Buying Process

• Make a Game Plan
• Assess Your Finances
• About Mortgages
• Choose a Realtor
• Choose A Neighborhood
• Choose a Home

Make A Game Plan

• Check Your Credit Rating
• Explore mortgage pre-qualification and pre-approval
• Become an Educated Buyer: Research Neighborhoods, Read Ads and Visit Open Houses
• Make a wish list to learn what you need, want and don’t want in a new home

Check Your Credit Rating

Even if you’re sure you have excellent credit, it’s wise to double-check at the outset. Straightening out any errors or disputed items now will avoid troublesome holdups down the road when you’re waiting for mortgage approval. You may see disputed items, in addition to errors caused by a faulty social security number, a name similar to yours, or a court ordered judgment you paid off that hasn’t been cleared from the public records. If such items appear, write a letter to the appropriate credit bureau. Credit bureaus are required to help you straighten things out in a reasonable time (usually 30 days).

 

TIP: Make sure that any outdated derogatory entries are deleted from your credit file. Adverse credit information is not supposed to be reported or included on your credit report after seven years (except bankruptcy information, which can be reported up to ten years).

 

TIP: Officially cancel inactive credit cards. If you have an inactive credit card with a $5,000 limit, even though you owe nothing on it, some mortgage lenders will consider that a potential future debt. Too many inactive credit cards with significant credit limits could keep you from obtaining a mortgage loan. Don’t just cut up your extra cards; officially cancel them, and do it now so there will be time for the news to reach the credit bureaus.

 

TIP: Hold off on making any major credit card or car purchases while you’re waiting to apply for a mortgage. Monthly payments you’re obligated to pay will be counted against you, and reduce the amount of the mortgage loan you’ll be offered. Even if you’ve been pre-approved for a mortgage, that approval is subject to last-minute evaluation of your financial situation, and a spending spree for appliances, furniture and other goodies intended for your new home may wreck your chances for buying it.

 

Any reputable real estate broker will “pre-qualify” you for a mortgage before you start house-hunting. This process includes analyzing your income, assets and present debt to estimate what you may be able to afford on a house purchase. Mortgage brokers, or a lender’s own mortgage counselors can also calculate the same sort of informal estimate for you. Obtaining mortgage “pre-approval” is another thing entirely. It means that you have in hand a lender’s written commitment to put together a loan for you (subject only to the particular house you want to buy passing the lender’s appraisal). Pre-approval makes you a strong buyer, welcomed by sellers. With most other purchasers, sellers must tie the house up on a contract while waiting to see if the would-be buyer can really obtain financing. The down side is that you must pay application fees to cover the lender’s paperwork in verifying your employment, income, assets, debts and credit rating. If you later decide not to use that particular lender, you’d have to start all over again elsewhere – with no rebate. Pre-approval will also speed up the entire mortgage procedure once you’ve found the house you want. The only remaining question will be whether the house will “appraise” for enough to warrant the loan. [Back to top]

 

Become an Educated Buyer: Research Neighborhoods, Read Ads and Visit Open Houses

If you were changing cities, the standard advice used to be to subscribe to the local newspaper in the new town and start reading local news and classified ads to get a feeling for different neighborhoods. Although that’s still a good idea, you can simplify and streamline the house-hunting process by using the Internet to Find a Home, Find a REALTOR^® , and Find Related Services. For local moves, you have the advantage of driving around neighborhoods that interest you and looking at lawn signs. Particularly on weekends, you will see “Open House” postings. Don’t hesitate to walk in, even if you’re not ready to buy yet. Visiting open houses is an excellent way to familiarize yourself with the market and judge various real estate agents you may meet along the way, and it won’t put you under obligation to anyone. [Back to top] Your Wish List Making sure you end up with the right home involves figuring out exactly what features you need, want and don’t want in a home. Before starting your search, you should make a “wish list” to decide which features are absolutely essential, which are nice “extras” if you happen to find them, and which are completely undesirable. The more specific you can be about what you’re looking for from the outset, the more effective your home search will be. Also keep in mind, that in the end, every home purchase is a compromise. [Back to top]

 

There’s no point wasting time and energy house-hunting before you know what you can afford. So your next step is to assess your finances:

• Compare buying with renting;
• Learn about interest rates;
• Research closing costs;
• Learn what the lenders consider as income;
• Understand the impact of your present debt payments;
• Calculate the amount of your down payment
• Figure out how much you can actually afford.

 

Interest Rates and How They Change Interest rates are usually expressed as an annual percentage of the amount borrowed. If you borrowed $120,000 at 10% interest, you’d owe interest of $12,000 for the first year. With most mortgage plans you’d pay it at the rate of $1,000 a month. You would also send in something each month to reduce the principal debt you owe – and the next month you’d owe a bit less interest. When your grandparents bought their home (putting at least half the purchase price down, by the way), their interest rate was probably around 4 or 5%. Rates stayed the same for years at a time. Then in the years following World War II, things became more turbulent. As economic changes speeded up, rates began to change several times a year. By the l980s, lenders were setting new rates on mortgage loans as often as once a week – and they still do today. When inflation hit a high in the ’80s, some mortgage loans carried interest rates as high as 17% – and those who absolutely needed to buy, paid that much. Rates dropped gradually through the 1990s, and by 1998 had reached their lowest rates in decades. Heading toward the millenium, home buyers appear to have the most favorable conditions for mortgage borrowing since their grandparents’ days – and without 50% down payments either.[Back to top] Some closing costs you pay up-front when you apply for a mortgage loan. That includes money for a credit check on all applicants and an appraisal on the property. Keep in mind that even if you don’t eventually receive the loan, that money is not refundable. Other closing costs are possible and should be considered when evaluating your financial situation. These may include, but are not limited to:

1. Title insurance fee;
2. Survey charge;
3. Loan origination fee;
4. Attorney fees or escrow fees;
5. Document preparation fee;
6. Garbage or trash collection fees; and the big one
7. Points – up-front interest paid in return for a lower interest rate. Each point is one percent of the loan amount. Sometimes you can contract for the seller to pay your points. TIP: Consider closing costs when choosing one mortgage plan over another. The good news is that if your cash is limited, some mortgage plans allow the seller to pay some or all of your closing costs, such as title insurance, escrow fees, and points. Certain closing costs can sometimes be added to the amount of mortgage loan you’re receiving.[Back to top]

How much you’ll put down depends on the cash you have available and the amounts you’ll need for closing costs and prepaid property taxes and homeowners’ insurance. Mortgage plans have various down payment requirements and they can range from 0% down on a VA (Veterans Administration) loan to between 3 and 5% down on a FHA (Federal Housing Administration) loans to 20% down, the traditional amount for a conventional loan. In addition, special state programs for first-time home buyers may set different sums, which are usually lower than conventional financing.If you put less than 20% down on most loans, you’ll be asked to protect the lender by carrying private mortgage insurance (PMI). Carrying PMI ensures that the debt is repaid if you default on the loan. This adds approximately an extra half a percent onto the loan.FHA mortgages, in return for their low-down-payment requirements, also charge for mortgage insurance premiums (MIP).[Back to top]

Here’s how it works: With a 28/33 ratio, you’d be allowed to spend up to 28% of your gross monthly income for mortgage payments.The lender will then run a different calculation. This one is your loan payment and debt payments combined, which may not exceed 33% of your gross monthly income.To calculate exactly how much you may borrow, you also need an estimate of current interest rates.For Example: Suppose you had $1,000 a month for mortgage payment; at 7% that would let you borrow about $160,000 on a 30-year loan. At 6% the loan amount would be nearly $175,000. If your rate were 8%, the loan amount would be a bit less than $150,000.As part of this calculation, you also need to estimate and include the property taxes, homeowner’s insurance, and Homeowner Association fees (if applicable) you might need to pay, which are considered part of your monthly expense.[Back to top]

 

Shopping for the right loan is just as important as choosing the right house. Your challenge is to select the loan terms that are most favorable to your situation. In selecting the loan that’s right for you, you’ll need to understand:

• Basic components of a mortgage loan;
• Fixed-rate mortgages;
• Adjustable-rate mortgages;
• Government loans and programs;
• Balloon loans; and
• Other affordable housing loans.

The following are the basic components of a mortgage loan:

TIP: The length of your mortgage repayment period will directly affect your monthly mortgage payments. The most popular mortgage term is 30 years. By extending payment over 30 years, you keep your monthly housing costs low. If you can afford higher monthly payments, you can select a mortgage term that is shorter. There are 20-year, 15-year, and even 10-year fixed-rate mortgages available from most mortgage lenders. The longer your repayment period is, the lower your monthly payments will be, but the total interest you pay over the life of the loan will be more. TIP: Lenders often view mortgages with larger down payments as more secure because more of your own money is invested in the property. However, there are other loans that require as little as 3% to 5% of the purchase price for a down payment.

TIP: Sometimes you can negotiate to have the seller pay some of your closing costs. TIP: Usually, the longer you plan to stay in your home, the more sense it makes to pay discount points. The most important difference between a loan that conforms to Fannie Mae/Freddie Mac guidelines and one that doesn’t is its loan limit. Fannie Mae and Freddie Mac will purchase loans only up to a certain loan limit (currently $227,150, but will be $240,000 as of January 1, 1999). If your loan amount will be for more than the conforming loan limit, the interest rate on your mortgage may be higher or you may have slightly different underwriting requirements, particularly in regard to your required down payment amount. Check with your lender about this if you are taking out a large loan amount. TIP: Nonconforming loans are sometimes called jumbo loans. [Back to top] 30-Year Fixed-Rate: 20-Year Fixed-Rate: For those who want a lower interest rate and want to own their homes free of debt sooner, this shorter mortgage amortizes principal and interest over just 20 years, saving a considerable amount of total interest paid over the life of the loan. 15-Year Fixed-Rate: This shorter-term mortgage will save you a significant amount of interest over the life of the loan. By paying off the mortgage more quickly, you also build up equity in your home sooner. This may be important if you are approaching retirement or have other large expenses to cover, such as financing your children’s education. However, the monthly payments you make on a 15-year mortgage will cost you more than those you would make on a 30- or 20-year loan. [Back to top] ARMs are attractive because they may initially offer a lower interest rate than fixed-rate mortgages. Since the monthly payments on an ARM start out lower than those of a fixed-rate mortgage of the same amount, you can qualify for a larger loan. The chief drawback, of course, is that your monthly payments may increase when interest rates rise. You may want to consider an ARM if:

1. You are confident your income will rise enough in the coming years to comfortably handle any increase in payments;
2. You plan to move in a few years and therefore are not so concerned about possible interest rate increases; or

You need a lower initial rate to afford to buy the home you want. An ARM has two “caps” or limits on how large an interest rate increase is permitted. One cap sets the most that your interest rate can go up during each adjustment period, and the other cap sets the maximum total amount of all interest adjustments over the life of the loan. For example, a typical ARM that adjusts annually may have a yearly cap of 2%, meaning that the adjusted interest rate can never be more than 2% higher than the previous year. And such an ARM may have a lifetime rate cap of 6%, meaning that the interest rate on your loan will never be more than 6% over the original rate. So, if you are looking at an ARM with a current introductory rate of 5%, a lifetime cap of 6% tells you that the highest interest rate you could ever pay would be 11%. TIP: Before applying for an ARM, be sure you know how high your monthly payments could go – the “worst-case scenario.” Only you can determine if you would feel comfortable paying this interest rate sometime in the future. Your lender can tell you which ARMs offer a conversion feature that allows you to convert from an adjustable rate to a fixed rate at certain times during the life of your loan. One important thing to know when comparing ARMs is that the interest rate changes on an ARM are always tied to a financial index. A financial index is a published number or percentage, such as the average interest rate or yield on Treasury bills. The following are the most common types of ARMs: CD-Indexed ARMs (Certificate of Deposit): After an initial six-month period, the initial rate and payments adjust every six months. These ARMs typically come with a per-adjustment cap of 1% and a lifetime rate cap of 6%. Treasury-Indexed ARMs: These are tied to the weekly average yield of U.S. Treasury Securities adjusted to a constant maturity of six months, one year, or three years. Likewise, the interest rate on your ARM will adjust once every six months, once each year, or once every three years, depending on the schedule you choose. Per-adjustment caps and lifetime rate caps also vary. Cost of Funds-Indexed ARMs: Indexed to the actual costs that a particular group of institutions pays to borrow money, the most popular of this type is the COFi for the 11th Federal Home Loan Bank District. COFi ARMs can adjust every month, every six months, or every year, and the per-adjustment caps and lifetime rate caps vary. Initial Fixed-Period ARMs: As protection against rapid interest rate increases in the early years of your loan, interest rates for these ARMs don’t adjust until several years after you take out the loan. You can choose from three, five, seven, or 10-year fixed terms. At the end of your chosen fixed-rate period, your interest rate would adjust every year. Two-Step Mortgage^®: This special type of ARM provides the benefit of initial low rates with the stability of longer term financing because it adjusts only once – either at seven years or at five years. After that initial adjustment, the mortgage maintains a fixed rate for the remaining 23 or 25 years of a 30-year mortgage repayment term. For example, if your initial interest rate were 8%, you would pay that rate for the first seven (or five) years. Then, for the remaining 23 (or 25) years, you would pay an interest rate that is indexed to the value of the 10-year U.S. Treasury security on the adjustment date. (At the adjustment date, there is no additional refinancing cost, no forms to complete, and no re-qualification necessary.) This new rate can never be more than 6 percentage points higher than your old rate. There are no limits on how much lower the adjusted interest rate can be. [Back to top] Various types of government loans include: FHA Loans: With FHA insurance, you can purchase a home with a very low down payment (from 3% to 5% of the FHA appraisal value or the purchase price, whichever is lower). FHA mortgages have a maximum loan limit that varies depending on the average cost of housing in a given region. VA Loans: The VA guarantee allows qualified veterans to buy a house costing up to $203,000 with no down payment. Moreover, the qualification guidelines for VA loans are more flexible than those for either FHA or conventional loans. To determine whether you are eligible, check with your nearest regional VA office. RHS Loans: The Rural Housing Service, a branch of the U.S. Department of Agriculture, offers low-interest-rate homeownership loans with no down payment requirements to low and moderate-income persons who live in rural areas or small towns. State and Local Loan Programs: A number of states sponsor programs to help first-time home buyers qualify for mortgages. Local housing agencies also offer, in some areas, attractive loan terms, such as low down payments or low interest rates, to home buyers who meet specified income guidelines. Some state and local programs may also offer down payment and closing cost assistance. Check with your state housing authority. You can find the office nearest you online or look in the government “blue pages” of your phone book. [Back to top] The advantage they offer is an interest rate that is lower than that of a fully amortizing fixed-rate mortgage. For example, your initial interest rate may be 7.5%, and you would pay that for the first five, seven, or 10 years (depending on the term of your balloon loan). Then, your entire outstanding loan balance would be due to the lender or you might have to pay a fee to refinance your loan at the prevailing interest rate. Be sure to ask about all the conditions for a refinance option at the end of the balloon term. With some balloon mortgages, the lender doesn’t guarantee to extend the loan past the balloon date. If you don’t feel you will be able to meet all the refinance conditions or think the balloon term may be up before you are ready to move, this type of loan may not be appropriate for you. [Back to top] [Back to top]  

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• Who is a REALTOR®;
• Using an agent and the obligations that are owed to you
• How to evaluate an agent.

As a prerequisite to selling real estate, a person must be licensed by the state in which they work, either as an agent/salesperson or as a broker. Before a license is issued, minimum standards for education, examinations and experience, which are determined on a state by state basis, must be met. After receiving a real estate license, most agents go on to join their local board or association of REALTORS^® and the NATIONAL ASSOCIATION OF REALTORS^®, the world’s largest professional trade association. They can then call themselves REALTORS^®. The term “REALTOR^®” is a registered collective membership mark that identifies a real estate professional who is a member of the NATIONAL ASSOCIATION OF REALTORS^® and subscribes to its strict Code of Ethics (which in many cases goes beyond state law). In the Staten Island area, it is the REALTOR^® who shares information on the homes they are marketing, through a Multiple Listing Service (MLS). Working with a REALTOR^® who belongs to an MLS will give you access to the greatest number of homes. [Back to top]

1. Put the client’s interests above anyone else’s;
2. Keep the client’s information confidential;
3. Obey the client’s lawful instructions;
4. Report to the client anything that would be useful; and
5. Account to the client for any money involved. NOTE: A REALTOR^® is held to an even higher standard of conduct under the NAR’s Code of Ethics.In recent years, state laws have been passed setting up various duties for different types of agents. As you start working with a REALTOR^®, ask for a clear explanation of your state’s current regulations, so that you will know where you stand on these important matters. [Back to top]
   How to Evaluate an Agent
   In making your decision to work with an agent, there are certain questions you should ask when evaluating a potential agent.
   The first question you should ask is whether the agent is a REALTOR^® . You should then ask:
   1. Does the agent have an active real estate license in good standing? (to find this information, you can check with your state’s governing agency)
   2. Does the agent belong to the Multiple Listing Service (MLS) and/or a reliable online home buyer’s search service? (Multiple Listing Services are cooperative information networks of REALTORS^® that provide descriptions of most of the houses for sale in a particular region.)
   3. What real estate designations does the agent hold?
   4. Which party is he or she representing–you or the seller? The discussion is supposed to occur early on, at “first serious contact” with you. The agent should discuss your state’s particular definitions of agency, so you’ll know where you stand.
   5. In exchange for your commitment, how will the agent help you accomplish your goals?

Show you homes that meet your requirements and provide you with a list of the properties he or she is showing you? [Back to top]  

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• Considering local factors
• Using neighborhood strategies.

1. Quality of schools
2. Property values
3. Traffic
4. Crime rate
5. Future construction
6. Proximity to: Schools, Employment, Hospitals, Shops, Public transportation, Cultural Activities (museums, concerts, theaters, etc.), Prisons, Freeways, Airports, Beaches, Parks, Stadiums

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You can maximize your home purchase location by incorporating some of the following strategies into your neighborhood search:

1. Look for communities that are likely to become “hot neighborhoods” in the coming years. They can often be discovered on the periphery of the most continuously desirable areas.
2. Look for a home in a good neighborhood that is a bit farther out of the city. If commuting is a concern, purchase a home that is close to public transportation.
3. Look at the neighborhood demand by asking your REALTOR^® whether multiple offers are being made, whether the gap between the list price and sale price is decreasing, and whether there is active community involvement. You can also drive around neighborhoods and see how many “sale pending” and “sold” signs there are in a particular area.
4. Look into purchasing a condominium or co-op, rather than a house, in a desirable neighborhood. This way you still may be able to purchase in a prime area that you otherwise could not afford.

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• Types of homes
• Home purchase considerations
• Home comparison chart
• What to do when you’ve found the right home for you.

Multi-Family Homes: Some buyers, particularly first-timers, start with multiple family dwellings, so they’ll have rental income to help with their costs. Many mortgage plans, including VA and FHA loans, can be used for buildings with up to four units, if the buyer intends to occupy one of them. Condominiums: With a condo, you own “from the plaster in” just as you would a single house. You also own a certain percentage of the “common elements”–staircases, sidewalks, roofs and the like. Monthly charges pay your share of taxes and insurance on those elements, as well as repairs and maintenance. A homeowners association administers the development. Co-ops: [Back to top]

1. Weigh your needs, purchase and maintenance budgets, and personal tastes in deciding whether you want a home that’s a newly constructed home, an older home or a home that requires some work, or a “fixer-upper.”
2. One-bedroom condos are more difficult to resell than two-bedroom ones;
3. Two-bedroom/one-bath single houses generally have less appeal than three or more bedroom houses to many buyers, and therefore less appreciation potential;
4. Homes with “curb appeal” (a well-maintained, attractive, and charming view-from the street appearance) are the easiest to resell;
5. When re-sale is a possibility, don’t buy the most expensive house on the street, or anything that is unusual or unique; and
6. The biggest, most expensive house on the block is not usually considered to be the best investment. The best investment potential is traditionally found in a lesser expensive, more moderately sized home on the street. [Back to top]