Finances & Buying a House

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Finances and buying a house

If you're ready to buy a home, you need to get your finances in order first.

• Mortgage
• Home equity loan

Mortgage Rates

30 yr fixed	3.75%
15 yr fixed	2.90%
5/1 ARM	2.68%
30 yr refi	3.74%
15 yr refi	2.89%

For most people, buying a house involves a double financial whammy.

First you have to assemble a pile of cash for the down payment and closing costs. Then you must convince a bank to lend you an even more staggering sum - generally 80% or more of the purchase price.

So your first step, even before you start the actual hunt for a property, should be to get your financial house in order.

Start with your credit

Credit reports are kept by the three major credit agencies, Experian, Equifax, and TransUnion. Among other things, they show whether you are habitually late with payments and whether you have run into serious credit problems in the past.

A credit score is a number calculated from a formula created by Fair Isaac based on the information in your credit report. You have three different credit scores, one for each of your credit reports.

A low credit score may hurt your chances for getting the best interest rate, or getting financing at all. So get a copy of your reports and know your credit scores. Try Fair Isaac'sMyFICO.com for reports and scores from Equifax and TransUnion. Experian scores and reports can be accessed from experian.com.

Errors are not uncommon. If you find any, you must contact the agencies directly to correct them, which can take two or three months to resolve. If the report is accurate but shows past problems, be prepared to explain them to a loan officer.

Know what you can afford

Next, you need to determine how much house you can afford. You can start with one of the Web's many calculators. For a more accurate figure, ask to be pre-approved by a lender, who will look at your income, debt and credit to determine the kind of loan that's in your league.

The rule of thumb here is to aim for a home that costs about two-and-a-half times your gross annual salary. If you have significant credit card debt or other financial obligations like alimony or even an expensive hobby, then you may need to set your sights lower.

Another rule of thumb: All your monthly home payments should not exceed 36% of your gross monthly income.

The size of your down payment will also determine how much you can afford.

Line up cash

If you haven't already, you'll need to come up with cash for your down payment and closing costs. Lenders like to see 20% of the home's price as a down payment. If you can put down more than that, the lender may be willing to approve a larger loan. If you have less, you'll need to find loans that can accommodate you.

Various private and public agencies - including Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Department of Veterans Affairs - provide low down payment mortgages through banks and mortgage companies. If you qualify, it's possible to pay as little as 3% up front. For more, check out Fanniemae.com or Freddiemac.com.

A warning: With a down payment under 20%, you will probably wind up having to pay for private mortgage insurance, a safety net protecting the bank in case you fail to make payments. PMI adds about 0.5% of the total loan amount to your mortgage payments for the year. So if you finance $200,000, your PMI will cost $1,000 annually.

Once you've considered the down payment, make sure you've got enough to cover fees and closing costs. These may include the appraisal fee, loan fees, attorney's fees, inspection fees, and the cost of a title search. They can easily add up to more than $10,000 - and often run to 5% of the mortgage amount.

If your available cash doesn't cover your needs, you have several options. First-time homebuyers can withdraw up to $10,000 without penalty from an Individual Retirement Account, if you have one, though you must pay taxes on the amount. You can also receive a cash gift of up to $13,000 a year (the limit for 2009) from each of your parents without triggering a gift tax.

Gift taxes are paid by the donor, not the recipient. (In fact, if your and your spouse's parents are both well-heeled, they can give you a total of $104,000 in one year - $13,000 from each of the four parents to each of you.)

Check on whether your employer can help; some big companies will chip in on the down payment or help you get a low-interest loan from selected lenders. You can also tap a 401(k) or similar retirement plan for a loan from yourself.

http://money.cnn.com/magazines/moneymag/money101/lesson8/index3.htm

How to Get an Offer Accepted in Today’s Market 
Our current inventory of homes is very low.  In most cases, within just a day or two of listing, there are multiple offers received, and the window for submitting an offer slams shut.  The first time or two, Buyers think it’s a fluke and will likely submit a list price or lower than list price offer.  However, after a few rejections, this can become frustrating.

So what is happening with offers?  Sellers are looking for the highest “net” offer.  This means the buyer who does not ask the seller to pay for closing costs, a home warranty, or repairs, and offers over list price is in a better position to have their offer accepted.  Buyers willing to pay HOA & tax transfer fees, will increase their “net” offer, making it more attractive to a Seller.  (Remember, you can always purchase a home warranty, paying for it yourself, instead of asking a Seller to pay for it.)

What else helps you get an offer accepted? CASH!  If you have to finance, sellers are now asking that you waive your appraisal contingency.  This means that you will pay any difference between the appraised value (which the bank will use to calculate your loan) and the agreed sales price.  For example, if you offer $175,000 for a home, and it appraises for only $150,000, you would need to pay, out of pocket, $25,000 in addition to whatever down payment is required by your lender.  That’s a pretty tough idea to accept, but Buyers are doing just that every day.  Why?  Because otherwise their offers are getting rejected in favor of higher net offers.  Buyers who already own a home, might consider taking equity out of their current home in order to make a cash offer on a second home.  

Remember, “terms” matter as much as price.  One of the reasons cash offers are so attractive to Sellers is that they can typically close within a matter of days, versus the month or more that a lender requires.  They also know that a “pre-approval” is not the same as a fully approved Buyer.  Since a deal can be cancelled, up to the very last minute, by a loan denial, Sellers will look at mortgaged offers as a “possible sale”, not a definite sale.  Therefore, if you need to use a mortgage, it is best to have your lenderfully approve you prior to submitting an offer.  This will make you less of a risk to the Seller.

Also know that various loans are not equal in the eyes of a Seller.  In order of preference, Sellers tend to favor conventional loans most, followed by FHA, and lastly VA.  What’s the difference?  Honestly, there is more of a difference than you might think.  Let’s take a look at what your loan means to a Seller:

Conventional Loan:  Usually means the Buyer has more cash on hand, and will be better able to waive any appraisal contingencies.  No rules mandated about who pays for what as far as fees are concerned.  Does not require a stringent inspection of the property by the lender.  It is possible for a conventional loan to close in as little as 10 days, butONLY if you have previously submitted everything your lender requires, and have gotten underwritten approval as a Buyer.  Note:  Not all lenders can close this quickly, however I do have a few that can, indeed, close in 10 days.

FHA Loan:  Often means a first time Buyer, who can be caught off guard by the fees involved in buying a home.  Some Buyers have gotten all the way to a final signing, only to discover that they do not have the money, required to be paid by them directly, in order to close.  An FHA loan also requires an inspection, which can turn up items that the lender demands be repaired PRIOR to closing.  These things can be as simple as installing water heater straps, or as complicated as requiring a new AC system.  Since cash buyers are usually willing to purchase “as-is”, Sellers often refuse to make any costly repairs in order to please a lender, which results in the Buyer not being able to get a loan on the property.

VA Loan:  Requires a very thorough inspection, and requires all repairs be made & re-inspected before the loan can be approved.  The VA also mandates which fees can be charged to the Buyer, all other fees, regardless of who traditionally pays, are charged to the Seller; this is the biggest stumbling block to getting a VA backed offer accepted.  A VA loan can also take a bit longer to close.  Very few Sellers right now will even consider a loan that involves a VA loan; as they are almost guaranteed to get an offer that would provide a higher net and a faster close than a  VA backed offer.

When you lose an offer on a home that you really want, it’s easy to think that the listing agent has a special relationship with the buyer’s agent, or that there was some sort of side deal in place.  But that’s simply not true.  The truth is, Sellers are receiving above list, high net offers, often in cash, on just about every home out there.  To have an offer accepted in today’s market, you need to be competitive.
Until a deal actually closes, we have no way of knowing the final sales price, however, once the sale closes, if we look at the records, we  almost always see that the winning bid was, honestly, better than the offer that was rejected.

Sometimes buyers lose a deal over a few hundred dollars, sometimes a few thousand, and sometimes the winning bid might actually be lower, but the “terms” were more attractive to the Seller.  Buyers often tell me “I would have beaten that offer!”  But hindsight is 20/20; there is simply no way to know what other offers are on the table, so there is no way to “beat” another offer.  Especially, since Sellers are receiving several offers, they are often not even bothering to send out multiple counter offers; they are simply selecting the best offer they received, and if countering, doing so only with that Buyer.  The best advice?  If you see a house that you really want, go all in and offer what you can truly afford with no regrets afterwards if your offer wasn't accepted. 

We don't expect any change in upcoming inventory over the next few months, in fact with so many Buyers in the market right now, inventory may get even tighter.  It's only going to get harder to find a home.  So when you see a home you love, be prepared to write your offer immediately, and make your first offer your "highest and best" offer, as you will likely not get a chance to adjust your offer.