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Home Buyers GuidePlanning | Shopping | Offer To Buy | Money | Protection | Closing | Financing | Glossary How Much House? House hunting begins at home-with planning. The first step toward buying a house is to sit down. Before you grab the road maps and hit the streets, you need to do a little planning. We call it "pre-qualifying." Simply, it's determining how much house you can afford to buy. Knowing your affordable price range will bring your house-hunting into focus. Many lenders, for a small "up-front" fee, will send out all required verification and pre-approve you for a mortgage, allowing you the opportunity to negotiate as a cash buyer. How much house you can afford to buy depends on two things. How much you can afford for the monthly housing payment. And, how much you can invest in the down payment. Monthly payments include principal and interest on the mortgage loan, and property taxes and insurance against fire and other hazards. These four costs are often abbreviated "P.l.T.I." (For some buyers and lenders, monthly housing costs may also include homeowner association dues, condominium fees and mortgage insurance.) Qualifying In today's market an "affordable" home is not so much determined by sales price as it is by the financing which translates that price into a monthly payment. A house hunter's first step is to set a housing budget, then go shopping for the house (price) and payments (P.l.T.I.) that fit that budget. Even though there are many ways to qualify to buy a home, make sure the monthly payment makes sense for you. A current rule of thumb is that the monthly payment should not be more than 25-33% of gross monthly income. Restrictions will apply for smaller down payments. How Much House Can I Afford? The key items are the size of the down payment, interest rate, APR and the amount of the mortgage. The down payment might be zero in the case of VA-backed mortgages. Or a buyer may invest 20 to 25 percent of the purchase with a conventional loan and not be required to buy mortgage insurance. Your Long & Foster Sales Associate can be very helpful to you in deter-mining just how much house you can afford. Sources For Your Down Payment The obvious source of money for your down payment is either your savings or the proceeds from the sale of a home you already own. But there are some other not so obvious sources. In recent years, for example, "parent power" has taken some new twists for first-time buyers. Home Equity Loan. Parents often have considerable equity built up in their own homes-and many are tapping that asset through home equity loans to make a gift to the youngsters. Ask your tax advisor for current information. Often lenders will require a "gift letter" to verify that parents don't expect repayment. Shared Equity/Profit-Sharing. In return for providing a part of the down payment, the parents (or another investor) share in the "profit" or net equity of the house when the home owners eventually sell it. Life Insurance. If you have built up a cash value on your life insurance policy over the years, you may be able to borrow from your insurance company up to the amount of this accumulated cash value. Often they will even ask a more favorable interest rate than would be asked for other types of loans. Stocks and Bonds. If you feel the market doesn't favor selling your stocks or bonds now, you may be able to secure a bank loan using your portfolio as security. Company Profit Sharing or Savings Plan. Look into the possibility of withdrawing what you have in your profit sharing or savings plan account or borrowing against it, if your company has these programs. Mortgage Insurance Can Reduce Down Payment If you need a conventional loan, there is a way to put down only 5 or 10 percent. Through the lender, you will be required to buy private mortgage insurance (PMI). This insurance provides protection for the lender in case of default, and allows the lender to approve a larger mortgage amount. In a common approach, you'd pay an initial amount at closing (often one percent of the mortgage if your down payment is 5 percent, 1/2 of 1 percent if you put down 10 percent). Then, included in your monthly payments for your mortgage, you would pay an additional one-twelfth of 1/4 percent of the mortgage balance. This payment will usually continue until dropped at the discretion of the lender, unless a stop point is specifically written into the deed of trust, such as accumulating a 20% equity. Ask your lender for specific figures for any loan program you are considering, as the amount of mortgage insurance varies by the type of loan. One Caution The larger the down payment, the less money you need to borrow, which means a lower monthly payment. However, remember that in addition to your down payment and monthly payments, you will need money to pay for closing costs, moving, appliances, household setup, a reserve for family emergencies and other miscellaneous items. So don't plan to put your last penny down on the closing table. Figuring Your Housing Budget Generally, lenders figure that the home buyer shouldn't pay more than 28-38 percent of gross income for P.l.T.I. payments, or 36-38 percent for both P.l.T.I. and monthly debts combined. This might be a little more or a little less depending on other outstanding long term debts (more than 10 months), alimony/child support payments, number of children and their ages, and other household budget items. The easiest way to make a quick estimate of the mortgage amount you may qualify for requires applying the two basic formulas for loan application that lenders use. Keep in mind the loan balance will vary over the term of the loan, although the monthly payment remains the same. Two Lender Formulas Most lenders will require that loan applicants meet both guidelines before approving a mortgage loan. The first formula compares income to housing costs without including long term debts, the second includes all debts. 28% Formula Total Monthly Housing Costs (P.I.T.I.) _______________________________ = 28% (or less) Gross Monthly Income
36% Formula P.I.T.I. + All Monthly Debts _______________________________ = 36% (or less) Gross Monthly Income A variety of other formulas exist. VA and some lenders use a single ratio based on mortgage payment and all debts, which allows easier qualifying for a more expensive home for a borrower with little debt. To figure your housing budget, simply multiply your gross monthly income (before taxes) by 28% and 36%. For example, a family with a monthly income of $3,500 might qualify for a mortgage with payments up to $980. For specific figures, ask your Long & Foster Sales Associate. More Mortgage Help New types of mortgages, such as graduated payment mortgages, flexible payment mortgages and deferred interest loans, feature monthly payments that start lower than usual in the early years-and thus help home buyers "afford" more house and buy sooner by qualifying on a lower mortgage payment. (See "Financing" chapter.)
What To Look For Choosing a place to live can be one of the most exhilarating experiences of a lifetime. We've learned through the thousands of home seekers we have helped that the best approach is to be prepared. Literally, to do some homework. Our observation is simple. Your move can be an improvement if you duplicate what you like in your present community and avoid what you dislike. House Hunting Begins At Home The search can begin in your present home so we've developed some questions to stimulate your thinking and help you identify your needs and preferences. Once you've clarified what you like in your present community, you will have a better idea of what you want to find. Plus, you will be able to express your preferences clearly to your Long & Foster Sales Associate who can help you find it. One hint to keep in mind as you go house hunting is an old wisdom: "The best time to think about selling your home is when you're buying it." In other words, what appeals to you as a buyer today will probably also appeal (or what turns you off will be a turn off) to buyers tomorrow. A careful house hunter will benefit years from now when it's time to sell to an equally value-conscious buyer. Build your buyer's savvy by reading classifieds and homes-for-sale magazines, and also visiting open houses. County And City Questions Would you characterize your present area as urban, suburban, semi-rural or rural? Is the population density low, medium or high? Is the population decreasing, stable or increasing? What natural features are the most significant? Woods? Hills? Flat land? Rivers? Ocean shore? Man-made lakes? Streams and ponds? How do you commute to work? Do you walk? Drive? Car pool? Taxi? Bus? Train? How far must you travel and how long does it take morning and evening? Do you use available public transportation for local trips or to visit close-by communities? Can someone reach your home on public transportation? Where do you do your shopping? Central commercial districts? Shopping malls? Supermarket shopping clusters? Community shops or home delivery? Imagine a list of typical stops in one week…how many miles and how much time would visiting the entire list require? Do you want greater convenience? What types of schools does your family attend now? From grade school to graduate school, and from day care needs to special vocational training, what facilities will you require in the next few years? Are there any special needs or plans? Although it's extremely difficult to compare quality of education…especially when the most important ingredient is the relationship between teacher and student…some statistical indicators can be helpful. Average class size at grade level. Comparative standardized test scores. Average salary of teachers. Percentage of high school graduates who go to college. What does the area offer for recreation and entertainment? Music? Movies and live stage? Sports arenas? Museums? Nightlife? What types of indoor and outdoor sports facilities are available? Are there public parks, country clubs, athletic clubs, fraternal groups? Do you require any special facilities? Choosing A Neighborhood After you take stock of the larger view of the county and city, this section helps you zero in on your neighborhood preferences. In real estate an old maxim says there are three criteria that determine market value: "Location, location, and location." The concept of neighborhood isn't as precise as county or city. Some people consider the boundaries to be the district around a grade school. Others consider it "walking distance," more or less within a half-mile radius. Wherever you draw the line, a neighborhood is the immediate area around your house. People, Services Every neighborhood can be described from three standpoints: its people (your future neighbors), what it looks like, and where its services are located. Yet any neighborhood description is highly subjective, which brings up another observation from our experience. No matter how much hard data one gathers about a neighborhood, nothing compares with information that local people provide. Whether it's fellow workers, letter carriers or people at a bus stop…neighbors are the best observers of a neighborhood. Talk to as many people as you can and ask them the following questions. Neighborhood Questions Do neighbors socialize regularly, or hold block parties, picnics, holiday parties, organize sports teams? What are the ways they have met their neighbors? Walking a dog, commuting, PTA, parties, little league, gardening? What types of dwellings: high-rise or low-rise apartments, condominiums, multi-family structures, single family houses, mobile homes? How much do the neighbors care for lawns and gardens? Are the houses maintained "like new," adequately, poorly? Is there a Home Owner's Association? Are cars parked mostly in garages, driveways, in the street? How old are the houses? More than 30 years old? 15 to 30 years? New? How far apart are the houses? Are property upgrades common? Swimming pools, tennis courts, fences, walls, patios, extensive landscaping? For convenience, how does the neighborhood rate? Can you walk to shopping or is a car necessary? List your five most frequent destinations. Are they clustered in one stop-and-shop location? Two stops? How much time is required for fire, police or ambulance services to arrive in an emergency? How close are cultural centers, parks, restaurants, theaters, playgrounds? How do the children routinely reach their schools, play areas, friends' homes? By walking, bicycle, bus, or do parents drive them? Is public transportation available for commuting or shopping? Do any local ordinances affect pets, parking, lawn, etc.? What are the disadvantages of the neighborhood? Freeway, railroad or airplane noise? Factory pollution, heavy traffic, exposure to heavy storms, possible flooding? Choosing A House We've saved the best for last. In many ways home finding is easier than choosing a county and a neighborhood, because you are considering tangible details. Yet our experience suggests that many people "decide" with emotion, and "justify" with facts. This section will help you strike a better balance. First, one should realize that thousands of houses are sold in the area every year. Inspecting the thousands of houses on the market is obviously impossible. But you can turn this overwhelming selection to your advantage. If you can clearly describe the features you require, your Long & Foster Sales Associate can make a preliminary screening for you. After you select the best houses, you can concentrate on inspecting your top choices. The key is knowing what you need. House Questions How many people will be living in the house? Do you prefer a new or resale home? What is your preferred housing style? Townhouse, colonial, contemporary, split level, split foyer, Cape Cod, rambler, or something else? How many total rooms do you need? Bedrooms, bathrooms? How strongly do you require features such as: separate living room, dining room, laundry room, basement or attic, family room, fireplace, workshop area, garage? How much property do you require? Do you have preferences for any particular natural features? House Hunting Many of our customers find it helpful to keep a record of the houses they inspect. A notebook is handy with pages large enough to record vital information, as well as hold stapled pictures of attractive houses and neighborhoods or clipped advertisements. Financial Details Is the asking price comparable to other houses in the neighborhood? Higher or lower? However, when carefully comparing properties be sure to take into account unique features and improvements that vary house to-house, and consult your Long & Foster Sales Associate who can provide a Market Comparative Analysis (CMA). Is the existing mortgage assumable? Required down payment amount? What financing method is acceptable to the seller? What are the annual property taxes? Will the taxes increase with the transfer of deed and a new market price? Any local bonds or assessments? Physical Details Outside. Address of property? House style? Lot size? Landscaping details? Degree of grounds maintenance required? Age of house? Structural condition? Are any major repairs or improvements necessary? Maintenance of building? Inside. Make a sketch of floor plans. Total number of rooms and baths on each floor? Any extras such as intercom, fireplaces, phone jacks? Built-in appliances: dishwasher, garbage disposal, trash compactor? Adequate storage space? Construction. Inspect quality of materials, present condition, craftsmanship both inside and outside. Insulation? Weather stripping or storm windows? Major systems. Plumbing, electrical, heating and cooling. What type of fuel does the heating system use? Approximate annual cost? A professional inspection of the major systems is recommended for a house that you are interested in purchasing. Computerized House Hunting At any moment a complete description of homes you would like to visit is available through the Multiple Listing Service (MLS) system in all Long & Foster offices. Here's how it works. When a house is listed for sale by any area broker, the home's vital statistics are fed into the computer: the lot size; the age and kind of home (condo, townhouse, single family); style (colonial, contemporary, Cape Cod, etc.); material (brick, stone, wood); the number, size and use of rooms (4 bedrooms, 2 1/2 baths, kitchen, living and dining rooms, family room, finished basement and attic, foyer, utility room, garage). Also included are features (fireplace, walkout deck, patio, wooded lot); equipment (stove, dishwasher, carpeting, etc.); the heating and/or cooling systems; the water and sewage systems; the annual taxes; the mortgage balance, monthly payments, and the amount of cash a buyer would need to assume the existing mortgage (if it's assumable), or the amount of cash required if the seller offers to take a second mortgage; and, finally, the price. Finger-Tip Home Search A buyer's requirements can be fed into the computer by a Long & Foster Sales Associate: particular neighborhoods; styles of homes; the number and kinds of rooms, and the price range. In minutes the computer makes a quick search among the houses listed, and prints out all the houses that meet the buyer's criteria. The computer also helps buyers determine which home sellers will offer seller financing. It can calculate the amount of mortgage payments at various interest rates, under various financing plans. It can also help evaluate the investment and the financing that is right for the buyer. Plus, it's updated each morning, as hundreds of houses enter and leave the market. In short, it's the only way a buyer can check out almost everything that's "out there." (In any area without a computer, this market search is done personally using listing books.) Negotiating The Purchase You've found it-your "dream" house! You want to buy it. Now what? You make an offer by submitting a signed real estate offer to purchase with the type of financing you desire. This will be the sales contract once the seller accepts. When you and the seller sign, you are agreeing to the contract conditions. Before you sign it, read it carefully and make sure you understand every detail. Ask questions. Verbal agreements should be written into the contract. If you plan to have a lawyer represent or advise you, retain one as early as possible. This is where your Long & Foster Sales Associate and an attorney can give you the assistance you need. Offers And Counter Offers Your Long & Foster Sales Associate will take the offer to a "contract presentation" with the home seller and the listing broker. In some areas the three of them will discuss the offer, and the seller will accept it as written, or make "counter offers" on unacceptable aspects, or reject it. The selling broker will then bring back the offer to buy to the home buyer, who can accept it, counter-the-counter offer, or reject it. The offer to buy becomes a contract when all parties have initialed every counter and signed the offer. When you sign the offer to buy you also will have to submit a deposit to show that you are earnest about your desire to buy-appropriately called "earnest money". Making Sure Your Contract Is Complete Sales contracts differ, depending on circumstances, but there are several provisions you may want to include in a contract for the purchase of real estate.
Locating The Right Loan You have the option of shopping around for the best terms you can obtain. Generally, a mortgage acceptance requires 30-45 days for conventional, 45-60 days for VA and FHA from application to approval. Long & Foster has an affiliated mortgage company-Prosperity Mortgage Company. Shop Smart For Mortgage Money It used to be that qualified home buyers simply went to their nearest bank or savings and loan for the standard, fixed-rate, 30-year mortgage or the VA/FHA backed loan. Interest rates were not highly competitive-back then. Now, of course, things have changed. Competition among lenders is lively, and smart borrowers shop carefully to find the financing that best suits their circumstances and needs. Here's where to shop: Mortgage Lenders. Mortgage lenders issue mortgages to borrowers. They then process and sell the mortgages to large investors or into the secondary mortgage market. Mortgage Loan Brokers. Some individuals or groups charge a fee (usually to the borrower) to match borrowers with lenders. Sometimes they make direct loans. An advantage of working with mortgage brokers is that they often represent many investors and can provide you with many more financing alternatives, usually at the same price as the mortgage banker. Financial Institutions. Mutual savings banks, savings and loan associations, insurance companies and some commercial banks are the traditional sources of mortgage loans. Savings and Loans often grant favorable terms to their own account holders. Private Lenders. Individuals (often home sellers) and groups (sometimes sellers' employers-if the seller is being transferred) lend money. This source is especially helpful in arranging second mortgages, but can also assist with first trusts, wrap-arounds and other mortgage plans. Credit Unions. Federal credit unions can write 30-year conventional and government insured mortgages. Some will make loans; others will not. A good possible source for credit union members. Finance Companies. To compete with the more traditional lenders, some finance companies promise quick service and some do not charge mortgage "points" or "pre-payment penalties." Ten Questions Most Lenders Will Ask You Unless you're prepared, applying for a mortgage loan can be something like going into a strange supermarket without a shopping list or your wallet-bewildering, time wasting and frustrating. Here's the information most lenders will need:
With this information in hand, here are the steps the lender will take to process your application:
Some Questions You Should Ask Most Lenders Here's how to shop; a few of the questions to ask a lender:
Slicing Interest Rates It is important to keep the tax advantage in mind when considering whether to rent or buy. A mortgage payment of $1,000 could result in a lower overall cost than an $800 rent amount after you consider tax advantages. Your Long & Foster Sales Associate can help you compare. Remember a buyer may not realize this "tax break" until tax time comes around unless withholding taxes are decreased in anticipation of increased interest payment deductions. Ask your Long & Foster Sales Associate how to get this "tax break" in each paycheck. Fire And Hazard Insurance Most lenders require a home buyer to provide at settlement a one-year paid receipt for a fire and hazard insurance policy, often called home owner's insurance. These policies are available from several leading insurance companies through Long & Foster's Insurance Agency, or the insurance company of your choice. Fire and hazard insurance provides protection for fire and other perils to your home and its contents. What To Expect From A House Inspector What can home buyers expect from a home inspector-besides a bill for $150-$350 (depending on size of property and/or complexity of the inspector's report)? First of all, require proof of membership in the American Society of Home Inspectors. Next, expect a quickly-delivered (one or two-day) written report. Expect practical returns. While you can see for yourself many flaws in a house, the practiced eye of a professional inspector can probably spot more, especially in areas not easily accessible to a home buyer. Specific information could even reduce the price of a house if the seller will agree the price has not already been discounted for defects. Possible Repairs
If no serious problems are found, inspection can pay off indirectly in assurance that you are making a sound investment. Many states now require that sellers provide buyers with either a residential property disclosure or disclaimer statement. Title Insurance Title insurance provides protection in the event any of a number of past actions threaten the title to your property. Most lenders will require title insurance to protect their interests. Be sure to ask about an "owner's" policy as well, to protect your title. You may save money if you buy owner's title insurance at the same time as mortgage title insurance, rather than buying it separately later. As a home buyer, you may be able to save money with a "re-issue rate" for title insurance, if the property changed hands within the last several years. The title insurance may allow a lower "re-issue rate" premium because the recent title search is still valid. Consult your title attorney and insurance company. After Loan Approval After the lender approves the mortgage, the buyer will receive a "loan commitment letter" stating the mortgage amount, interest rate and length of loan term. The buyer should check it carefully, and return a signed copy to the lender or follow other specific instructions. Next, the selling and listing brokers will coordinate a settlement date. You should be sent a letter confirming the date, place, time and a checklist of everything you, as the home buyer, need to bring. Walk-Through Inspection The purpose of the walk-through inspection the date of settlement or several days prior to settlement is to determine if all conditions in the contract are satisfied. The time for the buyer to inspect and note defects for correction by the seller is during the contract negotiations and prior to signing the sales agreement. Repair or replacement items should be noted in the contract or contingent on a house inspection, otherwise most resale homes are sold in "as is" condition. It is up to the buyer to perform the walk-through inspection, not the seller, who may or may not be present. The buyer should be accompanied by the selling agent. The home seller should be sure utilities are on so that equipment can be operated. Room By Room The buyer should try all lights and switches; turn all faucets on and off, run the shower, flush toilets; turn on the furnace and central air conditioning (in the off-season, buyer should hire a professional to certify proper functioning of both heating and air conditioning); test all stove burners, oven at bake and broil; run some ice cubes through disposal to test blades; run dishwasher, washer, dryer through complete cycle; open and close all windows and doors. In short, try everything, even keys and the fireplace flue. All deficiencies should be noted, and funds may be withheld from the home seller by the settlement attorney for repairs, if seller does not correct problems prior to settlement. The selling broker will coordinate with the listing broker and seller to make repairs before settlement, if possible. Upon receipt of bills and notification that repairs are complete, the attorney will release balance of funds to the seller, if money is escrowed for needed repairs The Big Day! The big day is here! Tonight you can pop open the champagne, but today there will be a lot of paper signing and a poignant passing of the keys (don't forget the garage keys, and electric door opener, too). At the settlement will be an attorney or title company representative (chosen by the buyers), all buyers, listing and selling brokers and all owners. The home seller should bring all warranties on equipment and any instructions on equipment maintenance or operation. The attorney will have searched the title, provided title insurance and obtained old and new lender instructions. First, all unresolved walk-through deficiencies are resolved. With the buyer, the attorney explains the deed of trust or mortgage; the deed of trust note or mortgage note; VA, FHA or lender forms; and settlement sheets. Buyer signs all these and pays the balance of the down payment and buyer's closing costs with cashier or certified check. Open Look At Closing Costs "Closing costs" have lost much of their mystery in recent years. Under the Real Estate Settlement Procedure Act, the home buyer is furnished an estimate of closing costs by the lender, in advance of the closing. In some cases some of the closing costs may be paid by the seller; this is particularly true for new housing, where the seller is the builder. Settlement fees vary widely depending on price location and other factors but overall the buyer's costs usually average between 3% and 7% of the sales price. Items that are usually included in the settlement fees are the loan origination fee, mortgage insurance premium, attorney fees, owner and lender title insurance, recording fees, county tax stamps, state tax stamps and the survey fee. In addition the lender will require an appraisal fee and a credit report fee in advance of the closing. A few other items, not required to be listed under the law, may also have to be paid at a closing. These include advance deposits held in escrow for real estate property taxes and insurance. The lender collects a portion of these every month and then pays the insurance and taxes when they are due. Because specific closing costs vary from area to area, and transaction to transaction, we encourage you to consult with your Long & Foster Sales Associate to determine your exact charges. Sometimes closing costs can amount to a sizable sum, but remember some of the items are tax deductible. The loan origination fee prepaid interest and property tax adjustments may be such items. Signing On The Dotted Line With the seller, the attorney explains the settlement sheets and gets the home seller's signature on them and the deed. Seller pays appropriate closing costs. If the seller's taxes or insurance have been escrowed, the seller will receive any money accumulated in the account for bills not yet due. Additionally the seller will be reimbursed for any money paid in advance and not used such as property taxes. The seller will receive these refunds at or after settlement, depending on the area. Taxes and home owner's dues or condominium fees will be prorated on a daily basis. Seller, buyer and brokers are supplied a copy of settlement sheets for their records. The house keys are passed. You are now the proud owner! Congratulations!! Different Mortgage Strategies When it comes to paying for a home, buyers today have an almost unlimited number of financing options from which to choose. They have before them a real "mortgage smorgasbord"-a table full with exotic names like "ARMs," "balloons," and "buy downs." Many involve financing assistance from the home seller. Others are from regular financial institutions like mortgage companies, banks and savings and loans. Here's a run-down on the main types of financing every home buyer should know today. Interest rates are intended for illustration only; ask your Long & Foster Sales Associate or loan officer from Prosperity Mortgage Company, a Long & Foster affiliated company, for current market rates. Conventional/VA/FHA Conventional Mortgage. A conventional loan is an indebtedness or mortgage made between a lending institution and a borrower without a third party participant, such as VA or FHA. Most types of conventional loans are paid off in equal monthly payments spread over 15, 25 or 30 years. The interest rate stays the same for the life of the loan, therefore the monthly principal and interest payment also remains constant. Terms of a conventional loan vary among lenders, but basically a loan can be obtained with as little as 5% down payment. When the down payment is less than 20% it is, in most cases, necessary for the loan to have private mortgage insurance to protect the lender. Example: The buyer purchases a $150,000 home. Typically, the lender will require a down payment of $30,000 or 20% of the purchase price. Assuming 8% market rate; $120,000 loan amount; 30 years, $880.52 monthly payment. With private mortgage insurance, however, the lender would lower the down payment requirement to 5%, or $7,500, which increases the monthly payment. (Lenders refer to private mortgage insurance as "PMI.") Advantage: Fixed rate financing is straight forward and easy to understand. Using private mortgage insurance normally adds up-front costs but new PMI plans allow premiums to be financed or paid monthly. VA Loan. The VA does not lend money, it guarantees a portion of the loan so that lenders who originate the loan feel comfortable with their risk. Qualified veterans can take out loans up to $203,000 with no down payment. VA-guaranteed loans can be combined with second mortgages and are assumable upon qualifying by any future buyer. Example: The veteran agrees to buy a home for $100,000. With no down payment, the loan amount is $102,000 (includes a minimum 2% VA Funding Fee) for 30 years, and say the VA interest rate is 8%, plus "points." The monthly payment for the $102,000 loan will be $748.44. Advantage: No down payment necessary. FHA Loan. Strictly speaking, FHA does not make a loan; rather, it insures loans, which makes lenders willing to finance home purchases on favorable terms. With an FHA loan the down payment can be as low as 2.25%. Discount Points may be paid by either the seller or buyer. At the date of this printing, FHA charges a 2.25% up front Mortgage Insurance Premium that can be financed in the mortgage amount or paid in cash at settlement. (There is no "up-front" premium on condos.) The borrower must also pay an annual Mortgage Insurance Premium of .50% which is collected monthly. Example: The buyer of a $100,000 home in Maryland, would make a down payment of approximately $2,250, resulting in a base loan amount of $97,750 and a total loan amount of $99,949, including the financed M.I.P. At a rate of 8%, the monthly principal and interest would be $773.39, plus $40.73 for the monthly M.I.P., for an adjusted payment of $814.12. Advantage: Low down payment and low interest rates. Fixed or adjustable rates available. Especially designed for first-time home buyers. Lender Funded Programs Many lenders today are willing to assist buyers with the closing costs. In exchange for paying a higher interest rate, a lender may forgo its normal charges plus pay other closing costs on behalf of the buyer. These plans vary widely, so study them carefully. The advantage is less cash is required to close. This is offset by higher monthly payments due to the higher interest rates. Owner Assisted Second Mortgage. The seller of the house lends the buyer enough to make up the difference between the purchase price and the down payment + first-mortgage balance. (A commercial lender may also make this kind of loan). The terms, including the interest rate, are based on buyer/seller agreement. It is often a short-term (5-to-15 year) loan; sometimes "interest only" payments being made until the term date, when the balance is due. A buyer can then pay off the loan or refinance. Example: A $100,000 home offers a $40,000 assumable first mortgage balance; to pay $60,000, the buyer puts $14,000 down and takes a 15-year second mortgage for $46,000 at 10%. Monthly payments on the first mortgage are $283; second mortgage, $494. The total, $777, is less than if the purchaser had taken out a new first mortgage for $86,000 at 8% ($821.86) and the second pays off after 15 years. Advantage: Well suited for the buyer with a small amount of cash for a down payment, but with a monthly income high enough to handle both mortgages. Buy Down Mortgage Plan. The seller (who in this case might be the home owner, the builder, or a third party) puts additional cash "up front" with the lender when the loan is closed, in exchange for a lower interest rate in the initial year(s) of the mortgage. Owner Financing. Owners may finance first, second, third or fourth loans. They may lend their equity back as a first mortgage (often called a "take back") or help the buyer in other ways. One form of owner financing (sometimes called a "balloon" mortgage) bases monthly payments on a 30 year-loan scale, but requires the balance of the mortgage to be paid at the end of a short period, say 5 to 7 years. Example: The house price is $100,000. The seller will take a down payment of $14,000. The balance ($86,000 less monthly payments made on the principal) will be due in five years. Interest rate, 10%. Monthly payments, $755-nearly all of it interest. At the end of five years, the buyer must pay the seller $83,054, the balance of the mortgage. At that time, the new owner will seek other financing. Advantage: Lower initial interest rate. If interest rates have declined by the time the balloon payment is due, the buyer can secure less expensive financing. Institution Assisted Assumable Mortgage. Buyer "takes over" or assumes the mortgage obligations of the seller (with concurrence of the lender). Down payment is the difference between new purchase price and the existing mortgage balance. Interest doesn't change, which is usually lower than today's rates. Example: With a house price of $100,000, the seller holds an assumable mortgage at 7%. The balance of the mortgage is $40,000. (The seller originally paid $50,000 for the house in 1969). Down payment, $60,000. Monthly payments on balance of seller's mortgage, $283. A substantial portion of the $60,000 might be financed by a second mortgage. Advantage: An opportunity for the buyer to get financing at bargain rates and seller has substantial marketing advantage if home is competitively priced. Adjustable Rate Mortgage (ARM). The interest rate may go up or down over the years, and it is keyed to a financial market index. Interest rate increases are at the lender's option, but rate decreases are mandatory. Monthly payments may also be adjusted on a periodic schedule. Many ARMs set a maximum adjustment on possible increases to interest rates and monthly payments, and/or overall floor or ceiling for life of the loan. The initial rate is often lower than conventional financing. Example: Buyer purchases a $100,000 home. Down payment $14,000; loan amount, $86,000; interest rate at start, 6%; monthly payments (interest and amortization) at start, $515.61. Interest rate adjusted annually to reflect Treasury bills; maximum annual rate adjustment is 2%; life-of-the-loan rate cap is 12%; monthly payments adjusted every year. Advantage: Initially, monthly payments are lower and less income is required to qualify. If interest rates decline, the rate is adjusted downward. Balloon Mortgages. A balloon mortgage is typically a loan which must be paid off after a certain period. The advantage they offer is an interest rate that is lower than a mortgage that is made for 30 years. Balloons may range in duration from 5 to 7 or 10 years. If the 30-year fixed rate quote was 8%, the 7-year balloon may be as low as 7.5%, providing lower payments for the 7-year period. One point to consider, however, is that the investor typically does not guarantee to extend the loan past the balloon date even though most balloon plans contain provisions for optional refinancing. Example: See example under the heading of "Owner Financing." Long & Foster®, Realtors®, is not a mortgage lender. These examples are for illustration only and were provided by Prosperity Mortgage Company, a Long & Foster affiliated company. The exact terms of any financing are subject to the requirements of the investors in each specific case. Choosing the "best" method depends on the circumstances of the individual. A real estate agent wil be most happy to fully explain the home buyer's options for financing.
Words To The Wise Agent. A person acting on behalf of another, called the principal. Agreement of Sale. Known by various names, such as "contract of purchase," "purchase agreement," "sales agreement" or "binder," according to location or jurisdiction. A contract in which a seller agrees to sell and a buyer agrees to buy, under certain specific terms and conditions spelled out in writing and signed by both parties. Annual Percentage Rate (APR). Includes quoted interest rate on the loan plus all additional service and finance charges associated with the loan. Includes all costs of financing; those paid at the time of closing and those paid over the term of the loan. The APR is usually slightly higher than the note rate. Appraisal. An expert judgment or estimate of the quality or value of real estate as of a given date. Assessed Value. The valuation placed upon property by a public tax assessor as the basis for taxes. Bill of Sale. An instrument which transfers title to personal property (chattels); a "Deed" transfers real property. Certificate of Title. A document signed by a title examiner or attorney, stating that the seller has good marketable and insurable title. Closing Statement (Settlement). The computation of financial adjustments between buyer and seller as of the day of closing a sale to determine the net amount of money which buyer must pay to seller to complete purchase of the real estate and seller's net proceeds. Also, "settlement sheets," "HUD-1." Commission. Payment to a real estate broker for services performed. Convey. To deed or transfer title of property from one person to another. Deed. A formal written instrument by which title to real property is transferred from one owner to another. Also, "conveyance". Deed of Trust. Like a mortgage, a security instrument whereby real property is given as security for a debt. However, in a deed of trust there are three parties to the instrument: the borrower, the trustee, and the lender (or beneficiary). Earnest Money. The money given to the seller by the potential buyer (usually held in escrow) upon the signing of the agreement of sale to show that buyer is serious about buying the house. Also, "deposit". Equity. The interest or value which owner has in real estate over and above the debts against it. (Sales Price - Mortgage Balance = Equity) Escrow. Funds, property, or other things of value left in trust to a third party. The escrow may be released upon the fulfillment of certain conditions or by agreement of the parties. Fixture. What was formerly personal property which is now permanently attached to real property and goes with the property when it is sold. Hazard Insurance. Protects against damages caused to property by fire, windstorms, and other common hazards. Listing Contract. Between a home owner (as principal) and a licensed real estate broker (as agent) by which the broker is employed to market the real estate within a given time for which service the owner agrees to pay a commission. Also, "listing agreement". Market Value. The highest price which a buyer, ready, willing and able but not compelled to buy, would pay, and the lowest price a seller, ready, willing and able but not compelled to sell, would accept. Basis for "listing price", or "asking price." Market Price. The actual amount for which a piece of property is sold. Also, "sales price," "purchase price". Mortgage. A lien or claim against real property given by the buyer to the lender as security for money borrowed. Mortgage Note. A written agreement to repay a loan. The agreement is secured by a mortgage, serves as proof of an indebtedness, and states the manner in which it shall be paid. Also, "deed of trust note." P.l.T.I. Principal, interest, taxes, and insurance. Most residential mortgage payments include the above and are therefore referred to as P.l.T.I. Also, "carrying charges". Points. Sometimes called "discount points" A point is one percent of the amount of the mortgage loan. Prepayment Penalty. Penalty for the payment of a mortgage note or deed of trust note before it actually becomes due. Principal. This word has several meanings:
(A) to denote the most important; Property Management. The operation of real property, including the leasing of space, collection of rents, selection of tenants, and the repair and renovation of the buildings and grounds. Prorate. To allocate between seller and buyer their proportionate share of an obligation paid or due. For example a prorate of real property taxes, fire insurance, or condominium fee. Sales Associate. A person with a real estate license and associated with a specific real estate broker. Survey. A map or plat made by a licensed surveyor showing the results of measuring the land with its elevations, improvements, boundaries, and its relationship to surrounding tracts of land. A survey is often required by the lender to assure a building is actually sited on the land according to its legal description. Title. As generally used, a document that indicates rights of ownership and possession of particular property. Title Abstract. A summary of the public records relating to the title to a particular piece of land. An attorney or title company reviews an abstract or title to determine whether there are any title defects. Title Insurance. Protects lenders and home owners against loss of their interest in property due to legal defects in title. Title Search or Examination. A check of the title records, generally at the local courthouse, to make sure the buyer is purchasing a house from the legal owner and there are no liens, overdue special assessments, or other claims. Transfer Tax. State tax, local tax (where applicable) and tax stamps (in some areas) required by law when title passes from one owner to another.
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