. Check on specifics.
Types of loans
In general, three broad categories of loans are available:
- Private vs. government loans. Most mortgage loans are
made by savings institutions, banks and mortgage companies.
Generally, a lender will require you to buy mortgage insurance,
particularly if you make a low down payment. This insurance
may be paid at closing or added to the loan amount. VA loans
require no mortgage insurance, but only qualified veterans
may apply for them. Mortgage insurance protects the lender,
to a degree, in the event of default. On government (FHA
and VA) loans, the government does not actually loan the
money but rather guarantees (or insures) to repay the lender
if you default for some reason. Government loans have important
advantages--they generally require a lower down payment
than conventional loans and often have a lower interest
rate or points. On the down side, government loans limit
the amount you can borrow, often take longer to process,
and sometimes have higher closing costs.
- Fixed rate vs. adjustable rate. On a fixed rate mortgage,
the interest rate stays the same over the life of the loan,
usually 15 or 30 years. That means your payment will not
change except for adjustments on taxes and insurance. Adjustable
rate mortgages (ARMS) have interest rates or monthly payments
that can go up or down over time. These mortgages typically
start out with a lower interest rate, lower monthly payments,
and lower fees and points than fixed rate mortgages and
often appeal to first-time home buyers, younger couples
who expect their incomes to grow in the coming years, and
people who might not have much cash for down payment and
closing costs. If you consider an adjustable rate mortgage,
ask the lender to explain the terms fully. Ask about the
interest-rate cap (the maximum rate you will be charged
no matter how high rates go in the market), the index that
will be used to calculate future interest rates, and how
index charges will affect your mortgage.
- Assumable vs. new loan. Some loans, particularly FHA and
VA loans as well as some adjustable rate mortgages, are
assumable. That means a buyer can assume an existing loan
usually on the same terms as the previous owner . Assuming
a loan may save some costs and time. As the buyer, you would
typically pay the lender a fee at closing for processing
the assumption.
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The true price of financing
When shopping for a loan, don't judge the loan by the interest rate
alone. Compare several items in the entire loan package, including:
- Points on a low-interest-rate loan can be double those
for a loan with a higher interest rate, causing you to pay
more up front.
- Total fees charged by the lender. Some lenders will absorb
the cost of many services, while others do not, so ask in
advance.
- Term. In general, the longer the life of the loan and
the more fixed the payment, the more you can expect to pay
over the life of the loan. For example, a 30-year, fixed-rate
loan will cost more in interest than a 15-year, fixed-rate
loan.
- Penalties. Ask what penalties will be charged if you pay
off the note early. A prepayment clause could require you
to pay a penalty if you pay off the loan early, such as
refinancing the loan at a later time.
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Loan approval process
From the lender's viewpoint, approving the loan, based on your financial
standing, is only part of the risk; the other part is the property
itself. The lender may require an appraisal to verify that the home
is worth the loan as well as a physical survey to discover any encroachments
on the property. Repairs may be required. Insurance must be purchased.
Verifications of employment, deposits, and other matters must be
obtained. Loan documentation and conveyance instruments must be
drawn and approved. In addition, the title company must research
the title and arrange for paying off any liens, taxes, and other
costs. All these conditions and others must be satisfied before
a transaction can close.
Hazard insurance
As another protection, the lender may require insurance to protect
against fire and storms. (Flood insurance could be required if the
house is in a flood plain.) Even if not required by a lender, it's
probably a good idea for you to consider all types of insurance.
Search to find the information you need |
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| Closing the Deal
The closing is the end of weeks or even months of research and decision
making. The closing could last less than an hour but may take longer,
depending on the complexity of the transaction. It often occurs
at the title company's office. The title company officer will explain
each document before you sign. You may want your attorney present
as well.
Two basic kinds of documents
If buying a home were strictly a cash transaction, you would simply
hand over the money and receive the deed. More than likely, however,
you are borrowing money for the home, which means that you are actually
making two transactions--acquiring the loan and buying the home.
As a borrower, you will sign a note promising to repay
the loan and a deed of trust (also known as the mortgage) pledging
the house (or other collateral) as security for the note. You will
also sign numerous other papers including acknowledgments, disclosures,
surveys, certificates, etc. Be sure to read each document carefully.
Ask questions if you do not understand anything. There are no dumb
questions. Seriously consider having your attorney present at closing.
As a home buyer, you will present a cashier's check (or
other good funds) to the seller, sign a document that itemizes closing
costs (the lender will have given you an estimate in advance), and
pay your share of the closing costs. In return, you will receive
a deed, transferring ownership rights to you.
The home is yours
At the end of the meeting, you will likely receive keys to the property.
At that moment, the home will be yours. Occasionally, possession
of the property will occur after closing. For example, the seller
may have negotiated with you for a few extra days after closing,
or the loan will not immediately fund, or other concerns. But, in
most transactions, you will be the new owner at the end of closing.
Some other points to keep in mind:
- Buyer/seller agency. It's important to understand who
your REALTOR® represents--buyer or seller. The REALTOR®
will provide you with information about representation.
As a buyer you may sign a buyer representation agreement
with a REALTOR®. It will discuss the scope of the REALTOR®'s
representation.
- Prepaids. You should be aware that your closing costs
will include prepayment of an escrow account to cover insurance
and taxes.
- REALTORS® are required to make properties available
without regard to race, color, religion, national origin,
sex, disability, or familial status.
- Be sure to have a property inspected by licensed inspectors
to determine: a) the condition of the property (structural,
mechanical, electrical items, etc.); b) any environmental
conditions (asbestos, lead-based paint, toxic materials,
etc.); c) wood-destroying insects; and d) other matters.
Brokers are not qualified to perform such inspections.
- Residential service contracts can offer repair to appliances,
electrical, plumbing, heating, cooling, or other systems
in the property.
- Be sure to obtain a policy of title insurance or have
an abstract of title reviewed by an attorney of your choice
before buying a property.
- Seek the advice of an attorney of your own choice before
entering into a binding agreement.
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