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| Top
Ten Mistakes |
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| If
you're like most people, purchasing a home is the
biggest investment you'll ever make. If you're considering
buying a home, you're likely aware of the complexity
of the endeavor. Because of the numerous factors to
consider when purchasing a home, it's important to
prepare as best you can. Some common home-buying principles
and caveats are presented here for your consideration.
By keeping them in mind, you'll help create a successful
and more enjoyable experience. These Top Ten lists
are by no means exhaustive. Since your home could
cost you 25 to 40 percent of your gross income, it's
important to conduct research, ask questions and study
the process carefully. |
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| Buying
a Home |
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1.
Looking for a home without being pre-approved
As a potential buyer competing for a property, you'll
have a better chance of getting your offer accepted
by being as prepared as possible. Consider this
hierarchy of preparedness:
- Neither pre-qualified nor
pre-approved
- Pre-qualified
- Pre-approved
The benefits available at each level can be
easily understood when viewed from the seller's
perspective. Imagine you're a seller in receipt
of multiple offers to purchase your property. A
complete stranger (buyer) is asking you to take
your property off the market for at least the next
two to three weeks while they apply for a loan.
As the seller, lets consider the type of buyer you'd
prefer to deal with.
Neither pre-qualified nor pre-approved
This buyer provides no evidence that they can afford
to purchase your property. You may wonder how serious
they are since they're not at least pre-qualified.
Pre-qualified
This buyer has met with a mortgage broker (or lender)
and discussed their situation. The buyer has informed
the broker regarding their income, expenses, assets
and liabilities. The broker may also have seen their
credit report. The buyer provided you with a letter
from the broker stating an opinion of what the buyer
can afford.
Pre-approved
This buyer has provided a broker written evidence
of income, expenses, assets, liabilities and credit.
All information has been verified by a lender. As
a result, much of the paperwork for this buyer's
loan has been completed. This buyer will probably
be able to close quickly. They provide you with
a letter (pre-approval certificate) from the lender.
You're as certain as possible that this buyer can
close.
As a potential buyer, you can see that being pre-approved
will give you the best chance of getting your offer
accepted. This is critical in a competitive situation.
2. Making verbal agreements.
If you're asked to sign a document containing instructions
contrary to your verbal agreements--don't! For example,
the seller verbally agrees to include the washing
machine in the sale, but the written purchase contract
excludes it. The written contract will override
the verbal contract. More importantly, your state
may require that contracts for the sale of real
property be in writing. Do not expect oral agreements
to be enforceable.
3. Choosing a lender just because they have
the lowest rate.
While the rate is important, consider the total
cost of your loan including the APR , loan fees,
discount and origination points. When receiving
a quote from a lender or broker, insist that the
discount points (charged by the lender to reduce
the interest rate) be distinguished from origination
points (charged for services rendered in originating
the loan).
The cost of the mortgage, however, shouldn't be
your only criterion. Have confidence that the company
you select is reputable and will deliver the loan
with the terms and costs they promised. If in the
final hours of the transaction you determine that
the lender has suddenly increased their profit margin
at your expense, you won't have time to start again
with a different lender. Ask family and friends
for referrals. Interview prospective mortgage companies.
4. Not receiving a Good Faith Estimate.
Within three business days after the broker or lender
receives your loan application, you must receive
a written statement of fees associated with the
transaction. This is both the law and the best way
to determine what you'll pay for your loan. Bring
the Good Faith Estimate (GFE) with you when you
sign loan documents. You should not be expected
to pay fees which are substantially different from
those contained in your GFE.
5. Not getting a rate lock in writing.
When a mortgage company tells you they
have locked your rate, get a written statement detailing
the interest rate, the length of the rate lock,
and program details.
6. Using a dual agent--i.e., an agent who
represents the buyer and the seller in the same
transaction.
Buyers and sellers have opposing interests. Sellers
want to receive the highest price, buyers want to
pay the lowest price. In the standard real estate
transaction, the seller pays the real estate commission.
When an agent represents both buyer and seller,
the agent can tend to negotiate more vigorously
on behalf of the seller. As a buyer, you're better
off having an agent representing you exclusively.
The only time you should consider a dual agent is
when you get a price break. In that case, proceed
cautiously and do your homework!
7. Buying a home without professional inspections.
Unless you're buying a new home with warranties
on most equipment, it's highly recommended that
you get property, roof and termite inspections.
This way you'll know what you are buying. Inspection
reports are great negotiating tools when asking
the seller to make needed repairs. When a professional
inspector recommends that certain repairs be done,
the seller is more likely to agree to do them.
If the seller agrees to make repairs, have your
inspector verify that they are done prior to close
of escrow. Do not assume that everything was done
as promised.
8. Not shopping for home insurance until
you are ready to close.
Start shopping for insurance as soon as you have
an accepted offer. Many buyers wait until the last
minute to get insurance and do not have time to
shop around.
9. Signing documents without reading them.
Whenever possible, review in advance the documents
you'll be signing. (Even though some specifics of
your transaction may not be known early in the transaction,
the documents you'll sign are standard forms and
are available for review.) It's unlikely that you'll
have sufficient time to read all the documents during
the closing appointment.
10 Not allowing for delays in the transaction.
In a perfect world, all real estate transactions
close on time. In the world we live in, transactions
are often delayed a week or more. Suppose you asked
your landlord to terminate your lease the day your
purchase transaction was scheduled to close. A day
or two before your scheduled closing date, you discover
your transaction is delayed a week. In a perfect
world, no one is inconvenienced and your landlord
is willing to work with you. More likely, however,
your landlord is inconvenienced and angry. Will
you be thrown out? Will you have to find interim
housing for a week or more? The eviction process
takes a little time, so the Sheriff won't immediately
remove you, but this type of stress-producing episode
can be avoided. How? Terminate your lease one week
after your real estate transaction is scheduled
to close. That way, if there is a delay in closing
your transaction, you have some leeway. This approach
might cost a little more, then again, it might not. |
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of Page |
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| Refinancing
your Home |
|
1.
Refinancing with your existing lender without shopping
around.
Your existing lender may not have the best rates and
programs. There is a general misconception that it
is easier to work with your current lender. In most
cases, your current lender will require the same documentation
as other companies. This is because most loans are
sold on the secondary market and have to be approved
independently. Even if you have made all your mortgage
payments on time, your existing lender will still
have to verify assets, liabilities, employment, etc.
all over again.
2. Not doing a break-even
analysis.
Determine the total cost of the transaction, then
calculate how much you will save every month. Divide
the total cost by the monthly savings to find the
number of months you will have to stay in the property
to break even. Example: if your transaction costs
$2000 and you save $50/month, you break even in 2000/50
= 40 months. In this case you'd refinance if you planned
to stay in your home for at least 40 months.
Note: This is a simplified break-even analysis.
If you are refinancing considering switching from
an adjustable to a fixed loan, or from a 30-year loan
to a 15-year loan, the analysis becomes much more
complex.
3. Not getting a written
good-faith estimate of closing costs.
See item number four above.
4.
Paying for an appraisal when you think your home value
may be too low.
Have the appraisal company prepare a desk review appraisal
(typically at no charge) to provide you with a range
of possible values. Your mortgage company's appraiser
may do this for you. Do not waste your money on a
full appraisal if you are doubtful about the value
of your home.
5. Using the county tax-assessor's value as the market
value of your home.
Mortgage companies do not use the county tax-assessor's
value to determine whether they will make the loan.
They use a market-value appraisal which may be very
different from the assessed value.
6.
Signing your loan documents without reviewing them.
See item number nine above.
7. Not
providing documents to your mortgage company in a
timely manner.
When your mortgage company asks you for additional
documents, provide them immediately. They are doing
what's necessary to get your loan approved and closed.
Delays in providing documents can result in a costly
delays.
8. Not getting a rate lock in writing.
When a mortgage company tells you they have locked
your rate, get a written statement which includes
the interest rate, the length of the rate lock and
details about the program.
9. Pulling
cash out of your credit line before you refinance
your first mortgage.
Many lenders have cash-out seasoning requirements.
This means that if you pull cash out of your credit
line for anything other than home improvements, they
will consider the refinance to be a cash-out transaction.
This usually results in stricter requirements and
can, in some cases, break the deal!
10.
Getting a second mortgage before you refinance your
first mortgage.
Many mortgage companies look at the combined loan
amounts (i.e., the first loan plus the second) when
refinancing the first mortgage. If you plan on refinancing
your first loan, check with your mortgage company
to find out if getting a second will cause your refinance
transaction to be turned down.
[Back to the top of this page] |
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| Getting
a Home/Equity Loan or Line |
|
1.
Not knowing if your loan has a pre-payment penalty
clause.
If you are getting a "NO FEE" home-equity
loan, chances are there's a hefty pre-payment penalty
included. You'll want to avoid such a loan if you
are planning to sell or refinance in the next three
to five years.
2. Getting too large a credit line.
When you get too large a credit line, you can be turned
down for other loans because some lenders calculate
your payments based upon the available credit--not
the used credit. Even when your equity line has a
zero balance, having a large equity line indicates
a large potential payment, which can make it difficult
to qualify for other loans.
3. Not
understanding the difference between an equity loan
and an equity line.
An equity loan is closed--i.e., you get all your money
up front and make fixed payments until it is paid
if full. An equity line is open--i.e., you can get
numerous advances for various amounts as you desire.
Most equity lines are accessed through a checkbook
or a credit card. For both equity loans and lines,
you can only be charged interest on the outstanding
principal balance.
Use an equity loan when you need all the money up
front--e.g., for home improvements, debt consolidation,
etc. Use an equity line when you have a periodic need
for money, or need the money for a future event--e.g.,
childrens' college tuition in the future.
4. Not checking the lifecap on your equity line.
Many credit lines have lifecaps of 18 percent. Be
prepared to make payments at the highest potential
rate.
5. Getting a home-equity loan
from your local bank without shopping around.
Many consumers get their equity line from the bank
with which they have their checking account. By all
means, consider your bank, but shop around before
making a commitment.
6. Not getting a good-faith estimate of closing costs.
See item number four above.
7. Assuming
that your home-equity loan is fully tax-deductible.
In some instances, your home-equity loan is NOT tax
deductible. Do not depend on your mortgage company
for information regarding this matter--check with
an accountant or CPA.
8. Assuming that a home-equity loan is always cheaper
than a car loan or a credit card.
Even after deducting interest for income tax purposes,
a credit card can be cheaper than a credit line. To
find out, compare the effective rate of your home-equity
line with the rate on your credit card or auto loan.
Effective rate = rate * (1 - tax bracket)
Example: The rate of the home-equity line
is 12 percent,your tax bracket is 30 percent, your
effectiverateis: .12 * (1 - .3) = .12 * .7 = .084
= 8.4 percent. If your credit card is higher than
8.4 percent, the equity loan is cheaper.
9. Getting a home-equity line of credit when
you plan to refinance your first mortgage in the near
future.
Many mortgage companies look at the combined
loan amounts (i.e., the first loan plus the second)
when refinancing the first mortgage. If you plan on
refinancing your first, check with your mortgage company
to find out if getting a second will cause your refinance
to be turned down.
10. Getting a home-equity line to pay off your credit
cards when your spending is out of control! When
you pay off your credit cards with an equity line,
don't continue to abuse your credit cards. If you
can't manage the plastic, tear it up! |
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