HOW TO BUY A HOUSE
A Guide To The Home Buying Process
BUYER READY DAY ONE
Buying a home in today’s market requires planning and preparation. The Madrona Group works to get you, the buyer, Buyer Ready Day One.
What does that mean?
Each buying market is a little different. And each buyers market is going to bring on it’s own advantages and challenge.
It is important to us that our clients know as much about the market as we know. That they understand exactly what the current market brings. That they are prepared for the experience and go into the transaction with their eyes wide open.
The Madrona Group is on your team
We know that a Real Estate Transaction has become even more complex over the past few years for Home Buyers. And since buying a home is one of the greatest emotional and financial investments anyone can make, having the right real estate broker, mortgage, escrow, and title team who can get the job done is crucial.
Our Agreement: We work as a team during the entire process. You receive uncompromising representation. You hold us accountable to our obligations. Together we are Committing to the Partnership.
TABLE OF CONTENTS
WE WILL BE YOUR PARTNER THROUGH THE 10 STEPS OF BUYING A HOME
Working with you find the right home.
2. NEGOTIATING THE CONTRACT
Working to get you the right conditions.
3. PURCHASE AND SALE AGREEMENT
Working to ensure all paperwork is correct.
4. THE HOME INSPECTION
Working to protect your investment.
5. THE TRANSACTION PROCESS
Working to manage and simplify a complex process.
6. LOAN COMMITMENT
Working to ensure your completed transaction.
7. THE APPRAISAL
Working to insure your your investment.
8. TITLE AND ESCROW
Working to prepare and legitimize documents.
9. FINAL WEEK OF CLOSING
Working to organize, and finalize your process.
10. POST CLOSING SERVICES
Working after the sale to give you peace of mind.
HOME BUYERS CHECKLIST
HOME OWNERSHIP ASSISTANCE PROGRAMS
Over the past decade, more than 275,000 Washington families have used FHA-insured mortgages to buy their homes. Maybe an FHA mortgage will work for you. Find out more about FHA’s purchase mortgage, FHA “rehab & repair” mortgage, its energy-efficient mortgage or itsreverse mortgage. It’s been the “safe, sound and smart” way to go for 275,000 Washington homebuyers. Maybe your family will be next.
Homebuyer programs, including downpayment and closing cost assistance
Free information and referral service. Call their Homeownership Hotline 1 (877) 894-HOME (4663)
HOME LOAN TYPES
Fixed-rate mortgages feature a fixed percentage rate and loan amount, so the monthly payment is the same every month for the entire length of the loan. Because of the loan’s stability, this is the most common type of mortgage for first-time homebuyers.
Important benefits of fixed-rate mortgages include:
- The monthly principal ind interest payment will not change over the life of the loan
- The interest rate will not change, even if market rates go up
- Knowing monthly mortgage expense in advance makes household budgeting easier
COMMON FIXED-RATE MORTGAGES INCLUDE:
These loans allow home buyers to borrow more money for the same monthly payment than do shorter-term loans. They may also make possible a lower down payment, because the down payment has less impact over the full life of the loan.
These loans generally require a higher monthly payment and down payment than their 30-year counterparts, and may be better suited for lower-priced homes. Since the term of the loan is half as long, the borrower gains significant savings on the total amount of interest paid on the loan.
Adjustable-rate mortgages (ARMs) have a variable interest rate and monthly payments that are recalculated on a regular basis to reflect changes in the market interest rate.The initial rate on an ARM is fixed for a specified period. The shorter the initial fixed period, the lower the initial rate can be. The lower rate reflects the fact that the lender assumes less risk of potential increases in the market interest rate, and the borrower isn’t paying for interest rate protection that he or she doesn’t need. This translates into a lower monthly payment than for a similar-term fixed-rate mortgage.Important benefits of adjustable-rate mortgages include:
- Interest rates that are typically lower than those of fixed-rate mortgages
- More money can be borrowed than with a fixed-rate mortgage
- If interest rates fall, the borrower benefits
- Useful in situations where unpredictable interest rates make fixed-rate mortgages difficult to obtain
A notable disadvantage of ARMs is that they expose borrowers to the risk that market interest rates may rise in the future, resulting in increased monthly mortgage payments.
The Federal Housing Administration (FHA) offers FHA-backed loans that are designed to help increase home ownership by low- and moderate-income families and first-time homebuyers. Because the FHA insures the loan, lenders can offer greater flexibility in lending guidelines.Available for single- and multi-family homes, FHA loan financing options include traditional fixed-rate products, adjustable rate mortgages and temporary interest rate buy-downs.Important benefits of FHA-insured loans include:
- Low down payment
- Minimal closing costs
- More flexible credit-qualifying guidelines
- No income limits
- Higher debt ratios allowed
- Less stringent job requirement guidelines
The U.S. Department of Veterans Affairs (VA) offers VA-backed loans to veterans, active-duty personnel, reservists/National Guard members and some surviving spouses. When the loan is approved, the VA will guarantee part of it. The amount of the VA’s guarantee usually depends on the size of the loan.A VA-guaranteed loan can be used to buy a home, manufactured home or condominium; buy a lot for a manufactured home; build, repair or improve a home (including energy-efficient improvements); or refinance an existing loan. These loans can also be used for rate and term refinancing or cash-out refinancing of a primary residence.Important benefits of VA loans include:
- Little or no down payment required
- Competitive interest rates
- Easier qualification requirements
- Borrower does not have to pay for private mortgage insurance
U.S. Department of Agriculture (USDA) mortgage loans are offered in rural areas to help lower-income households gain access to home loans at reasonable mortgage rates.Property types eligible for USDA loans include single-family homes, condominiums and manufactured housing on a permanent foundation. Eligibility requirements vary depending on property location, and these loans are offered only to individuals whose income is below rural-development county limits based on the number of members in the household.Important benefits of USDA mortgages include:
- No money down, and up to 103.5% financing
- Available for purchase and no-cash-out refinances of primary residences
- Gifts and/or grants are allowed for closing costs
- Borrower’s closing costs may be paid by the seller or financed into the loan amount
A conforming loan is a mortgage that is equal to or less than the loan limit set annually by Fannie Mae or Freddie Mac, the government-sponsored agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders. The current conforming loan limit for a single-family home or condominium in most areas of the country is $417,000, with higher limits allowed for designated high-priced markets.The terms conforming and conventional are often used interchangeably. Mortgage loans that are higher than the conforming loan limit are called jumbo mortgages or nonconforming loans.
Jumbo mortgage loans are designed for homebuyers who need to finance especially large purchases. A loan is considered jumbo if it exceeds the “conforming” loan limit set annually by Fannie Mae and Freddie Mac, the government-sponsored agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders.The current conforming loan limit for a single-family home or condominium in most areas of the country is $417,000, with higher limits allowed for designated high-priced real estate markets. Jumbo loans are available for primary homes, secondary or vacation homes, investment properties and condominiums.A variety of jumbo loan options are available, such as 30-year fixed mortgages, adjustable rate mortgages, and VA loans.Important benefits of jumbo mortgages include:
- The ability to purchase a home in a high-priced area
- Relatively low down payment requirements if salary is high
- Ability to rapidly build credit through regular loan payments
A reverse mortgage enables homeowners age 62 and older to convert part of the equity in their primary residence into tax-free cash without having to sell their home or give up title. It is a low-interest loan that uses a home’s equity as collateral. It is called a reverse mortgage because rather than the homeowner making monthly payments to a lender, the lender makes monthly payments to the homeowner.The reverse mortgage process includes important consumer protections, such as a requirement that the borrower talk with an independent third-party loan counselor before securing the mortgage. This helps ensure that borrowers understand the program and have reviewed alternative options.Important benefits of reverse mortgages include:
- They enable homeowners to access home equity without making monthly payments
- No income or medical requirements
- Borrower’s name stays on the title of the house
- Money can be received all at once, in fixed monthly payments or as a line of credit
- Loan income has no impact on regular Social Security or Medicare benefits
HomePath Mortgage allows a buyer to purchase a Fannie Mae-owned property with a low down payment, no lender-required appraisal and no mortgage insurance*. Expanded seller contributions towards closing costs are allowed. Available for owner occupants and investors.
Benefits of HomePath Mortgage:
- 3% down option that can be gifted from a close blood relative (owner-occupant only)
- Flexible mortgage terms with fixed rate options
- You can have as low as a 660 credit score
- You can get financing as an investor with 10% down
- No appraisal required
- No mortgage insurance*
Home Affordable Refinance Program (HARP)The Home Affordable Refinance Program (HARP) is designed to assist homeowners with good credit standing, to refinance their mortgages – even if they owe more than the home’s current value. This offers an option for “underwater” homeowners who owe more than their home’s current value.The goal of this program is to put responsible borrowers in a better financial position by:
- Reducing monthly principal and interest payments
- Reducing interest rate
- Reducing the amortization period
- Moving from a more risky loan structure to a more stable product
These affordable refinance opportunities are offered to homeowners with an existing loan that was purchased or pooled by Fannie Mae (FNMA) prior to June 1, 2009. To determine if you have a FNMA loan, visit:www.efanniemae.com/sf/mha/mharefiThe advantages of this program are:
- Financing for homes with up to 135% loan to value (LTV)
- Unlimited combined loan to value (CLTV) or high combined loan to value (HCLTV) for borrowers with second mortgages. This is calculated by:
|CLTV or HCLTV =||Value of Loan 1 + Value of Loan 2|
|Total Value of Property|
- Minimum FICO scores as low as 620
- Desktop Underwriting (DU) requiring less documentation
- Jumbo-Conforming or high-balance loans in high-cost loan areas may qualify
3. HIRE A SUPERSTAR REAL ESTATE TEAM
BUYER’S GUIDE TO SHORT SALE OR BANK OWNED PURCHASES
- Stringent Qualifications. Some sellers may advertise a short sale when in reality they don’t qualify for one with their lender. Unfortunately, whether the lender will approve the seller’s hardship is often unknown until the seller and a buyer reach agreement and that agreement is presented to the lender.
- Lenders aren’t naive. Lenders will usually require a broker’s price opinion, known as a BPO, before agreeing to a short sale price. If a lender believes they will lose less by taking the property back in foreclosure over a short sale, the lender may hold out for a higher price or just refuse to approve the short sale offer.
- Many Homes Sell “As Is”. Since most short sale sellers have little or no cash, it is common for the seller to refuse to pay for any repairs or work orders found during the buyer’s inspection.
- Length of Time to Close. Lenders are overwhelmed. Depending on a particular lender’s backlog, it could take anywhere from weeks to months to get a response to your offer. If multiple lenders are involved, the process gets longer and more difficult as all of the lenders must mutually agree on the short sale.
- Loss of Control. Because the sale cannot close without lender approval, the lender(s) essentially control the timing of closing thereby making it difficult for the buyer to plan a move and market conditions may change while the buyer waits.
- Lenders Can Change Conditions. Some lenders reserve the right to renegotiate the terms of the short sale at the last minute which can cause the buyer’s purchase to fail.
- Little Seller Motivation. Most short sale sellers will receive no money at closing. Sometimes this can affect their motivation to communicate, cooperate and even to close the sale.
- Property Condition. Most bank-owned properties are sold “As Is”. As a result, buyers assume the risk of most property condition defects that may not be discovered until after closing. Even if the buyer discovers a defect in their inspection, many times the bank will not consider paying for any repairs.
- Buyer Financing. The buyer’s lender may require the property to be repaired (e.g. a new roof) as a requirement of the buyer’s new loan. As stated above, this cost will fall on the buyer since the bank that owns the property has little appetite to pay for repairs.
- No/Limited Form 17 Disclosures. While banks are not exempt from providing Form 17, most will condition the sale on the buyer’s waiver of the right to receive a fully completed form.
- Length of Time to Negotiate the Offer. Banks are not typical sellers, may be in a different time zone and closed on weekends. They are overwhelmed and it may take days or weeks to respond to the buyer’s offer. Further, there can be little sense of urgency to respond, especially if it is not at or near the price the lender expects to receive
- Onerous Terms. The bank will provide their own addendum to the Purchase Agreement that will contain non-standard terms and conditions that are mostly unfavorable to the buyer. This may require the buyer to engage a lawyer to review the forms.
- Inspections. Since the buyer is likely purchasing “as-is”, inspections are critical and sometimes it makes sense to have more than one inspection. This can increase the buyer’s costs..
- Earnest Money. Some banks are requiring a larger earnest money deposit than would a typical seller. The bank may also require the buyer make the deposit even before the bank accepts the offer.
5. MAKE AN OFFER
6. GET A HOME INSPECTION
10 QUESTIONS TO ASK YOUR HOME INSPECTOR:
The inspector should ensure that their inspection and inspection report will meet all applicable requirements in your state if applicable and will comply with a well-recognized standard of practice and code of ethics. You should be able to request and see a copy of these items ahead of time and ask any questions you may have. If there are any areas you want to make sure are inspected, be sure to identify them upfront.
The inspector should be able to provide his or her history in the profession and perhaps even a few names as referrals. Newer inspectors can be very qualified, and many work with a partner or have access to more experienced inspectors to assist them in the inspection.
Related experience in construction or engineering is helpful, but is no substitute for training and experience in the unique discipline of home inspection. If the inspection is for a commercial property, then this should be asked about as well.
Some inspector associations and state regulations allow the inspector to perform repair work on problems uncovered in the inspection. Other associations and regulations strictly forbid this as a conflict of interest.
The average on-site inspection time for a single inspector is two to three hours for a typical single-family house; anything significantly less may not be enough time to perform a thorough inspection. Additional inspectors may be brought in for very large properties and buildings.
Costs vary dramatically, depending on the region, size and age of the house, scope of services and other factors. A typical range might be $300-$500, but consider the value of the home inspection in terms of the investment being made. Cost does not necessarily reflect quality. HUD Does not regulate home inspection fees.
Ask to see samples and determine whether or not you can understand the inspector’s reporting style and if the time parameters fulfill your needs. Most inspectors provide their full report within 24 hours of the inspection.
This is a valuable educational opportunity, and an inspector’s refusal to allow this should raise a red flag. Never pass up this opportunity to see your prospective home through the eyes of an expert.
There are many state and national associations for home inspectors. Request to see their membership ID, and perform whatever due diligence you deem appropriate.
One can never know it all, and the inspector’s commitment to continuing education is a good measure of his or her professionalism and service to the consumer. This is especially important in cases where the home is much older or includes unique elements requiring additional or updated training.
7. SHOP FOR HOMEOWNERS INSURANCE
12 WAYS TO SAVE ON HOME OWNERS INSURANCE
It’ll take some time, but could save you a good sum of money. Ask your friends, check the Yellow Pages or contact your state insurance department. (Phone numbers and Web sitesare listed here.) National Association of Insurance Commissioners (www.naic.org) has information to help you choose an insurer in your state, including complaints. States often make information available on typical rates charged by major insurers and many states provide the frequency of consumer complaints by company.
Also check consumer guides, insurance agents, companies and online insurance quote services. This will give you an idea of price ranges and tell you which companies have the lowest prices. But don’t consider price alone. The insurer you select should offer a fair price and deliver the quality service you would expect if you needed assistance in filing a claim. So in assessing service quality, use the complaint information cited above and talk to a number of insurers to get a feeling for the type of service they give. Ask them what they would do to lower your costs.
Check the financial stability of the companies you are considering with rating companies such as A.M. Best (www.ambest.com) and Standard & Poor’s (www.standardandpoors.com) and consult consumer magazines. When you’ve narrowed the field to three insurers, get price quotes.
Deductibles are the amount of money you have to pay toward a loss before your insurance company starts to pay a claim, according to the terms of your policy. The higher your deductible, the more money you can save on your premiums. Nowadays, most insurance companies recommend a deductible of at least $500. If you can afford to raise your deductible to $1,000, you may save as much as 25 percent. Remember, if you live in a disaster-prone area, your insurance policy may have a separate deductible for certain kinds of damage. If you live near the coast in the East, you may have a separate windstorm deductible; if you live in a state vulnerable to hail storms, you may have a separate deductible for hail; and if you live in an earthquake-prone area, your earthquake policy has a deductible.
The land under your house isn’t at risk from theft, windstorm, fire and the other perils covered in your homeowners policy. So don’t include its value in deciding how much homeowners insurance to buy. If you do, you will pay a higher premium than you should.
Some companies that sell homeowners, auto and liability coverage will take 5 to 15 percent off your premium if you buy two or more policies from them. But make certain this combined price is lower than buying the different coverages from different companies.
Find out from your insurance agent or company representative what steps you can take to make your home more resistant to windstorms and other natural disasters. You may be able to save on your premiums by adding storm shutters, reinforcing your roof or buying stronger roofing materials. Older homes can be retrofitted to make them better able to withstand earthquakes. In addition, consider modernizing your heating, plumbing and electrical systems to reduce the risk of fire and water damage.
You can usually get discounts of at least 5 percent for a smoke detector, burglar alarm or dead-bolt locks. Some companies offer to cut your premium by as much as 15 or 20 percent if you install a sophisticated sprinkler system and a fire and burglar alarm that rings at the police, fire or other monitoring stations. These systems aren’t cheap and not every system qualifies for a discount. Before you buy such a system, find out what kind your insurer recommends, how much the device would cost and how much you’d save on premiums.
Companies offer several types of discounts, but they don’t all offer the same discount or the same amount of discount in all states. For example, since retired people stay at home more than working people they are less likely to be burglarized and may spot fires sooner, too. Retired people also have more time for maintaining their homes. If you’re at least 55 years old and retired, you may qualify for a discount of up to 10 percent at some companies. Some employers and professional associations administer group insurance programs that may offer a better deal than you can get elsewhere.
Establishing a solid credit history can cut your insurance costs. Insurers are increasingly using credit information to price homeowners insurance policies. In most states, your insurer must advise you of any adverse action, such as a higher rate, at which time you should verify the accuracy of the information on which the insurer relied. To protect your credit standing, pay your bills on time, don’t obtain more credit than you need and keep your credit balances as low as possible. Check your credit record on a regular basis and have any errors corrected promptly so that your record remains accurate.
If you’ve kept your coverage with a company for several years, you may receive a special discount for being a long-term policyholder. Some insurers will reduce their premiums by 5 percent if you stay with them for three to five years and by 10 percent if you remain a policyholder for six years or more. But make certain to periodically compare this price with that of other policies.
You want your policy to cover any major purchases or additions to your home. But you don’t want to spend money for coverage you don’t need. If your five-year-old fur coat is no longer worth the $5,000 you paid for it, you’ll want to reduce or cancel your floater (extra insurance for items whose full value is not covered by standard homeowners policies such as expensive jewelry, high-end computers and valuable art work) and pocket the difference.
If you live in a high-risk area — say, one that is especially vulnerable to coastal storms, fires, or crime — and have been buying your homeowners insurance through a government plan, you should check with an insurance agent or company representative or contact your state department of insurance for the names of companies that might be interested in your business. You may find that there are steps you can take that would allow you to buy insurance at a lower price in the private market.
You may pay less for insurance if you buy a house close to a fire hydrant or in a community that has a professional rather than a volunteer fire department. It may also be cheaper if your home’s electrical, heating and plumbing systems are less than 10 years old. If you live in the East, consider a brick home because it’s more wind resistant. If you live in an earthquake-prone area, look for a wooden frame house because it is more likely to withstand this type of disaster. Choosing wisely could cut your premiums by 5 to 15 percent.
Check the CLUE (Comprehensive Loss Underwriting Exchange) report of the home you are thinking of buying. These reports contain the insurance claim history of the property and can help you judge some of the problems the house may have.
Remember that flood insurance and earthquake damage are not covered by a standard homeowners policy. If you buy a house in a flood-prone area, you’ll have to pay for a flood insurance policy that costs an average of $400 a year. The Federal Emergency Management Agency provides useful information on flood insurance on its Web site at FloodSmart.gov. A separate earthquake policy is available from most insurance companies. The cost of the coverage will depend on the likelihood of earthquakes in your area. In California the California Earthquake Authority (www.earthquakeauthority.com) provides this coverage.
8. SIGN PAPERS
You’re finally ready to go to “settlement” or “closing.” Be sure to read everything before you sign!
You are a home owner.