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Costs
and Financing
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How Much
House Can You Afford?
Knowing your price range brings your house hunting into focus. Since most people
will borrow money to make their house purchase, it helps to look at your
finances, at the lenders will.
The amount of money a lender will loan for your house purchase depends primarily
on how much you can afford for the monthly payment and how much you can invest
in the down payment.
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Monthly payments consist of the principal and interest on the mortgage loan, as well as property taxes and homeowner's insurance. These four costs are often abbreviated as PITI. |
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Generally, lenders figure that the buyer shouldn't pay more than 28% of gross income for PITI, or 36% for both PITI and monthly long-term debts such as car payments, credit card payments, school loan payments, child support and alimony payments. |
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The larger the down payment, the less you need to borrow, which means a lower monthly 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 other sources that you may not have considered. Talk with your lender about acceptable down payment sources. |
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Conventional loans require a down payment as low as 0-5% of the purchase price of the home. You will be required to buy private mortgage insurance (PMI) with a down payment of less than 20% or in special higher risk situations. This insurance protects the lender in case of default and allows the lender to approve a larger mortgage amount than would otherwise be approved. |
There are multitudes of financing options. You can go to mortgage bankers, savings and loans, or commercial banks. There are conventional mortgage, adjustable rate mortgages, balloon mortgages and assumable mortgages. Mortgages are available from the Federal Housing Administration, Veterans Administration and Iowa Finance Authority.
Finding the Right Home |
The search for your dream home begins in your present home. By asking yourself key questions about what you like in your present home, you'll save time in the house-hunting process.
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What styles of home do you like - two stories, ranch, and split-level, or something else? |
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What size of home do you need - number of bedrooms, baths? |
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What are your priorities in home features - garage, gourmet kitchen, fireplace, first-floor family room, formal dining room or other feature? |
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What natural features outside the home are most significant to you - woods, hills, streams, lakes, others? |
Choosing
Your Home
Texas
Real Estate Group will help you find the right home through the use of the HAR Multiple
Listing Services (MLS). This exclusive, computerized real estate information
system allows you to look at homes on the market, inside and out.
Many people "decide with emotion and justify with facts." Your new
home has to feel right, but it has to work right, too. You can evaluate many of
the physical features yourself by systematically looking for certain details,
outside, inside and throughout the house.
Structural
and Mechanical Systems
Inspect the quality of materials and craftsmanship.
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Are exposed beams and joists in good condition? |
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Do basement walls have any large cracks that may indicate a shifting foundation? |
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Are there any mildew stains that indicate dampness or flooding? |
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If the basement is not heated, is the ceiling insulated? Is the attic well insulated? |
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Is there any evidence of water damage from a leaky roof? |
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Are floors springy or are they even and solid? |
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Are walls (especially at door frames and windows) free from large cracks? |
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Do all doors and windows work smoothly? Are bathroom fixtures in good condition? |
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Does the faucet's water flow remain steady when toilets are flushed? |
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Does water drain well? |
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Are there enough well placed electrical outlets in the room? |
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Does the service to the house match its electrical needs? |
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Is the capacity and recovery time of the water heater adequate for your family? |
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Does the water heater show signs of rust? |
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Do kitchen appliances seem to be in good condition (if included in the sale)? |
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Will your appliances (if you're bringing them with you) fit in the present space? |
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Do the furnace and/or air-conditioning unit(s) appear to be well-serviced? |
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Is the fan quiet? |
Outside
details
Be very observant as you look around
outside the house.
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Is the outdoor lighting adequate? |
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Are the sidewalks and driveway in good condition? |
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Will water drain off of the sidewalks and driveway? |
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Are there any noticeable sags or dips in the roof? |
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Are the shingles in good condition? |
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Are the gutters in good condition, with tight seams and downspouts that point away from the house? |
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Do the foundation walls have any cracks larger than 14-inch wide? |
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Is the house's exterior surface in good condition? |
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Are there cracks where materials meet at two walls or at windows and walls? |
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Do windows, doors and the chimney sit square and plumb? |
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Do outdoor electrical outlets have ground fault current interrupters to prevent shock? |
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Is the lot sloped for proper drainage? |
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Are there low spots near the house? |
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Does the landscaping appear healthy? |
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Are large trees at least 30 feet from the house? |
Inside
details
Make a sketch of the floor plan.
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How many finished/unfinished rooms and bathrooms are on each floor? |
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Does the main entry lead people directly to the living room or make them wonder which way to go? |
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Are eating areas (including any located outdoors) easily accessible from the kitchen? |
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Does traffic through the kitchen flow outside of the work area? |
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Are the stove, sink and refrigerator arranged in an efficient working layout? |
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Are there built-in appliances like a dishwasher, garbage disposal or trash compactor? |
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Do open appliance doors block doorways, cabinets or each other? |
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Is there adequate counter and cupboard space? |
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Are bathrooms accessible without having to cross a bedroom or other living space? |
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Is there adequate counter and storage space in the bathroom? |
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Do bedrooms have two uninterrupted wall surfaces for easy furniture arrangement? |
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Is there adequate closet/storage space? |
A professional housing inspector can make
sure the house and major mechanical systems are in sound condition. An
inspector's report can help you make an informed decision and is well worth the
cost.
Choosing a Neighborhood
In many ways, choosing a house is easier than choosing a neighborhood. The
neighborhood determines the value of the house. An old real estate maxim says
there are three criteria that determine a property's market value:
"location, location, location." The fact is that two identical houses
built across town from each other can bring a sale price thousands of dollars
apart. Your sales associate can give you information about market values of
houses in various locations. But you must research to determine the right
neighborhood for you.
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What are your preferences? Consider distance from work, shopping, schools, public transportation and recreation. |
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When
you drive around a neighborhood, consider the overall impression |
While you will form an overall impression by driving by, walking around and talking with other residents in the neighborhood, review the zoning or covenants. These impacts such things as allowable commercial and industrial uses, on street parking availability, and the styles of houses that can be built in the future.
Six
Simple Things You Can Do to Ensure a Smooth Home Purchase
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1. Check your credit.
Before you apply for a home loan, regardless of your credit, it's a smart idea
to obtain a copy of your credit report from the three major credit bureaus and
review the information. If there are errors or things that need to be addressed,
it's easier to address them before you have found a house, than after you have
found a house and are trying to close your loan. If you know that there are a
few blemishes on your credit, let your lender know what they are, why they are
there, and why you are a still good credit risk. Lenders look at your credit to
determine how likely you will pay back the loan. If you had extenuating
circumstances - like a loss of a job or medical bills - let them know so that
they understand that it is not likely to happen again in the future.
2. Get approved before you buy.
An approval means that a lender has reviewed your credit history, verified your
assets and employment, and has approved your loan before you have found a home
to purchase. As long as the home appraises for at least the purchase price, the
loan should close. Getting approved also gives you an advantage over other
buyers. Your firm approval makes it easier for you to negotiate on the price of
a home, than a person who is not approved or is pre-qualified. While getting
pre-qualified may sound official, it is really just getting an idea of what you
can afford. Its having a person plug in a few numbers that you give them -
your monthly income and your monthly debt - and getting an approximate payment
calculated. From the payment, the calculator can approximate the house price
range that you can afford. No information is verified. Because your assets,
income or credit is not verified, a pre-qualification has little value when
purchasing a home.
3. Find a great realtor. Texas Real Estate Group will negotiate the best price or contingencies for you.
4. Learn about the neighborhood.
Often times the house you find may be in a neighborhood that you're not familiar
with, which is ok. It just means that you'll have to do a little more research.
If you find a house that you like, ask for a list of the neighborhood properties
that sold in the last year. How does your home rank? Is it at the top of the
price range? If so, it might be hard to resell. Is it average or on the low end?
If so, great - as the other home prices go up in value, they will pull your
home's value up as well. Check out the schools - are they sought after? A good
school district means your neighborhood will always be valued by families which
is a great reassurance to purchase, not to mention the value-add if you have
school-age children. Next, contact the police station and obtain crime
statistics? Are they acceptable to you? Sometimes, if they won't give them to
you, it could be a cause for alarm. Talk to the neighbors. The more people you
talk to, the better sense you will get of who makes up the neighborhood and how
they will effect your time spent in it. Check out the location of the shopping,
police and fire stations, schools, and air traffic overhead. These are all
things that might affect your property value or quality of your life.
5. Protect Yourself.
Ask your Realtor for a copy of the documents you will be asked to sign if you
decide to buy the house. Read them ahead of time so that you'll understand the
questions that you will be asked, the things you need to know, and the decisions
you will need to make.
6. Have reasonable expectations.
There is a lot of money at stake. No house is perfect. Understanding and
remembering these two statements will help diffuse the negotiation stage, the
inspection stage and the closing stage. Emotions are high for both buyers and
sellers. - The seller may have loving memories and years of sweat equity in the
house. Maybe they are being relocated and don't want to go. Understanding their
motivations for selling will help you appreciate their situation and predicament
during these emotional times. There is a lot of money at stake for all the
parties involved (and that includes the realtors) - Just remember that market
value (the value of a home) is the price that a willing buyer and a willing
seller can agree to. If you cannot agree on a price, ask yourself: Is there
something you missed? Are there comparables that support the price that they
want? Are there motivations that might factor into the price they are demanding?
In the end, does it matter? What is the house worth to you today and what do you
think you can reasonably sell it for based on the amount of time you plan to
spend in it? Think about the answers to those questions before you make your
move. No house is perfect - Always get an inspection. It might be a few hundred
dollars, but it's worth it. It's the inspector's job to find any problems with
the house that could cost you thousands to repair down the road. Some inspectors
have a tendency to over play the importance of their role and the items that
they find. Get objective opinions that you trust before making a decision on an
inspection report. Likewise, if an inspector says a foundation is cracked but
its nothing to worry about - get a second opinion. Ask a handyman for an idea of
how much repairs will cost and how complicated they are. The home buying process
is an emotional, complex and time-consuming process, but it is worth it. Nothing
compares to owning your own home in a neighborhood that you chose.
Negotiating The Purchase |
Writing the Offer
When you've selected the house you want to buy, your next step is to submit a
signed real estate offer to purchase. Texas Real Estate Group
will take you through a step-by-step process to make the purchase.
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You know the seller's asking price, but you need to decide how much you'll offer. Consider factors like the length of time the house has been on the market, reasonableness of the price, availability of financing and other costs. |
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Decide how much earnest money to offer. Determine what happens to this deposit. Usually, a third party holds it until the sale is closed or the contract is broken. When the sale is closed, it is applied to the down payment or closing costs. But if you fail to buy the house after the seller has accepted your offer, the seller has the right to keep this earnest money. Decide the type of deed you want. You'll most likely specify that the seller convey the property with a general warranty deed that transfers ownership rights (title) to you. |
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Specify your desired closing date and possession date. Allow yourself enough time to obtain financing. |
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You may want to include a contingency plan for closing and occupancy in case you can't secure possession on the agreed date. This may include provisions such as a daily rent-back agreement for "post-settlement occupancy" by the seller. |
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Decide what items you want to buy with the house. Items often specified in the offer to buy include appliances, light fixtures, chandeliers, window coverings and swing sets. |
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Determine what special provisions should be included for items such as property taxes, hazard insurance and utility bills. |
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Require the seller to conduct a title search to prove the title is clear. The title should show no substantial claims or liens against the property. |
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Determine if you want the seller to provide a homeowner's warranty on the property. |
Presenting
the Offer
Lora Shreve will present the offer to the seller or the seller's agent. The
seller will accept, reject or counter your offer with changes in the terms. You
may either sign it as it is showing your agreement, or make a counteroffer.
When both the seller and buyer agree to the terms and sign the document, it
becomes a valid contract.
Obtaining Financing |
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Once you learn the seller has accepted
your offer, your key job is to obtain financing. If you have already been
pre-approved, you're well on your way to having all the needed information
and documentation organized. Here's a list of information you will need to
provide for most loan applications. 10
Things Most Lenders Request
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With this information, the lender will follow these steps to process your application:
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Verify the facts. |
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Request and review your credit report. |
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Make a property appraisal. |
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Review your application. |
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Determine whether to make the loan. |
Things You Should Ask the Lender
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What types of mortgage loans does the financial institution offer? |
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Is the mortgage open-ended? |
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Can you borrow up to the amount of principal you've paid to make home improvements? |
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What is the interest rate? |
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If the rate drops, what is the cost to refinance at a lower interest rate? |
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Will mortgage insurance be required for loans other than FHA-insured or VA-guaranteed mortgages? |
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How much principal must be paid before the insurance requirement is dropped? |
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What are the premiums and are the premiums refundable if you prepay the mortgage? |
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What reserves, such as those for property taxes or hazard insurance, are required? |
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How long must you pay into these reserves? |
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At some point, will you pay these costs directly? |
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What fees will be charged at closing, including points, loan origination, abstracts, attorney's fees, appraisals, termite inspections reports or credit reports? |
Within three days of applying for the loan,
your lender should issue you a good faith estimate of the fees charged for
closing. This estimate may not include deposits for hazard insurance or property
taxes.
What to Expect
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Loan origination fees are a percentage of the loan that covers the lender's administrative costs. The loan discount, referred to as points (with each point equaling 1% of the loan), is extra interest paid to the lender to make up the difference between market interest and the interest of the loan. |
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Survey, appraisal or inspection charges that the lender incurs to establish the value and condition of the house. |
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Assumption or transfer fees on assumable mortgages. |
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Charges to title/abstract searches, and recording and transfer charges. |
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Mortgage interest, the first year's hazard insurance and the first year's mortgage insurance (if required) that are paid to the lender in advance. |
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Reserved deposits that are used by the lender to pay for hazard insurance, property taxes and mortgage insurance are also paid at closing. |
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Other fees may include a variety of services, such as document preparation, notary services, handling the schedule and warranties. |
Closing
Details
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Inspections
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Buyer's Loan Processing
If the buyer is financing the purchase of your house, the process will typically
take 30 to 60 days. On the chance that a buyer's financing will not be given
final approval, you should keep the house in good "showing" condition.
Your Property Title
As part of the contract process, you must prove to the buyer that you have a
clear title on the house - that you own the property, and that there are no
legal claims against it. Proof of title is provided by:
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The abstract of title being continued and certified by the abstractor as complete and accurate. |
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The attorney representing the buyer and/or financial institution then searches the title and issues an opinion that the title is clear. |
Your Details
You sales associate or attorney can help you gather the paperwork that the
contract requires. Some of the details you'll probably need to handle include:
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Notifying your lender that you will be paying off the mortgage and asking for a statement of what you owe. Your outstanding balance will be subtracted from the amount you receive from the seller. |
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Having any fix-up work done according to the contract so that final inspections may take place. |
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Gathering all warranties and instruction books for your home's appliances or major systems to give to the buyer. |
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Once you have a closing date established, notifying the utility, telephone, water and other services to advise them on your final billing date. |
Buyer's Final Inspection
A walk-through inspection several days prior to settlement allows the buyer to
determine if conditions of the contract are satisfied. The buyer should have
inspected and noted any defects during the contract negotiation and prior to
signing the sales agreement. It is up to the buyer to perform the inspection.
The selling and/or the listing agent should accompany the buyer. The seller may
or may not be present, but should make sure that utilities are on so that
equipment can be operated.
Signing Papers and Passing Keys
At the settlement (closing), the home seller should bring all warranties on
equipment (or leave them in an obvious place in the house) and instructions on
equipment maintenance or operation. Be sure to bring all keys and electric door
openers.
Texas
Real Estate Group will explain the settlement sheets to you. These outline the closing
costs to you. Typical costs for the seller include:
State deed transfer tax
Termite inspection, if applicable ($60-$70) VA or FHA loans
Abstracting costs ($250 - $350)
Recording Fee ($40)
Mortgage balance pay-off
Interest on the mortgage up to the date the mortgage is paid-off
The real estate agent's commission
Pro-rated taxes and homeowner's association dues, if applicable
Homeowner's warranty
Well/Septic inspection ($70-$150), if applicable
Deed preparation ($50-$70)
If property or homeowner's insurance have been in escrow with your lender,
you'll receive any money that is accumulated in that escrow account for bills
not yet due. You'll actually receive these funds at or after settlement.
The seller, the buyer and the agents receive a copy of the settlement sheets.
The listing broker's closing department will actually disburse money after all
the funds are in hand, the new lender has reviewed the papers, the title has
been examined and the deed recorded.
Congratulations!
