There are cracks in the foundation. Nothing structural. Nothing that’s going to threaten the stability of the home, but they’re there. Nooks, crannies and holes through which seeps an invisible threat. Colorless, odorless and undetectable by your average human, it is nonetheless the second leading cause of lung cancer in the United States.
Radon gas – even the name sounds ominous, evoking images of radiation and nuclear devastation. Radon gas is created when uranium in the soil decays. The gas then seeps through any access point into a home. Common entry points are cracks in the foundation, poorly sealed pipes, drainage or any other loose point. Once in the home, the gas can collect in certain areas – especially basements and other low-lying, closed areas – and build up over time to dangerous levels. The Environmental Protection Agency of the US Government has set a threshold of 4 pico curies per liter as the safe level. As humans are exposed to the gas over a period of years, it can have a significant and detrimental effect.
Decide location versus space before searching for a home
it’s important to set your priorities and decide which is more important to you: space or location. If you settle on this in advance, you can make thought-out decisions during the home-buying process and avoid the unsettling feeling of buyer’s remorse.
Sweat equity can save thousands
If you have the skills, the time and the patience to live with dust and debris for a while, do-it-yourself home improvement projects can save you a big chunk of cash.
According to Freddie Mac, mortgage rates continue to remain at historic levels, hovering near four percent nationwide.
Today’s mortgage rates, the pace and volume of homes going under contract, as well as the loosening of mortgage guidelines, is turning today’s housing market into the hottest in a decade.
It’s a seller market. As a first time home buyer, you’ll want to be well-equipped to enter this market with as much knowledge as possible.
One of the best ways to understand the process of buying a home is to go through it step by step.
SAVING FOR A DOWN PAYMENT
The down payment required to buy a home will vary based your loan program. There are programs available with no down payment. There are also a few downpayment assistance programs (DPA) available to first time homebuyers.
The majority of first time home buyers, however, should expect to put down anywhere from 3% to twenty percent of the purchase price. Note, though, that buyers have options to put no money down, and can put more than twenty percent down at any time.
After saving for a downpayment, buyers will have closing costs to pay on the loan, too. Closing costs vary by state and can add up to several thousand dollars. However, it’s common for sellers to pay closing costs on behalf of a buyer. Be sure to ask your real estate agent to work that into a contract.
Lastly, be mindful that some lenders may require additional cash reserves so don’t plan on spending everything you have on your home. Aside from putting your ability to get approved in jeopardy, it’s poor financial judgment to leave yourself without money in reserve.
DETERMINE HOME AFFORDABILITY
When buying a home, mortgage lenders will look at your income, your assets, the down payment you have, as well as your other debts, liabilities, and obligations.
It is recommended that homebuyers look for homes that cost no more than three to five times their annual household income, assuming a 20% down payment and only moderate debt in addition to new housing payment.
Another general guideline is that a buyer’s total debt payments should not exceed 36% of their total household income, a ratio known as debt-to-income (DTI).
Lenders use this guideline because it has been shown to be a level at which most borrowers can comfortably repay their mortgage, while still having money left over for “life”.
The “36% figure” is just a recommendation, however. Some households are able to manage ratios in excess of 36 percent and, for some households, 36 percent is too high.
The best approach is to work with a mortgage professional to determine exactly what you can afford, both from a loan approval standpoint, as well as a comfort level for making the monthly payments.
CHECK YOUR CREDIT
Before applying for a mortgage — or any other loan type — it’s helpful to know your credit standing. By law, you can receive one free copy of your credit report per year.
Mortgage lenders will evaluate your credit using the FICO scoring model. The FICO model scoring ranges from 300-850. Generally, the higher your credit score, the better loan for which you’ll qualify.
When you receive your credit report, be sure to review it for errors and omissions. If you find something wrong, dispute it. This will start the process of removing the error from your record and may also improve your credit score.
Before shopping for a home, it is important to know how much you’ll be able to actually spend. The best way to do this is to get pre-qualified for a mortgage.
The process of getting pre-qualified involves providing some personal and financial information to your mortgage lender, such as income and asset info, as well as information for pulling credit.
Your mortgage lender will review this information and let you know how much you’ll be able to spend on a home.
Getting pre-approved is the next step.
Getting pre-approved is more in-depth than getting pre-qualified. During the pre-approval process, you will be asked for documentation which support the information you’ve verbally provided as part of your pre-qualification.
Documentation typically includes W-2s, pay stubs, and bank statements; and may include federal tax returns.
A distinct advantage of completing the pre-qualification and pre-approval steps beforelooking for a home is that you’ll know in advance exactly how much you can afford.
In addition, getting pre-approved also allows you to move much faster when you find that perfect home. In today’s competitive market, a pre-approval lets the seller know your offer is serious. Not having one can weaken your bid and cause you to lose out to another buyer whose financing is already in order.
HIRE A REAL ESTATE AGENT
Although it’s possible to search for homes using internet sites devoted to real estate, you can give yourself an immediate advantage by enlisting the services of a professional. Real estate agents have more in-depth and up-to-date knowledge of the communities and real estate markets that you are considering.
Why hire a real estate professional? Because, if you’re like most Americans, buying a home is the most expensive purchase you’ll make in their lifetime. In addition, the process of buying a home can be complex.
Unlike buying a car, laws that affect home buying change every year and vary from state to state. Real estate agents are required to stay current on the various laws and regulations. Additionally, real estate agents can help point out features or faults with a property that may otherwise go unnoticed.
A real estate agent can usually negotiate better sales contract terms, and offer greater knowledge of search areas.
There are a number of ways to find a good real estate professional. As with most service providers, nothing beats a good recommendation from someone you know and trust.
FIND A HOME, MAKE AN OFFER
With the help of your real estate agent, you can begin touring homes in your price range. It will be helpful to take notes on the homes that you visit as it may be possible that you will view a lot of houses. After a while they may run together.
Some even take pictures or videos to help them remember.
Not only will you want to take notes about the home, you’ll also want to evaluate the neighborhood. In what condition are the other homes ? Is there a lot of traffic on the street? Is there adequate parking? How about proximity to shopping?
Depending on the buyer, these examples may or not be as important. It’s good to know what’s most important to you and your family before shopping for a home. Take the necessary time to find the right home. But. don’t take too much time.
In a sellers’ market, homes which are priced right sell quickly.
After viewing homes for a few days, chances are you’ll know which one or two you’re serious about buying. After you find the right home, your real estate agent will help you come up with and negotiate an appropriate offer based on the value of comparable homes in the same neighborhood.
Be mindful of your financial circumstances, down payment amount and closing costs when negotiating a price.
Then, once you and the seller reach an agreement on the price, you’ll go under contract, or in escrow depending on your geographic location.
ORDER A HOME INSPECTION
After you’ve found a home and negotiated a sales price, there are two steps to pursue simultaneously. The first is to schedule your home inspection.
Home inspections are a common “next step” between buyer and seller after a home goes under contract. They’re so common that purchase offers are typically written with a contingency clause stating that the offer is subject to a satisfactory inspection by a licensed home appraiser.
As a home buyer, always exercise your right to a home inspection.
Home inspections will cost between $200-600, depending on the size and age of the home; and should be performed by a licensed home inspector who will be impartial to the inspection’s outcome.
Licensed home inspectors are trained to look for defects in a home which you, or your real estate agent, may have missed including faulty electrical wiring, building code violations, roof issues, and other health or safety hazards.
A thorough inspection will take anywhere from 2 to 8 hours to complete.
Several days after the inspection, the licensed inspector will provide to you a report which details the home’s system and structure. Expect for the report will note deficiencies. It will then be your choice whether to ask the seller to remedy the deficiencies found.
If the seller agrees to make repairs (e.g.; replace jiggly door handle; repair cracked window sill), you will have an opportunity to “walk-thru” the home prior to closing to ensure all repairs were made, as agreed.
Inspections should be performed on all homes — even newly-built ones.
ORDER AN APPRAISAL
An appraisal is an opinion of value from a licensed real estate appraiser who visits the home and inspects its size, condition, function, and quality.
First, an appraiser comes out to the property and inspects the home. Next, the appraiser researches similar homes in the area and compares recent sales to determine a fair market value.
The appraiser then gives a final appraisal report which includes a final “opinion of value.”
A real estate appraisal helps to establish a home’s market value – the expected price it would fetch if offered in an open, competitive real estate market. Appraisals can help buyers ensure that they don’t overpay for a home.
By law, mortgage companies cannot complete their own appraisals so many hire an appraisal management company (AMC) to handle the work which, in turn, gives the work to a licensed professional appraiser.
The appraisal must be performed by a third party who has no interest in the outcome of the appraisal.
SUBMIT LOAN TO YOUR LENDER
When you submit a loan to your lender, it’s known as “going into underwriting”.
The term “underwriting” refers to the process that leads to a final loan approval or denial. A loan’s approval status is made by a professional underwriter which uses specialized software programs and number-crunching analysis.
Once an underwriter has reviewed all of a mortgage applicants information and documentation, a decision will be made on the loan’s status. There are a few possible outcomes at this point.
The majority of loan applications are “approved with conditions.” This means that the loan is approved — so long as the borrower provides additional, clarifying information. Conditions typically fall into three categories: explanation and correction of anomalies, verifications and attestations, and supplementary documentation.
Explanation and Correction of Anomalies refers to inconsistencies in a credit reports; and may include official explanations of out-of-the-ordinary pay stubs, tax statements, and wages.
Verifications and Attestations include verifying a borrower’s income, employment, housing history, and gift funds, when applicable.
Lastly, supplementary documentation requests may include clarification on credit profile items, profit-and-loss statements from a business, and tax-related documents.
SHOP FOR HOMEOWNERS INSURANCE
Once your home inspection is complete and your loan is underwriting, it’s time to get started with your homeowners insurance policy.
Known officially as “hazard insurance”, homeowners insurance is a requirement of your loan approval. Lenders want to be sure that your home can rebuilt to its same specifications in the event of catastrophe, and won’t approve your home loan until such a policy is in place.
You shop for your hazard insurance, knowing that quoted premiums will vary by insurer based on the age of the home, its construction type, its proximity to services such as police and fire departments, and your deductible amount.
You’ll be asked to show proof that your policy is in effect as of your closing date. Many insurance policies are pre-written, and made effective upon payment of the first year’s premium, which typically occurs at closing — not before.
RECEIVE YOUR APPROVAL FROM YOUR LENDER
After a file has been fully underwritten and all of the conditions are satisfactorily met, a final underwriting approval will be issued. This is known as a “Clear to Close”.
Clear to Close means that the documentation you provided to your lender have met their approval, and that no additional paperwork is required.
When you’re Clear to Close, your lender is ready to fund your loan and will begin communicating with the closing agent to prepare your documentation for closing.
CLOSE ON YOUR HOME
Depending on where you live, “closing” on a home goes by different names. In many states, it’s simply known as “closing”. In other states, notably California, closing is often referred to as “going to escrow”.
Closing is also known as “settlement”.
Regardless of what you call it, however, closing is the last step prior to getting the keys to your new home. It’s the legal process by which ownership of a home moves from one person to another, in the form of a deed.
Closing is a relatively simple process. In advance, all of the necessary paperwork for signature will have been delivered by your lender, and your final Settlement Statement — called the HUD-1 — will mirror the preliminary settlement statement which was sent to you in advance.
Often, closing is just the formality of “sealing the deal”. Sometimes the seller is there; or, an agent for the seller is there. Your real estate agent may be there, too, as may your lender.
Closings can take anywhere from 25 minutes to two hours, depending on the complexity of the transaction.
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1. Start with your credit. Credit reports are kept by the three major credit agencies, Experian, Equifax, and TransUnion. They show whether you are habitually late with payments and whether you have run into serious credit problems in the past.
A credit score is a number calculated from a formula created by Fair Isaac based on the information in your credit report. You have three different credit scores, one for each of your credit reports.
A low credit score may hurt your chances for getting the best interest rate, or getting financing at all. So get a copy of your reports and know your credit scores. Try Fair Isaac’s MyFICO.com.
Errors are common. If you find any, contact the agencies directly to correct them, which can take two or three months to resolve. If the report is accurate but shows past problems, be prepared to explain them to a loan officer.
2. Set your budget. Next, you need to determine how much house you can afford. You can start with an online calculator. For a more accurate figure, ask to be pre-approved by a lender, who will look at your income, debt and credit to determine the kind of loan that’s in your league.
The rule of thumb is to aim for a home that costs about two-and-a-half times your gross annual salary. If you have significant credit card debt or other financial obligations like alimony or even an expensive hobby, then you may need to set your sights lower.
Another rule of thumb: All your monthly home payments should not exceed 36% of your gross monthly income.
The size of your down payment will also determine how much you can afford.
3. Line up cash. You’ll need to come up with cash for your down payment and closing costs. Lenders like to see 20% of the home’s price as a down payment. If you can put down more than that, the lender may be willing to approve a larger loan. If you have less, you’ll need to find loans that can accommodate you.
Various private and public agencies — including Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Department of Veterans Affairs — provide low down payment mortgages through banks and mortgage companies. If you qualify, it’s possible to pay as little as 3% up front.
A warning: With a down payment under 20%, you will probably wind up having to pay for private mortgage insurance, a safety net protecting the bank in case you fail to make payments. PMI adds about 0.5% of the total loan amount to your mortgage payments for the year.
Once you’ve considered the down payment, make sure you’ve got enough to cover fees and closing costs. These may include the appraisal fee, loan fees, attorney’s fees, inspection fees, and the cost of a title search. They can easily add up to more than $10,000 — and often run to 5% of the mortgage amount.
If your available cash doesn’t cover your needs, you have several options. First-time homebuyers can withdraw up to $10,000 without penalty from an Individual Retirement Account, if you have one, though you must pay taxes on the amount. You can also receive a cash gift of up to $14,000 a year from each of your parents without triggering a gift tax.
Check on whether your employer can help; some big companies will chip in on the down payment or help you get a low-interest loan from selected lenders. You can also tap a 401(k) or similar retirement plan for a loan from yourself.
4. Find an agent: Most sellers list their homes through an agent — but those agents work for the seller, not you. They’re paid based on a percentage, usually 5 to 7% of the purchase price, so their interest will be in getting you to pay more.
You need “exclusive buyer agent.” Sometimes buyer agents are paid directly by you, on an hourly or contracted fee. Other times they split the commission that the seller’s agent gets upon sale. A buyer’s representative has the same access to homes for sale that a seller’s agent does, but his or her allegiance is supposed to be only to you.
5. Search for a home. Your first step here is to figure out what city or neighborhood you want to live in. Look for signs of economic vitality: a mixture of young families and older couples, low unemployment and good incomes.
Pay special attention to districts with good schools, even if you don’t have school-age children. When it comes time to sell, you’ll find that a strong school system is a major advantage in helping your home retain or gain value.
Try also to get an idea about the real estate market in the area. For example, if homes are selling close to or even above the asking price, that shows the area is desirable. If you have the flexibility, consider doing your house hunt in the off-season — meaning, generally, the colder months of the year. You’ll have less competition and sellers may be more willing to negotiate.
Be wary of choosing search criteria that are too restrictive. For example, select a price range 10% above and 10% below your true range. Add a 10-mile cushion to the location you specify.
6. Make an offer. Once you find the house you want, move quickly to make your bid. If you’re working with a buyer’s broker, then get advice from him or her on an initial offer. If you’re working with a seller’s agent, devise the strategy yourself.
Try to line up data on at least three houses that have sold recently in the neighborhood. If you really want the house, don’t lowball. The seller may give up in disgust. Remember, that your leverage depends on the pace of the market. In a slow market, you’ve got muscle; in a hot market, you may have none at all.
There’s no foolproof system for negotiating a fair price. Occasionally it’s best to deal directly with the seller yourself. More often it’s better to work exclusively through intermediaries.
Be creative about finding ways to satisfy the seller’s needs. For instance, ask if the seller would throw in kitchen and laundry appliances if you meet his price — or take them away in exchange for a lower price.
Once you reach a mutually acceptable price, the seller’s agent will draw up an offer to purchase that includes an estimated closing date (usually 45 to 60 days from acceptance of the offer).
7. Enter contract. Have your lawyer or buyers agent review this document to make sure the deal is contingent upon:
1. your obtaining a mortgage
2. a home inspection that shows no significant defects
3. a guarantee that you may conduct a walk-through inspection 24 hours before closing.
You also need to make a good-faith deposit — usually 1% to 10% of the purchase price — that should be deposited into an escrow account. The seller will receive this money after the deal has closed. If the deal falls through, you will get the money back only if you or the home failed any of the contingency clauses.
8. Secure a loan. Now call your mortgage broker or lender and move quickly to agree on terms, if you have not already done so. This is when you decide whether to go with the fixed rate or adjustable rate mortgage and whether to pay points. Expect to pay $50 to $75 for a credit check at this point, and another $150, on average to $300 for an appraisal of the home. Most other fees will be due at the closing.
If you don’t already have one, look into taking out a homeowner’s insurance policy, too. Most lenders require that you have homeowner’s insurance in place before they’ll approve your loan.
9. Get an inspection: In addition to the appraisal that the mortgage lender will make of your home, you should hire your own home inspector. An inspection costs about $300, on average, and up to $1,000 for a big job and takes two hours or more.
Ask to be present during the inspection, because you will learn a lot about your house, including its overall condition, construction materials, wiring, and heating. If the inspector turns up major problems, like a roof that needs to be replaced, then ask your lawyer or agent to discuss it with the seller. You will either want the seller to fix the problem before you move in, or deduct the cost of the repair from the final price. If the seller won’t agree to either remedy you may decide to walk away from the deal, which you can do without penalty if you have that contingency written into the contract.
10. Close the deal. About two days before the actual closing, you will receive a final HUD Settlement Statement from your lender that lists all the charges you can expect to pay at closing.
Review it carefully. It will include things like the cost of title insurance that protects you and the lender from any claims someone may make regarding ownership of your property. The cost of title insurance varies greatly from state to state but usually comes in at less than 1% of the home’s price.
The lender might also require you to establish an escrow account, which it can tap if you fall behind on your mortgage or property tax payments. Lenders can require deposits of up to two months’ worth of payments.
The actual closing is often somewhat anticlimactic. It’s a ritual affair, with customs that differ by region. Your lawyer or real estate agent can brief you on the particulars.
The spring homebuying season is in full bloom, and odds are, if you’re reading this, you may be thinking it’s time to finally start looking for your first house. But before you dive in, it’s important to get your finances organized and know what you can afford. Here’s a checklist to get you moving toward this major purchase.
Pay down your debt. And while you’re at it, check your credit score and look over your credit report. “Before you start the process, you should make sure your credit score is OK,” says Michael Eisenberg, a certified public accountant and personal financial planner with Eisenberg Financial Advisors in Los Angeles. “If you don’t have a good credit score, you may not get the best [interest] rate. In fact, you may not get a loan, period.”
So before you do anything else – with any luck, long before you do anything else – focus on paying down your credit cards, paying your bills on time and raising your credit score. (A score of 720 and above is generally considered good, and 750 to 850 is excellent). You want your future mortgage lender to like what it sees when it comes time to request a loan for a house.
Have money in the bank. Most experts suggest that you have at least 20 percent of the house’s purchase price saved as a down payment. You can certainly buy a house without that – and many people do – but there are plenty of good reasons to put down at least 20 percent. For starters, you’ll almost certainly avoid paying private mortgage insurance, or you won’t have to pay it for long. PMI is typically 1 to 2 percent of the value of the loan, split into monthly payments. It may not seem like much, but if it adds, say, $100 to your monthly mortgage payment, you can see why you’d like to avoid it.
In other words, if you happen to have $20,000 in a bank account, and you’re thinking of buying a house in the not-so distant future, hang onto it. This isn’t the time to buy that motorcycle you’ve always wanted or invest in a coin collection.
Fine-tune your budget. Regardless of what you have in the bank now, this is a long-term, year-after-year, month-after-month expense you’re going to take on. “So the first thing I would say to anyone buying a home is, ‘Let’s see how much you can afford to spend,'” Eisenberg says. “Everyone thinks about the mortgage and interest, but there’s more to it than that. What about the property taxes? Will you have homeowner association fees? Are you renting now, and will your house be much bigger? That means you’ll pay more for utilities. Are there amenities that you’re going to have to take care of? Does the house have a pool? You need to plan much more than by asking yourself if you can afford the mortgage.”
Pej Barlavi, a real estate broker in New York City, agrees. “I always recommend to work your numbers backwards,” he says. “First, know your budget or set a monthly budget that you will be comfortable with paying that will not put you under a difficult strain should you not be able to work for several months.”
That might sound a little grim, but think about it. If this is going to be a house you’ll live in for years, there are going to be good and bad times ahead. You want to be prepared.
Think about how you’ll pay for the house. Yes, with money. But will you take out a fixed-rate mortgage or an adjustable-rate mortgage?
ARMs had a terrible reputation after the Great Recession, and for good reason. With an adjustable-rate mortgage, you’ll get the lowest rate available – but then it will adjust after several years, often based on an index, like the Cost of Funds Index. The main point here is that your payment with an adjustable-rate mortgage won’t stay the same.
“During the economic meltdown of 2007-2009, many homeowners lost their jobs and then discovered the interest rates on their mortgages were going up,” says Diana Webb, an associate professor of finance at Northwood University. Small wonder she says: “Adjustable rate mortgages are the scariest mortgages that I see.”