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Buying a Home

As a rule of thumb, you can afford a home that costs a maximum of twice your gross annual income. However, the maximum home price you can afford will depend on six factors:

  1. Your household income
  2. Cash available for the down payment, closing costs, and cash reserves required by the lender
  3. Outstanding debts
  4. Credit history
  5. The type of mortgage you select
  6. Current interest rates

Lenders will assess your ability to cover projected home costs and your debt-income ratio to determine the size loan you can borrow. Projected home costs include the monthly principal and interest on your loan, property taxes, hazard insurance, and, if relevant, homeowner association dues and private mortgage insurance. The sum of these costs is referred to as “PITI” (principle, interests, tax, and insurance).

Some realtors require sellers to complete a disclosure form revealing any significant defects or malfunctions existing in the home’s major systems, to include:

  • Interior and exterior walls
  • Ceilings
  • Roof
  • Insulation
  • Windows and doors
  • Fences, driveway, and sidewalks
  • Floors
  • Foundation
  • Electrical and plumbing systems

The form also asks sellers to note the presence of environmental hazards, shared walls or fences, encroachment of easements, additions or repairs made without the necessary permits, building code violations, zoning violations, citations against the property, and lawsuits against the seller affecting the property. People buying a condominium must be told about covenants, codes, and deed restrictions authorized by the homeowners association.

It is still recommended that buyers hire a professional home inspector to assess undisclosed or overlooked issues. Be sure to ask questions about anything that remains unclear or that the seller has not properly addressed.

Unless a seller’s top priority is a quick sale, a very low offer in a normal market may be rejected immediately.

In a strong buyer’s market, a below-market offer will usually lead to an acceptance or a counteroffer. An outright rejection is unlikely unless the seller is receiving several offers.

In a strong seller’s market, offers are often higher than asking price. Sellers are more likely to accept offers at or above asking price, though there are other considerations involved:

  1. Is the offer contingent upon anything, such as the sale of the buyer’s current house?
  2. Does the buyer want the seller to make some repairs before the close of escrow or make a price concession (e.g., seller’s points or closing costs)?
  3. Is the offer all cash, meaning the buyer has waived the financing contingency?

If the seller is receiving multiple offers at or above the asking price, they’re most likely to accept offers that are immediate, set in stone, and won’t require concessions or financing contingencies.

A seller’s advertised price should be treated as a rough estimate of what they would like to receive. Some home sellers deliberately overprice while others ask for close to market value. Some may underprice to encourage competition and overbidding. Before making an offer, investigate how much comparable homes have sold for in the area so that you can determine whether the asking price reflects market value. Your ability to negotiate for a lower price will depend on factors including:

  1. Current real estate market trends
  2. The property’s market value
  3. The seller’s motivations (e.g., a fast sale vs. profit)
  4. The condition of the property

In addition to negotiating for a lower price, you can also ask for seller’s points, renovations and repairs, and contributions to closing costs. Negotiations should begin as soon as you make your offer and thorough preparation is key.

The type of loan program you choose will typically impact the size of your down payment. Conventional loan programs require a minimum of 3 to 5 percent. Paying the minimum down payment comes with perks, allowing buyers to take full advantage of homeownership tax benefits (e.g., deductibles related to mortgage interests and property taxes). A minimum down payment is also beneficial if it allows buyers to maintain reserves for unexpected home improvements.

If you can afford to put down more than the minimum, it may be more prudent to make a larger down payment and thereby reduce the amount of debt that must be financed. Some lenders offer reduced interest rates in exchange for a higher down payment. Once a buyer puts twenty percent or more as a down payment on their desired home, they will waive the requirement for mortgage insurance. In the long run, lower interest rates and waived mortgage insurance can yield substantial savings.

Loan prequalification or pre-approval will tell you exactly how much house you can afford, and it is highly recommended that you seek pre-qualification before looking at available housing. This will allow you to make informed decisions in the marketplace and put forward a reasonable offer.

To get prequalified, you will need to fill out a loan application and pay a small fee that covers:

  1. Credit checks
  2. Employment and income verification
  3. Checking and savings account verification

Prequalification does not guarantee that you will receive financing for any house you choose within your pre-approved price range. You will still need to obtain an appraisal and inspection of the home you’re interested in to prove its value to the bank.

Many established lenders have set interest rates that aren’t open to negotiation. However, some lenders are willing to negotiate on both the loan interest rate and the number of discount points you can pay to reduce your interest over time. It never hurts to shop around, know the market, and try to get the best deal.

Always look at the APR or Actual Percentage Rate, a combination of interest rate and discount points, to get the best deal possible. Note that the interest rate is much more open to negotiation on purchases that involve seller financing.

Home value appreciation is strongly tied to location, local housing market growth, and external economic factors. It may be easier to predict market trends in existing neighborhoods than new-home communities, but both new and resale homes are subject to market volatility.

Distressed properties (aka “fixer-uppers”) can be found everywhere. These properties have a low market value due to significant wear and tear. You must consider if the expense of bringing the value of a fixer-upper to its full potential is within your budget.

Some homeowners enjoy the challenge of taking on minor repairs and cosmetic upgrades. Most, however, should steer clear of properties with significant structural damage, which often aren’t move-in ready and cost a fortune to fix. Those properties are best handled by builders or tradesmen engaged in the professional repair and renovation business.

You can secure renovation loans that roll the estimated cost of repairs in with the price of the property. You can also secure rehabilitation-only loans with a $5,000 minimum or refinance your mortgage to include estimated repair costs after purchasing the property. Typically, investors must put down 15% while owner-occupants can secure these loans with a 3-5% down payment.

It is recommended that you only seek financing if you need to complete major repairs, such as a new roof or window replacements. You can then finance additional repairs or improvements, like new carpeting, kitchen cabinets, or appliances. The renovation loan approval process is similar to mortgage approval but involves an additional “as repaired” appraisal. To complete an as repaired appraisal, you will need to submit plans and specifications for the projects that require financing, which will undergo architectural review and cost estimation. Once approved, renovation proceeds are advanced periodically during the rehabilitation period to temporarily cover related costs.

The right remodels improve livability and enhance curb appeal, increasing its appeal to potential buyers. Your actual return on investment will be impacted by everything from the quality of materials and craftsmanship to current market conditions. Few home improvements will yield a 100% ROI, meaning that you are not likely to recoup 100% of the cost of the improvement. However, remodeling is often worthwhile if it means making your property more attractive and competitive in the marketplace.

Buying directly at a legal foreclosure sale can be risky and dangerous. The process has many disadvantages. There is no financing, so purchases require cash. Without checking the title, the buyer risks acquiring a seriously deficient title. The property’s condition is typically not known, and buyers generally are not permitted to inspect the interior until the sale is finalized. Additionally, many states do not include Estate (probate) and foreclosure sales in their disclosure laws. The law protects the seller who has recently acquired the property through adverse circumstances (i.e., inheritance) and may have little or no direct information about it. It’s best to leave foreclosures to investors and developers with enough capital to make use of the land if the home is untenable.

Selling a Home

Property sells year-round. The speed and final price of a sale depends on supply, demand, and other economic factors. That said, historic trends reveal that the time of year can impact home sales.

The real estate market generally picks up in the early spring, placing upward pressure on interest rates and home prices, which may cause some buyers to postpone their search until costs stabilize. If there is a slight summer slowdown, sales activity tends to pick up until November. The supply of homes on the market often diminishes in the winter, and sellers have considerably less competition.

No matter the time of year, you’ll see the best results if you are able to show the listed property continuously until securing the right buyer.

The two most important factors in selling a home are price and condition. Start with proper pricing that reflects your home’s current market value. Then, assess and complete any improvements or repairs that you’re willing to make.

Another important factor is exposure. You’ll need to generate interest in the property with open houses, broker open houses, good signage, and quality listings on multiple listing services. Choose a realtor that has a proven track record and experience in your community to ensure meaningful exposure.

There are two methods commonly used to determine home value: appraisal and comparative market analysis.

For a fee, appraisers review factors such as location, square footage, construction quality, excess land, views, water frontage, and amenities (e.g., garages, number of baths, etc.) in relation to comparable properties that have recently sold. An appraisal is considered more official and is defensible in court.

Many of the same factors are considered in a comparative market analysis that you’ll find in an appraisal, but a comparative market analysis is an informal estimate of market value generated by a realtor broker. It is based on sales and listings that will compete with your property that are similar in size, style and location.

When you’re putting your home on the market, the goal is to reveal the property’s full potential in a way that allows prospective buyers to envision their own belongings in the space. To accomplish this goal, you need to declutter, deep clean, and depersonalize. Depersonalizing is the process of removing anything that reflects your own life or subjective taste (e.g., family photos or niche collections). You can then use your own furniture and remaining décor to “stage” your home to highlight its functionality and attractive qualities.

Another important thing to consider is curb appeal. Good curb appeal creates a good first impression and heightens interest in the interior of your home. You can improve curb appeal by cleaning up the yard and garden areas, repainting if necessary, and cleaning the windows.

You do not have to repair material defects, but you must disclose them, and the house should be appropriately priced for that defect. Completing minor repairs before putting your house on the market may lead to a better sales price and a faster sale. Major repairs may not be worth your time or money, but this will depend on your motivations and the condition of the property.

In addition to the seller disclosure requirement, buyers have the right to include a contingency allowing them to back out of the sale if their inspection reveals numerous undisclosed defects. Alternatively, buyers can attempt to negotiate for a reduced price or seller repairs.

In addition to the material defects that you are reasonably aware of, you should disclose any of the following information if relevant:

  • Homeowners association dues
  • Additions or renovations that do not meet local building codes and permit requirements
  • Neighborhood nuisances that a buyer might not immediately notice (e.g., ongoing noise, zoning ordinances that restrict land use, association rules, etc.)

Sellers do not have to disclose the terms of other offers. You may disclose the existence of other offers, so that all parties are aware that they should be submitting their best offer.

Yes, both financing contingencies and inspection contingencies are considered standard.

A seller’s willingness to grant contingencies will depend on the state of the real estate market (i.e., if it’s a buyer’s market or a seller’s market), the condition of the home, the price they hope to get, how many other offers they’ve received, and how motivated they are to sell. It’s worth noting that sellers can also request contingencies during the negotiation phase. Any contingencies that are granted during negotiations will be included in the contract.

Regardless of the state of the market, price and condition are the two most important factors in selling a home. If your home is not getting the activity it needs in order to sell, it’s probably overpriced for the market. The first step is to lower the price. Next, assess any cosmetic defects that can be repaired. Finally, evaluate the methods you’re currently using to market the property and increase exposure.

If these steps do not increase activity, you can consider removing your home from the market and waiting for overall housing and market conditions to improve. If waiting is not an option, discuss a short sale or a deed in lieu of a foreclosure with your mortgage lender and realtor. These are considered more radical options than lowering the price but aren’t as damaging in the long term as a foreclosure.

You may need to a consider a short sale, a process by which the seller finds a buyer for a price that is below the mortgage amount and negotiates the difference with the lender.

You will need to demonstrate financial hardship in order to negotiate with lenders and split the difference between the sale price and the remaining debt. If the loan was a low-down-payment mortgage with private mortgage insurance (or PMI), the lender must involve the mortgage insurance company that insured the low-down loan. Once all these issues are resolved or negotiated, the house may be sold.

Property foreclosure is one of the most damaging events to a borrower’s credit history. In the aftermath, it can take a minimum of 7-10 years to find lenders that will willingly finance your debt. You will need to provide significant evidence to the lender that you are “credit-worthy,” first.

Before taking a foreclosure, talk to your mortgage lender about possible courses of action, well as to the effects those actions might have on your credit report. A deed in lieu of foreclosure or short sale typically have a negative impact on credit history, but both are easier to recover from than a foreclosure.

Refinancing after bankruptcy is a good idea, but it can be difficult to get lenders to agree. If you are struggling to stay current on mortgage payments, contact your lender and explain the situation and discuss any alternative payment options available to you.

Loans & Mortgages

A normal down payment is 5-20% of the selling price of the house, land, or construction estimate. However, some lenders require as little as 3% down.

Mortgages are paid off in monthly installments that include both the agreed upon principle and the interest on the remaining balance. Some mortgages come with a fixed interest rate for a set period of time.

The maximum number of years for the loan can be 30 years or the number of years left until your retirement age (60 for traditionally employed applicants or 65 for self-employed applicants), whichever is less.

For first time homeowners, the normal lending criterion is up to 90% of the total value. However, the bank may consider up to 100% financing, subject to special conditions.

This is the period during construction of a new home when the homeowner is not yet paying the mortgage principle but is required to pay interest on the amount drawn. This typically continues for a maximum of eight (8) months or until completion of construction, whichever is sooner.

This is loan repayment by equal periodic installments including accrued interest on the outstanding balances, calculated to pay off the debt at the end of a fixed period.

This is a letter given to mortgage applicants when their mortgage has been approved. The Letter of Offer will explain the terms and conditions of the mortgage. Briefly, it is your loan agreement with the bank.

Disbursement (aka drawdown) is the amount of debt under an approved loan that you’ve already paid.