Archive for the ‘Getting A Mortgage’ Category

Out-of-pocket costs when buying a home

The Costs of Homebuying

In the process of buying a house or condo, there are generally three times you can count on getting out your checkbook.

  1. Making the Offer/Earnest Money – You’ve found what you hope will be your new home and have decided to submit an offer. To show the seller you’re serious about purchasing the home, you’ll need to make an earnest money deposit. This amount is typically 1-3% of the purchase price, and is usually submitted to your agent when the offer is made or (at the latest) 2 days after the seller accepts your offer. If the offer isn’t accepted, the earnest money is returned to you. If the seller accepts, the money is deposited in a trust account where it’s safely held until closing, at which point it’s applied to your closing costs or refunded to you (the latter if you finance your closing costs as part of the mortgage or if they’re paid by the seller). And if along the way you decide the home isn’t right for you, there are several ways you can legally terminate the offer and get your earnest money back. (I feel another post coming on…in the meantime, contact me or ask your agent for details.)
  2. The Inspection – I would never buy a home without first having it inspected, and I counsel my clients to do the same. Inspectors look for problems with the home’s major systems including plumbing, electrical, roof, foundation, siding, etc. and recommend remedies for any issues they find. The cost depends on the home’s total square footage – approximately $200-250 for a small studio condo up to $350-400 for a 3,000 sq. ft. house. Get referrals for good inspectors from family, friends, and your agent. Increase your chances of getting the seller to fix what’s really important by prioritizing what you ask for. (Don’t expect a seller to fix every item in the inspector’s report, especially when buying an older home. If you do, you may find they won’t agree to fix anything.) Issues like water in the crawl space, a leaky roof, presence of rodents or other pests are major issues that should definitely be addressed.
  3. Closing costs – “Closing” is when the ownership of your new home is officially transferred from the seller to you. Sellers will sometimes agree to pay these costs (usually 2-3% of the purchase price), especially in a buyer’s market. These costs can be generalized into three categories:  
  • what you’re charged by your lender for borrowing the mortgage money (approximately 1-3% of the loan amount);
  • what you’re charged by your lender for establishing the loan (this includes appraisal fees, mortgage insurance premiums, prepaid property taxes and loan interest);
  • and what you’re charged for title insurance, deed transfer and recording. (Title insurance costs pay for the search of public records to determine if the property is free from any other ownership or liens. Transfer and recording fees cover the transfer of taxes and the legal recording of the deed with the appropriate governmental agencies.) 

If the seller is not paying your costs and you’re not financing them as part of your loan, your earnest money deposit will be applied toward them at closing. The difference between your earnest money deposit and total closing costs will represent either additional money you’ll need to bring to the closing table or a refund you’ll receive after.

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Questions to ask before buying a condo

You’ve found a condo that you could call home. You like the layout, can live with the square footage, and have already started placing furniture in your mind.

However before writing up an offer, there are a few important questions you should ask your agent.

  1. What is the level of owner occupancy in the building, and what level does my lender require? An owner occupant lives in the unit they own, rather than renting it to a tenant. Many lenders require a certain percentage of owner-occupants before they’ll agree to finance you. The exact percentage required will vary by lender, but I’ve seen this range from 50% to 80%. Why do lenders care? Pride of ownership. Owners are more likely to maintain their homes and the building as a whole better than renters would. If you default on your loan, the lender wants some assurance they’ll be able to sell your unit – a task made easier if the complex is well-maintained.
  2. Is there any pending litigation? It isn’t uncommon for condo associations (particularly in newer buildings) to have lawsuits pending with contractors. The lawsuits typically involve alleged errors made during construction or renovation. Many lenders will not agree to finance your purchase if litigation is in process. Why do lenders care? If the condo association doesn’t win the lawsuit and doesn’t have sufficient money in reserve, a special assessment may need to be levied. Each unit owner will then be required to contribute a certain amount of money (above and beyond mortgage payment and standard homeowner’s dues) to fix whatever issue the lawsuit attempted to address (defects with the building’s roof, siding, structure, etc.). As this scenario can significantly impact your ability to make the mortgage payment, your lender would prefer to avoid it.
  3. And finally, have any other written offers been received? Before having your agent write and submit an offer, make sure she/he has been in touch with the seller’s agent to find out if any other offers are currently on the table. Inexperienced agents sometimes forget to get this question answered before taking the time to draft an offer.

Buyers: What to avoid once you’re pre-approved for a mortgage

Here’s an account of interactions I had with three different first-time buyers this summer. The advice I gave these clients may be useful to other buyers as well.

Clients A: Happy couple with newborn

Shortly after they were pre-approved for their mortgage, I got an e-mail asking if they should buy a car (apparently the back seat in one of their vehicles wasn’t set up to accommodate the new baby seat they needed).

I responded with a resounding NO.

Some first-time buyers don’t realize that getting a pre-approval doesn’t guarantee they’ll be approved for the actual loan. “Pre-approval” simply means that the lender has taken a snapshot of credit, income, debt, and assets at that particular point in time. If this “snapshot” changes significantly between the pre-approval and when the buyer(s) attempt to close on the loan (i.e. house is found, offer is accepted, and application is finalized), the lender may decide to loan less than originally quoted (or may even withdraw the loan offer completely).

If my clients had purchased a car, their debt would’ve increased significantly though their incomes remained the same. This would very likely result in the lender reducing the amount they were willing to finance – if my clients had been pre-approved for $350k they might actually only have received $300-325k. (As debt increases and income remains the same, lender risk also increases because the borrower is now responsible for paying out more each month from the same pool of income. To mitigate their risk, lenders will lend less.)

Client B: Happy single guy

We found the condo he wanted and got his offer accepted. He had already scoped out where his big new LCD high-definition TV would go. Luckily he waited until after closing to buy it, for the reasons I gave above. One might think a lender wouldn’t notice a couple thousand dollars recently added to a credit card when finalizing a loan. This may be – but with mortgage credit standards tightening by the day, is it worth risking it? Wait until after the home is actually yours before you start decorating it.

Clients C: Happy newlyweds

These clients were tempted to do something many do when trying to clean up their credit: payoff and close credit cards. So why did I stop them?

Paying off balances (or even just reducing them below 1/2 of the total credit available) is great. Closing the cards is not. If cards are closed, your payment history will eventually fall off your credit report. When applying for a loan, you want as much of your credit history to show as possible.

To really clean up your credit, you need to understand how it works. Your score is influenced by two things: frequency of use and balance carried. If you use credit frequently and carry a balance greater than 50% of your available credit, your score will suffer. If you use credit frequently and carry a balance less than 50% of your available credit, your score will improve (especially if you pay off this balance every month).