Buyer’s Corner

For now, the list below is a description of some factors that a bank or virtually any lender will look at before approving a home loan:

1. Your Credit Score – Credit score in terms of bank language is also known as your FICO score. This number (between 300 and 850) is an indication of your past credit history, while the higher the number, the better results. A low score tells the bank about risks associated with lending you the loan. Your credit score is calculated with the help of factors as: payment history, credit utilization, and length of credit history (the longer the history the higher the score). Other factors as new credit accounts also impact the score but to a very a lesser degree.
2. Income – Banks are not concerned with how much you make, rather your monthly income with respect to a monthly housing cost. A higher income is not necessarily important for loan qualification process, but the income does influence the loan amount. Lenders will consider your total monthly income from various sources to ensure your income is sufficient for covering monthly mortgage payments.
3. Present loans – Do you have ongoing debts or long term payments as student loans and car payments? Banks will go through all such payments as well. Having such loans is not bad, especially if the history shows proper payments, but banks want to know how the expense is eating away your income.
4. Down Payment Percentage – If homebuyers put down 20 percent, they will stand a better chance of receiving a loan. If you aim for 20%, this will ensure that you’re a serious and capable buyer. Consider how the financial crisis in 2008 affected our banking system, if banks had to extend home loans then it would have been riskier for them. While it certainly doesn’t mean that if you cannot put down 20% then you’re not up for an approval, it just indicates that banks are more risk averse. In a case where you cannot be ready for 20% down payment, you will still have government insured programs that allow you to pay less up-front.

The next step in your journey is choosing the right type of mortgage for your individual financial needs. While there are some people who can and do pay cash for a new home, most are like you, and this is where your lender’s skills and knowledge will take effect.

Pre-qualifying before house hunting puts you ahead of the game. Your research into how much home you can afford has provided you with the knowledge of already knowing the standard of mortgages for which you qualify. Quite simply, you are shopping for a loan from a mortgage lender.

First, review the major kinds of mortgages you may encounter. The following list contains the mortgages you are most likely to see. Again, ask questions; your lender will be happy to explain each type of loan arrangement and satisfy all your concerns.

• Fixed-Rate Mortgage (FRM)
  This is the standard mortgage model. It is the oldest and most easily understood type of mortgage. Its primary attraction is that the interest rate and the amount of payment remain fixed for the life of the loan, typically either 15 or 30 years. However, if rates fall, the holder cannot benefit from the new, lower rate except by refinancing.
• Adjustable-Rate Mortgage (ARM)
  With this kind of mortgage, the interest rate you pay rises and falls along with other rates charged throughout the economy. Therefore, you, the borrower, assume the risk of rising rates, and you stand to benefit should rates fall. An essential question to ask about an ARM is whether there are limits on how much your rate can be raised, both at each review and over the whole term of the loan. Without limits, known as “caps,” you’ll have no way to predict how much your rate (and thus your monthly payments) might change.
• Convertible Option
  FRM and ARM represent the primary options available to homebuyers today. The convertible mortgage represents something of a compromise between the two. It is designed for those who want the advantages of the ARM, but also want to limit the risk of rising rates.

  Under this arrangement, the buyer starts out with an ARM, but has the option of converting to an FRM at specified points during the loan term. You may want to ask the lender these questions: When can you convert? How often can you consider the option? Are there any up-front fees involved? Will you have to pay more for an ARM with the conversion feature than for an ARM without it? Are there additional fees due if and when you decide to convert? Find out the lender’s conversion rate. Graduated Payment Mortgage (GPM)

  A fixed-rate GPM starts out with low payments, usually below that of a fixed-rate and possibly that of an ARM, but rise gradually (usually over five to ten years), then level off for the remaining years of the loan.

• Growing-Equity Mortgage (GEM)
  This option is designed for borrowers who want to pay off their mortgage as soon as possible. Therefore, the interest rate remains fixed, but the amount of the monthly payment increases according to a prearranged schedule, with the higher payments going to reduce the principal balance. This mortgage can be appealing to someone who is expecting regular income growth and wants to build equity quickly.
• Fifteen-Year Mortgage
  Like the GEM, the fifteen-year mortgage enables borrowers to repay their loan more quickly, which means they build equity faster and pay less interest over the life of the mortgage.
• Biweekly Mortgage
  Another option for people who want to repay their loans sooner is the biweekly mortgage. Instead of making a single mortgage payment each month, borrowers who choose this option make two equal payments monthly.
• Federal Housing Administration Insured Loans (FHA)
  FHA, also known as the Federal Housing Administration, operates under the control of the Department of Housing and Urban Development (HUD) and has the primary responsibility for administering the government home loan insurance program. This program allows buyers who might otherwise not qualify for a home loan to obtain one because the risk is removed from the lender by FHA.

The FHA mortgage program is backed by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD). This agency provides insurance for FHA mortgages, allowing lenders to help borrowers who might not otherwise qualify for a mortgage.

The FHA, or Federal Housing Administration, provides mortgage insurance on loans made by FHA-approved lenders. FHA insures these loans on single family and multi-family homes in the United States and its territories. It is the largest insurer of residential mortgages in the world, insuring tens of millions of properties since 1934 when it was created.

• FICO® score at least 580 = 3.5% down payment.
• FICO® score between 500 and 579 = 10% down payment.
• MIP (Mortgage Insurance Premium ) is required.
• Debt-to-Income Ratio < 43%.
• The home must be the borrower’s primary residence.
• Borrower must have steady income and proof of employment.

An FHA Loan is a mortgage that’s insured by the Federal Housing Administration. They allow borrowers to finance homes with down payments as low as 3.5% and are especially popular with first-time homebuyers.

FHA loans are a good option for first-time homebuyers who may not have saved enough for a large down payment. Even borrowers who have suffered from bankruptcy or foreclosures may qualify for an FHA-backed mortgage.

 Figure out what your ‘perfect home’ looks like.

Write down on a piece of paper all of the things you must have in your new home, things that would be nice to have and things that don’t really matter.  This a great way to really create the vision you want for your next home.

• Check out the neighborhood
• Do you like the school district.  Ask others what they think of the schools
• How far away is shopping, golf, entertainment or parks what does your family enjoy?
• Do you hav room for growth
• Your realestate agent will ask you many of these questions to help you find your dream home so the more you know now the better they can serve you.

To help your real estate agent with this process, make three lists – a need list, a do-not-want list and a dream list. Factor in your current housing needs, likes, dislikes and possible future changes in your life and lifestyle, such as more children, less children, parents moving in or out and other major life changing factors.

Your must have list may include:

• Number of bedrooms
• Number of bathrooms
• Bath in the master bedroom
• Separate dining room
• Garage
• Basement

While what you absolutely do not want may include:

• Small bathrooms
• No counter space
• No windows in kitchen/bathroom
• Tiny yard
• Insufficient closet space
• No garage

For your dream list, you may add some things that would be nice to have which may include:

• Fireplace
• Swimming pool with Jacuzzi
• Greenhouse
• Breakfast nook
• Two stories
• Skylights

What to include when making an offer

Your purchase offer, if accepted as it stands, will become a binding sales contract—also known as a purchase agreement, an earnest money agreement or a deposit receipt. It’s important, therefore, the offer contain every element needed to serve as a blueprint for the final sale. These purchase offers should include the following:

• Address and sometimes a legal description of the property
• Sale price
• Terms—for example, this is an all-cash transaction, or the deal is subject to you obtaining a mortgage for a given amount.
• Seller’s promise to provide clear title (ownership)
• Target date for closing (the actual sale)
• Amount of earnest money deposit accompanying the offer—whether it’s a check, cash or a promissory note—and how the earnest money will be returned to you if the offer is rejected (or kept as damages if you back out of the deal for no good reason)
• Method by which real estate taxes, rents, fuel, water bills and utilities are to be adjusted (prorated) between buyer and seller
• Provisions about who will pay for title insurance, survey, termite inspections and the like
• Type of deed that will be granted
• Other requirements specific to your state, which might include a chance for attorney review of the contract, disclosure of specific environmental hazards or other state-specific clauses
• A provision the buyer may make a last-minute walk-through inspection of the property just before the closing
• A time limit (preferably short) after which the offer will expire
• Contingencies (these are extremely important matter and discussed in detail below)

Contingencies

If your proposal says, “This offer is contingent upon (or subject to) a certain event”, you’re saying you will go through with the purchase only if that event occurs. The following are two common contingencies contained in a purchase offer:

• Financing. You, the buyer, must be able to get specific financing from a lending institution. If you can’t secure the loan, you will not be bound by the contract.
• Home inspection. The property must get a satisfactory report by a home inspector “within 10 days after acceptance of the offer” (for example). The seller must wait 10 days to see if the inspector submits a report that satisfies you. If not, the contract would become void. Again, make sure all inspection conditions are detailed in the written contract.

Negotiating the price

Is the listed price the right price? A REALTOR® can give you a Comparative Market Analysis (CMA) of the home’s value, or you can check local listings on realtor.com® to see what similar properties sold for. Based on the home inspection, you might also ask for a lower price or repair contingencies if the home needs fixes.

You’re in a strong bargaining position—meaning you look particularly welcome to a seller—if the following conditions apply to your situation:

• You are an all-cash buyer;
• You have been pre-approved for a mortgage;
• You don’t have a house that must be sold before you can afford to buy.

In those circumstances, you may be able to negotiate discounts from the listed price. On the other hand, in a hot seller’s market, if the perfect house comes on the market, you may want to offer the full list price (or more) to beat out other early offers.

It’s very helpful to find out why the house is being sold and whether the seller is under pressure. Keep these considerations in mind:

• Every month a vacant house remains unsold represents considerable expense for the seller.
• If the sellers are divorcing, they may just want out quickly.
• Estate sales often yield a bargain in return for a prompt deal.