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Buyer Guide to Buying

Before You Buy
Before you actively look at homes to buy, it's necessary to know how much you can qualify for. Use mortgage calculators to determine how much you can buy with your down payment and closing cost money and what your monthly payments will be.

Know Your Credit Worthiness
Look at your credit report before you go to a lender. It is not uncommon to find problems with reports, especially if you have a common last name.

Get Pre-Approved
After you see your credit report and any problems are cleared up, get pre-approved with a lender. Take the steps necessary to get a letter from the lender stating you are "pre-approved" for a loan in a specific price range. It's important to have this letter before you make a contract offer to buy real estate. Once your pre-approved, you know what price range of homes you should be looking at.

What Kind of House is Right?
Determine the specifics you want or need in a home.

  • What are your day to day and future needs?
  • Do you enjoy swinging a hammer?
  • Older houses have great charm, but may need updating.
  • New homes offer the latest energy efficiency and design features.
  • Larger lots can give room for additions and swimming pools.
  • A fixer upper can dramatically increase in worth.
  • A PUD may have private recreational facilities such as a pool and play parks.
  • A condo or town-house will relieve you of yard work and exterior maintenance.

Sit down with your real estate agent and make up a wants and needs list. Knowing your price range, your agent can determine in what neighborhoods or towns to start looking. You may find that you are limited to where you look based on your situation.

There is no sense in wasting your or your agent's time in areas out of your price range.

  • Wants and Needs
  • Price range
  • Building style/design
  • New construction
  • Remodeled
  • Fixer upper
  • Minimum # bedrooms
  • Bathrooms
  • Family room
  • Fire place
  • Office/den
  • Hardwood floors
  • Swimming pool / Spa
  • In-law quarters
  • Workshop
  • Central air conditioning
  • Parking facilities
  • Yard size
  • School district
  • Work locations
  • Special zoning or location

With a list of houses that you can afford to buy, drive-by them and check out the surrounding neighborhood. Next make an appointment with your real estate agent to view the interior of the ones you are interested in.
After you have narrowed your selection to few houses it is important to visit them at different times of the day. Visit them during the morning commute time. If you visit only during the middle of the day, you might not notice if the street in front of the home is used as a minor thoroughfare or a shortcut. This is also a good time to find out how you emerge from you residential area into traffic on a thoroughfare or how long it takes for freeway access. Go back after dark and walk around the block. You might notice that headlights from approaching traffic shine into the home or hear sounds from a nearby night club or park that you were not aware of.

After previewing a number of homes, you will want to preview some a second time. This is the time to make measurements, ask questions and make a closer self-inspection. When you want to make an offer, ask your agent for sales comps to arrive at an offering price. A "seller's market" or "buyer's market" can have big effect on how much to offer. There is no sense in making a low offer on a well priced home in a seller's market.

A properly written contract will allow a buyer a number of outs if certain items are not met or approved. Get a copy of a typical real estate contract prior to making an offer and have your agent go over it with you.

Buying a home, you are entering into a legally binding contract that must be clearly understood both in terms of rights and obligations. Today's real estate contracts are quite lengthy. Agents are trained to understand and explain the contract along with the reports that are involved in a real estate transaction. Have your agent give you a sample contract to read over prior to you making your first offer. Get explanations to areas you don't understand. This will take a lot of pressure off you during the negotiation period. When it comes to contracts, put everything in writing and fill in all the blanks. Wording should be specific and carefully chosen. When it comes to who pays for what or if it ever comes to litigation, it's what is in writing that counts.

Presenting the Offer
When you find the right home, move on it quickly. Have your agent run "comps" on similar sales in the neighborhood. Use this information to base your initial offer. Before your agent writes up the offer, he should attempt to find the sellers motivation. Where are they moving? Why are they selling? How long has the home been on the market? Do they have an offer on another house?

The agent will want to consider other aspects before writing up an intelligent offer. Is the property still for sale or are there offers pending? Is it a probate or foreclosure sale? How much do the sellers owe, are they willing to carry back a loan? Who pays for certain transfer fees may be decided by local custom. Different scenarios will dictate how a contract will be written up and presented. Be Realistic with Your Offer Negotiation time can be very emotional. If you give a lowball offer, the seller may reject it and any other offers.

Your agent will present your offer with all the reasoning behind it.
Your agent will be more effective if you are not present at the negotiating table. Let them do their job. They know more about the details of the offer and can present your offer in a positive light. When an agent presents an offer on your behalf, often there is another agent involved, the listing agent. If your offer is reasonable, expect 1 or 2 counter offers. You will be signing many papers during this time. Contract, counter offers, disclosures, addendums, reports and so on. Make sure to get a copy of everything you sign. You should have copies with the signatures of all those involved in the transactions. After the seller has accepted your offer, the process of escrow and closing begins. Inspections need to be ordered and scheduled in a timely manner. The loan process will begin and generate an equal amount of paperwork. This can be a very emotional and confusing time because of what is involved. The agent will follow the transaction through the closing and will walk you through the steps and keep you informed.

Be patient, realistic and educated about the process.
The typical real estate transaction takes 30-45 days to close after a contract is ratified.

Closing Costs

Down Payment
Most lenders require at least 10% of the purchase price, though new programs are available for 3%-5% down. 100% financing can be found, but you credit must be excellent and PMI insurance will be required.

Loan Origination Fee
A lender's fee for establishing a new loan. Government regulations allow only 1% origination fee on FHA or VA loans. Conventional loan fees can vary from -1 to 3+ points, plus other costs. A point is 1% of the loan.

Appraisal Fee
Fee paid to obtain an estimate of market value upon which the lender will base the loan amount. The cost is about $300-$500. Non refundable.

Credit Report
An evaluation of the buyer's credit habits made by a credit bureau for the lender.
The cost is $50-$60. Non refundable.

Tax Service Fee
A charge of approximately $75 is made by a tax service company to verify to the lender that the taxes have actually been paid when due or are due to be paid by borrower or mortgage company if impounding.

Assumption Fee
Fee of approximately $250 up to 1% of the loan balance is charged by the existing lender for the privilege of assuming the existing loan.

Pest Inspection Fee
Fees of $75 - $175 is charged by termite companies for inspecting property for damage done by wood destroying organisms and dry rot.
It is customary for the seller to pay for Section 1 and the buyer for Section 2 work.

Other Inspection Fees
Other inspections the buyer may choose to have done are: property inspections that usually cover foundation, electrical, plumbing and overall construction at a cost of $300-$400. Roof inspections cost $75-$125. Geological reports cover subject's site in relation to fault and slide zones, costing about $100. Septic $200-$400. Radon $50-$100. Asbestos $75-$125.

Alta Title Insurance
This is an extended policy with more specific coverage than the CLTA standard policy. It covers unrecorded liens, is based on loan amount only and is required by almost all lenders. The cost is obtained from a rate chart and is based on the loan amount.

City Transfer Tax
A municipal tax imposed within the corporate limits of some cities.
The cost is $3.30 per $1,000 of selling price, usually negotiable between buyer and seller, but custom varies between countries.
The VA does not allow the veteran buyer to pay any portion of this cost.

Miscellaneous Costs & Fees
An estimate of $150 should be adequate to cover minor items as notary, recording documents, endorsements, etc. as well as allowing for variations from these other estimates.

Hazard Insurance Reserve
Two month's premium is collected for the impound account if required.
The buyer will need to either provide or pay for coverage for the 1st year.

Prepaid Interest
Interest must be paid from COE (close of escrow) to 30 days prior to the first regular mortgage payment. An estimate of one months interest should suffice.

Mortgage Insurance
Mortgage Insurance is required on all conventional loans greater than 80%. The cost may range from 1/2% to 1% per year and 14 months premium is collected in advance. This is coverage for the lender in case of default.

Tax Impounds
If the new loan is going to have an impound account, the lender will require from 2-10 months taxes to be deposited, depending on the time of year. Note: if taxes are prorated, buyer's total charge for taxes should equal about six month's taxes.

Escrow Fee
These fees range from $750-$2500, depending on the sales price. In some counties its customarily paid by the seller, in other counties the buyer pays, while in others it may be customarily split. Remember though, everything is negotiable.

Negotiating Fees
The above fees are typical costs when buying real estate in California counties. Most of the fees are considered buyer's non-recurring closing costs. Some of the fees are fixed while others are negotiable. Your real estate agent can negotiate with the sellers to pay some or most of these costs, saving you thousands of dollars in closing costs. Ask your real estate agent and loan agent to provide estimated closing costs of buying a home before looking at homes.

Understand the Market
Understanding the market is one of the most important steps to take before buying a home. In a seller's market, listed properties will often be on the market for 45 days or less before sale. These properties will often sell at, near, and sometimes even above asking price. In general, area property prices will be rising. In a buyer's market, homes will remain on the market for periods often exceeding two months, and the sale price is usually noticeably less than the asking price. In general, area property prices will be falling.

To help get an idea of the market in your area, it is important to look at the recent comparable sales, better known as "comps." Comps are properties within the same general area of each other with similar attributes.

Mortgage Types
Adjustable - An Adjustable Rate Mortgage, or ARM, is a type of mortgage in which the interest rate is adjusted up or down, in accordance with current interest rate levels. The interest rates are tied to an economic index outside of your banks control, such as the Treasury bill rate. Your monthly principal and interest payment will fluctuate with these rate changes. Initially payments will be less than with a fixed mortgage, making this type of mortgage attractive to short-term buyers. Note: Inquire on the "cap", or maximum interest level your mortgage can reach, since it is possible for rates to raise significantly during the term of your mortgage.

Fixed - a fixed rate mortgage, on the other hand, uses both a fixed term (length of time) and fixed interest rate. At the start of the mortgage the rate and term are determined, and as a result the monthly amount for principal and interest payments remain constant for the duration of the mortgage. Fixed rate loans are more attractive to home buyers who plan on spending a long time in their home, or expect no major change in income.

Assumable - Sometimes homebuyers can find a loan which is "assumable." With an assumable loan, the current sellers lender is willing to transfer the existing loan to you, either at the previous interest rate or the current interest rate. Assumable loans are attractive to buyers because they usually require less paper work and less time.

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