Owning your own home is the American Dream. And that dream is more alive today than ever before. Yet one of the first realizations a prospective home buyer often comes to is that the “dream home” does not always seem affordable.
Buying a home has changed. Before, buyers usually shopped for the best house they could find, then “took out” a loan. Today, prospective buyers must shop as thoroughly as they can for the best financing as they do for the best house. In today’s market, both tasks are equally important.
How Much House?
House hunting begins at home—with planning. The first step toward buying a house is to sit down. Before you grab the road maps and hit the streets, you need to do a little planning. We call it “pre-qualifying”. Simply, it’s determining how much house you can afford to buy. Knowing your affordable price range will bring your house-hunting into focus. Many lenders will send out all required verification and pre-approve you for a mortgage, allowing you the opportunity to negotiate as a cash buyer.
How much house you can afford to buy depends on two things: how much you can afford for the monthly housing payment, and how much you can invest in the down payment. Monthly payments include principal and interest on the mortgage loan, and property taxes and insurance against fire and other hazards. These four costs are often abbreviated “P.I.T.I.”. For some buyers and lenders, monthly housing costs may also include homeowners association dues, condominium fees, and mortgage insurance.
How Much House Can I Afford?
The key items are the size of the down payment, interest rate, any monthly property fees, and the amount of the mortgage. The down payment might be zero in the case of VA-backed mortgages. A down payment of 20% or more on a conventional loan will eliminate the need for mortgage insurance. Your Long & Foster Sales Associate can be very helpful to you in determining just how much house you can afford.
Sources For Your Down 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 some other not so obvious sources. In recent years, for example “parent power” has taken some new twists for first-time buyers.
Home Equity Loan. Parents often have considerable equity built up in their own homes—and many are tapping that asset through home equity loans to make a gift to their children. Ask your tax advisor for current information. Often lenders will require a “gift letter” to verify that parents don’t expect repayment.
Life Insurance. If you have built up a cash value on your life insurance policy over the years, you may be able to borrow from your insurance company up to the amount of this accumulated cash value. Often, they will even ask a more favorable interest rate than would be asked for other types of loans.
Stocks and Bonds. If you feel the market doesn’t favor selling your stocks or bonds now, you may be able to secure a bank loan using your portfolio as security.
Company Profit Sharing or Savings Plan. Look into the possibility of withdrawing what you have in your profit sharing or savings plan account or borrowing against it, if your company has these programs.
Mortgage Insurance Can Reduce Down Payment
If you obtain a conventional loan, you may make a down payment of 20% or less. Through the lender, you will be required to buy private mortgage insurance (PMI). This insurance provides protection for the lender in case of default, allowing the lender to approve a larger loan amount.
Mortgage insurance offers a variety of payment options. You may make an initial payment at closing and monthly payments with the house payment. You may make only an initial payment or only monthly payments. You may even increase your interest rate and have the lender pay the insurance. Be sure to ask your lender for a comparison of the benefits of each of these plans.
The larger the down payment, the less money you need to borrow. This means a lower monthly payment. However, remember that in addition to your down payment and monthly payments, you will need money to pay for closing costs, moving, appliances, household setup, a reserve for family emergencies, and other miscellaneous items. So don’t plan to put your last penny down on the closing table.
What To Look For
Choosing a place to live can be one of the most exhilarating experiences of a lifetime. We’ve learned through the thousands of home seekers we have helped that the best approach is to be prepared. Literally, to do some homework. Our observation is simple. Your move can be an improvement if you duplicate what you like in your present community and avoid what you dislike.
House Hunting Begins At Home
The search can begin in your present home so we’ve developed some questions to stimulate your thinking and help you identify your needs and preferences. Once you’ve clarified what you like in your present community, you will have a better idea of what you want to find. Plus, you will be able to express your preferences clearly to your Long & Foster Sales Associate who can help you find it.
One hint to keep in mind as you go house hunting is an old wisdom: “The best time to think about selling your home is when you’re buying it.” In other words, what appeals to you as a buyer today will probably also appeal (or what turns you off will be a turn off) to buyers tomorrow. A careful house hunter will benefit years from now when it’s time to sell to an equally value-conscious buyer. Build your buyer savvy by viewing real estate Websites, reading newspaper classified ads, homes-for-sale magazines, and visiting open houses.
County and City Questions
Would you characterize your present area as urban, suburban, semi-rural, or rural? Is the population density low, medium, or high? Is the population decreasing, stable, or increasing?
What natural features are the most significant? Woods? Hills? Flat land? River? Ocean shore? Man-made lakes? Streams and ponds?
How do you commute to work? Do you walk? Drive? Car pool? Taxi? Bus? Train? How far must you travel and how long does it take morning and evening? Do you use available public transportation for local trips or to visit close-by communities? Can someone reach your home on public transportation?
Where do you do your shopping? Central commercial districts? Shopping malls? Supermarket shopping clusters? Community shops or home delivery? Imagine a list of typical stops in one week . . . how many miles and how much time would visiting the entire list require. Do you want greater convenience?
What types of schools does your family attend now? From grade school to graduate school, and from day care needs to special vocational training, what facilities will you require in the next few years? Are there any special needs or plans? Although it’s extremely difficult to compare quality of education, especially when the most important ingredient is the relationship between teacher and student, some statistical indicators can be helpful. Average class size at grade level. Comparative standardized text scores. Average salary of teachers. Percentage of high school graduates who go to college.
What does the area offer for recreation and entertainment? Music? Movies and live stage? Sports arenas? Museums? Nightlife? What types of indoor and outdoor sports facilities are available? Are there public parks, country clubs, athletic clubs, fraternal groups? Do you require any special facilities?
Choosing A Neighborhood
After you take stock of the larger view of the county and city, this section helps you zero in on your neighborhood preferences. In real estate, an old maxim says there are three criteria that determine market value: “location, location, and location”.
The concept of neighborhood isn’t as precise as county or city. Some people consider the boundaries to be the district around a grade school. Others consider it “walking distance”, more or less within a half-mile radius. Wherever you draw the line, a neighborhood is the immediate area around your house.
Every neighborhood can be described from three standpoints: its people (your future neighbors), what it looks like, and where its services are located. Yet any neighborhood description is highly subjective, which brings up another observation from our experience.
No matter how much hard data one gathers about a neighborhood, nothing compares with information that local people provide. Whether it’s fellow workers, letter carriers, or people at a bus stop . . . neighbors are the best observers of a neighborhood. Talk to as many people as you can, and ask them the following questions:
Do neighbors socialize regularly, or hold block parties, picnics, holiday parties, organize sports teams? What are the ways they have met their neighbors? Walking a dog, commuting, PTA, parties, little league, gardening?
What types of dwellings: high-rise or low-rise apartments, condominiums, multi-family structures, single-family houses, mobile homes? How much do the neighbors care for lawns and gardens? Are the houses maintained “like new”, adequately, poorly? Is there a Homeowners Association?
Are cars parked mostly in garages, driveways, in the street? How old are the houses? More than 30 years old? 15 to 30 years? New? How far apart are the houses? Are property upgrades common? Swimming pools, tennis courts, fences, walls, patios, extensive landscaping?
For convenience, how does the neighborhood rate? Can you walk to shopping or is a car necessary? List your five most frequent destinations. Are they clustered in one stop-and-shop location? Two stops? How much time is required for fire, police, or ambulance services to arrive in an emergency? How close are cultural centers, parks, restaurants, theaters, playgrounds?
How do the children routinely reach their schools, play areas, friends’ homes? By walking, bicycle, bus, or do parents drive them? Is public transportation available for commuting or shopping? Do any local ordinances affect pets, parking, lawn, etc.?
What are the disadvantages of the neighborhood? Freeway, railroad, or airplane noise? Factory pollution, heavy traffic, exposure to heavy storms, possible flooding?
Area House Styles
The metropolitan area is known for its variety of housing. This section is designed to introduce some of the basic styles most frequently found in the area. Numerous variations and other unique styles not mentioned here are also available.
Cape Cod. A symmetrical peaked roof often with dormer windows which creates a one-and-a-half story design with living space upstairs in an “expansion attic”.
Colonial. A two-story design with center hall or side entry, often with basement. Variations often feature double or single wings with garage. Numerous styles include New England, Federal, Plantation, Dutch Colonial, Georgian, French Colonial.
Contemporary. Modern and non-traditional creation of living spaces using a spectrum of shapes, materials, and designs. An “open” use of space is characteristic. May be single or multiple stories.
Hi-Rise Condominium. Multi-story building with elevator access to owned apartments; monthly fee usually pays for use of recreation facilities, maintenance and utilities.
Low-Rise Condominium. A cluster of attached units, four stories or less ranging from converted garden apartments to ramblers and two-story townhouses. Resident owns title to living space while jointly owning public areas; condominium fee often covers maintenance, amenities, sometimes water; other utilities may be individually billed.
Rambler. A single-story house with all living areas on same level. Variations include L-shape or U-shape plan, perhaps with basement. Sometimes called “ranch”; if it is small, a “bungalow” or “cottage”.
Split Foyer. Entry is between floors. Makes use of slope by placing basement partially above ground level on uphill side, thus basement becomes livable space. Also called “split entry”.
Split Level. Side wing has two levels off main ground floor; designed for maximum living space while occupying the least land. Garage and sub-basement are frequent options.
Townhouse. A row of two-or-three-story dwellings sharing common walls, also called “row houses”. Wide range of styles from contemporary to colonial. The term “semi-detached” describes a pair of townhouse end units; similar in function to a duplex.
Choosing A House
We’ve saved the best for last. In many ways, finding a home is easier than choosing a county and a neighborhood, because you are considering tangible details. Yet our experience suggests that many people “decide” with emotion and “justify” with facts. This section will help you find a better balance.
First, one should realize that thousands of houses are sold in the area every year. Inspecting the thousands of houses on the market is obviously impossible. But you can turn this overwhelming selection to your advantage. If you can clearly describe the features you require, your Long & Foster Sales Associate can make a preliminary screening for you. After you select the best houses, you can concentrate on inspecting your top choices. The key is knowing what you need.
How many people will be living in the house? Do you prefer a new or resale home? What is your preferred housing style? Townhouse, colonial, contemporary, split level, split foyer, Cape Cod, rambler, or something else?
How many total rooms do you need? Bedrooms, bathrooms? How strongly do you require features such as: separate living room, dining room, laundry room, basement or attic, family room, fireplace, workshop area, garage? How much property do you require? Do you have preferences for any particular natural features?
House Hunting Many of our customers find it helpful to keep a record of the houses they inspect. A notebook is handy with pages large enough to record vital information, as well as hold stapled pictures of attractive houses and neighborhoods or clipped advertisements.
Is the asking price comparable to other houses in the neighborhood? Higher or lower? However, when carefully comparing properties, be sure to take into account unique features and improvements that vary house-to-house, and consult your Long & Foster Sales Associate who can provide a Comparative Market Analysis (CMA).
Is the existing mortgage assumable? Required down payment amount? What financing method is acceptable to the seller?
What are the annual property taxes? Will the taxes increase with the transfer of deed and a new market price? Any local bonds or assessments?
Physical Details Outside.
Address of property? House style? Lot size? Landscaping details? Degree of grounds maintenance required? Age of house? Structural condition? Are any major repairs or improvements necessary? Maintenance of building?
Inside. Make a sketch of floor plans. Total number of rooms and baths on each floor? Any extras such as intercom, fireplaces, phone jacks? Built-in appliances: dishwasher, garbage disposal, trash compactor? Adequate storage space?
Construction. Inspect quality of materials, present condition, craftsmanship both inside and outside. Insulation? Weather stripping or storm windows?
Major Systems. Plumbing, electrical, heating and cooling. What type of fuel does the heating system use? Approximate annual cost? A professional inspection of the major systems is recommended for a house that you are interested in purchasing.
House Hunting on the Web
At any moment a complete description of homes you would like to visit is available through your Long & Foster Sales Associate. Here’s how it works.
When a house is listed for sale by any area broker, the home’s vital statistics are fed into the computer: the lot size; the age and kind of home (condo, townhouse, single family); style (colonial, contemporary, Cape Cod, etc.); material (brick, stone, wood); the number, size, and use of rooms (4 bedrooms, 2 1/2 baths, kitchen, living and dining rooms, family room, finished basement and attic, foyer, utility room, garage).
Also included are features (fireplace, walkout deck, patio, wooded lot); equipment (stove, dishwasher, carpeting, etc.); the heating and/or cooling systems; the water and sewage systems; the annual taxes; the mortgage balance, monthly payments and the amount of cash a buyer would need to assume the existing mortgage (if it’s assumable), or the amount of cash required if the seller offers to take a second mortgage; and, finally, the price.
Finger-Tip Home Search
A buyer’s requirements can be fed into the computer by a Long & Foster Sales Associate: particular neighborhoods, styles of homes; the number and kinds of rooms, and the price range. In minutes, the computer makes a quick search among the houses listed, and prints out all the houses that meet the buyer’s criteria.
The computer also helps buyers determine which home sellers will offer seller financing. It can calculate the amount of mortgage payments at various interest rates, under various financing plans. It can also help evaluate the investment and the financing that is right for the buyer. Plus, it’s updated each morning, as houses enter and leave the market. In short, it’s the only way a buyer can check out almost everything that’s “out there”.
Negotiating the Purchase
You’ve found it—your “dream house”! You want to buy it. Now what? You make an offer by submitting a signed real estate offer to purchase with the type of financing you desire.
This will be the sales contract once the seller accepts. When you and the seller sign, you are agreeing to the contract conditions. Before you sign it, read it carefully and make sure you understand every detail. Ask questions. Verbal agreements should be written into the contract. If you plan to have a lawyer represent or advise you, retain one as early as possible. This is where your Long & Foster Sales Associate and an attorney can give you the assistance you need.
Offers and Counter Offers
Your Long & Foster Sales Associate will take the offer to a “contract presentation” with the home seller and the listing broker. In some areas, the three of them will discuss the offer, and the seller will accept it as written, or make “counter offers” on unacceptable aspects, or reject it. The selling broker will then bring back the offer to buy to the homebuyer, who can accept it, counter-the-counter offer, or reject it. The offer to buy becomes a contract when all parties have initialed every counter and signed the offer.
When you sign the offer to buy, you also will have to submit a deposit to show that you are earnest about your desire to buy—appropriately called “earnest money”.
Making Sure Your Contract is Complete
Sales contracts differ, depending on circumstances, but there are several provisions you may want to include in a contract for the purchase of real estate.
- Deposit. The amount of “earnest money” should be clearly stated, plus the amount of money you will be paying at settlement and your sources of financing. A common purchase deposit in many areas is 1-2% of the purchase price, deposited in escrow.
- Contingency on Financing. Be specific about the total loan amount, the date a second or third mortgage is due, and the exact financing terms. Many contracts have an “alternative financing clause” that allows buyers to accept different financing than that which is written in the contract, as long as it doesn’t affect seller’s net proceeds.
- Contingency on Inspection. You may make the contract contingent on a building inspection report. You will usually have to pay for this inspection, but the peace of mind or detection of a problem is well worth the cost of inspecting.
- Termites. The contract may require the seller or buyer, depending upon the area, to pay for a termite inspection. The results of this inspection may further require payment for removal of the infestation and repair of any damages from the infestation. You should get a written report at settlement indicating that the property is free and clear of any active termite infestation. In some areas, well and septic certificates are also required.
- Personal Property. Light fixtures, drapery rods, chandeliers, washers, dryers, refrigerators, heating oil in the tank, storm windows and doors, firewood, even swimming pool chemicals, and other items not physically attached should be specified in writing if they’re to be conveyed to the buyer. Misunderstandings based on verbal agreements can delay settlement as well as cause friction.
- Repair Work. Standard contracts of sale require sellers to be responsible for plumbing, heating, mechanical, and electrical systems to be in working order at time of settlement. You should conduct a “pre-settlement walk-through inspection” which should be made several days before or not later than the day of settlement.
- Title Attorney or Insurance Company. The buyer has the right to select a title attorney or insurance company. You should shop and compare prices before deciding what attorney or title company will conduct your settlement. Also, be sure to clear the title company with the lender, whose interests are also involved. Ask your Long & Foster Sales Associate for a list of our Prestige Partners®, who provide settlement and insurance services throughout our seven state Mid-Atlantic Region and the District of Columbia.
- Closing and Occupancy Date. Include an arrangement with the seller in the event you can’t secure possession on the agreed date, such as a daily rent-back agreement for “post-settlement occupancy”.
Locating The Right Loan
You have the option of shopping around for the best terms you can obtain. Generally, a mortgage acceptance requires 30-45 days for conventional, 45-60 days for VA and FHA from application to approval. In some cases, loans may be approved more quickly. Prosperity Home Mortgage, LLC is a joint venture between Long & Foster and Wells Fargo Home Mortgage.
Shop Smart For Mortgage Money
It used to be that qualified homebuyers simply went to their nearest bank or savings and loan for the standard, fixed-rate, 30-year mortgage or the VA/FHA backed loan. Interest rates were not highly competitive—back then.
Now, of course, things have changed. Competition among lenders is lively, and smart borrowers shop carefully to find the financing that best suits their circumstances and needs. Here’s where to shop:
Mortgage Lenders. Mortgage lenders issue mortgages to borrowers. They then process and sell the mortgages to large investors or into the secondary mortgage market.
Mortgage Loan Brokers. Some individuals or groups charge a fee (usually to the borrower) to match borrowers with lenders. Sometimes they make direct loans. An advantage of working with mortgage brokers is that they often represent many investors and can provide you with many more financing alternatives, usually at the same price as the mortgage banker.
Financial Institutions. Mutual savings banks, savings and loan associations, insurance companies, and some commercial banks are the traditional sources of mortgage loans. Savings and Loans often grant favorable terms to their own account holders.
Private Lenders. Individuals (often home sellers) and groups (sometimes seller’s employers—if the seller is being transferred) lend money. This source is especially helpful in arranging second mortgages, but can also assist with first trusts, wrap-arounds, and other mortgage plans.
Credit Unions. Federal credit unions can write 30-year conventional and government insured mortgages. Some will make loans; others may not. This may be a good source for credit union members.
Finance Companies. To compete with the more traditional lenders, some finance companies promise quick service and some do not charge mortgage “points” or “pre-payment penalties”.
Ten Questions Most Lenders Will Ask You
Here’s the information most lenders will need:
- The amount of money you wish to borrow and the length of time you will need the money.
- Your current address and any other addresses covering the previous 24 months.
- Your social security number.
- Your current employer’s name, address and phone number and the same information for any other employers in the previous 24 months.
- Your gross monthly income including documentation: most recent pay stub, final pay stub for any job you may have left in the current year and previous year’s W-2 form(s).
- Complete account statements (all pages) for any bank, credit union, retirement, or brokerage accounts.
- Your assets (real estate, personal property, stocks and bonds, life insurance with cash value, etc.).
- A complete list of your debts including account numbers, balances and minimum payments.
- A copy of the sales contract.
- An account, in writing, of any problems concerning your application and any documentation of the circumstances of those problems.
With this information in hand, here are the general steps the lender will take to process your application:
- Verify the facts.
- Get a credit report.
- Make a property appraisal.
- Review your application.
- Decide whether or not to make the loan.
Some Questions You Should Ask Most Lenders
Here’s how to shop; a few of the questions to ask a lender:
- Are both fixed-rate and adjustable mortgage loans available?
- What is the interest rate?
- What is the total origination charge?
- How long can I “lock-in” the financing at the current interest rate?
- What are the other fees a lender may charge me in conjunction with my loan?
- Are funds for a second mortgage available?
- On adjustable loans: How often will the interest rate be adjusted? Is there a maximum limit on each rate change? How often will the monthly payment be adjusted? Is there a ceiling on payment adjustments? Can the term of the loan be extended?
- Is there a pre-payment penalty clause? This involves extra charges for paying off the loan before maturity. About 80% of all loans in the United States are paid off early.
- What is the “grace” period? How late can a monthly payment be made before a late charge is assessed? What will happen if a payment is missed?
- If you sell your house, will the new buyer be able to assume your mortgage at the same interest rate?
- Do you have to pay “points” to get your new mortgage? Usually lenders charge points for the cost of giving you a mortgage loan.
- Will the lender require mortgage insurance?
Slicing Interest Rates
It is important to keep the tax advantage in mind when considering whether to rent or buy. A mortgage payment of $1,500 could result in a lower overall cost than an $1,200 rent amount after you consider tax advantages.
Remember a buyer may not realize this “tax break” until tax time comes around unless withholding taxes are decreased in anticipation of increased interest payment deductions. Please contact your tax advisor for more information.
Fire And Hazard Insurance
Most lenders require a homebuyer to provide a one-year paid receipt at settlement for a fire and hazard insurance policy, often called homeowner’s insurance. These policies are available from several leading insurance companies through Long & Foster Insurance Agency, Inc., or the insurance company of your choice. Fire and hazard insurance provides protection for fire and other perils to your home and its contents.
What To Expect From A Home Inspector
What can homebuyers expect from a home inspector — besides a bill for $300 and up (depending on the size of property and/or complexity of the inspector’s report)?
First of all, require proof of membership in the American Society of Home Inspectors. Next, expect a quickly-delivered (one or two-day) written report.
Expect practical returns. While you can see for yourself many flaws in a house, the practiced eye of a professional inspector can probably spot more, especially in areas not easily accessible to a homebuyer. Specific information could even reduce the price of a house if the seller will agree the price has not already been discounted for defects.
- Serious problems (heating, roofing, plumbing)
- Medium problems (insulation, paint)
- Minor problems (electrical outlets, kitchen sink)
If no serious problems are found, inspection can pay off indirectly in assurance that you are making a sound investment.
Many states now require that sellers provide buyers with either a residential property disclosure or disclaimer statement.
Title insurance provides protection in the event any of a number of past actions threaten the title to your property. Most lenders will require title insurance to protect their interests. Be sure to ask about an “owner’s” policy as well, to protect your title. You may save money if you buy owner’s title insurance at the same time as mortgage title insurance, rather than buying it separately later.
As a homebuyer, you may be able to save money with a “re-issue rate” for title insurance, if the property changed hands within the last several years. The title insurance may allow a lower “re-issue rate” premium because the recent title search is still valid. Consult your title attorney and insurance company.
After Loan Approval
After the lender approves the mortgage, the buyer will receive a “loan commitment letter” stating the mortgage amount, interest rate, and length of loan term. The buyer should check it carefully, and return a signed copy to the lender or follow other specific instructions.
Next, the selling and listing brokers will coordinate a settlement date. You should be sent a letter confirming the date, place, time, and a checklist of everything you, as the homebuyer, need to bring.
The purpose of the walk-through inspection on the day of settlement or several days prior to settlement is to determine if all conditions in the contract are satisfied. The time for the buyer to inspect and note defects for correction by the seller is during the contract negotiations and prior to signing the sales agreement. Repair or replacement items should be noted in the contract or contingent on a house inspection, otherwise, most resale homes are sold in “as is” condition.
It is up to the buyer to perform the walk-through inspection, not the seller, who may or may not be present. The buyer should be accompanied by the selling agent. The home seller should be sure utilities are on so that equipment can be operated.
Room By Room
The buyer should try all lights and switches; turn all faucets on and off, run shower, flush toilets; turn on the furnace and central air conditioning (in the off-season, buyer should hire a professional to certify proper functioning of both heating and air conditioning); test all stove burners, oven at bake and broil; run some ice cubes through disposal to test blades; run dishwasher, washer, dryer through complete cycles; open and close all windows and doors. In short, try everything, even keys and the fireplace flue.
All deficiencies should be noted, and funds may be withheld from the home seller by the settlement attorney for repairs, if seller does not correct problems prior to settlement. The selling broker will coordinate with the listing broker and seller to make repairs before settlement, if possible. Upon receipt of bills and notification that repairs are complete, the attorney will release balance of funds to the seller, if money is escrowed for needed repairs.
The Big Day!
The big day is here! Tonight you can pop open the champagne, but today there will be a lot of paper signing and a poignant passing of the keys (don’t forget the garage keys and electric door opener, too).
At the settlement there will be an attorney or title company representative (chosen by the buyers), all buyers, listing and selling brokers, and all owners. The home seller should bring all warranties on equipment and any instructions on equipment maintenance or operation.
The attorney will have searched the title, provided title insurance, and obtained old and new lender instructions. First, all unresolved walk-through deficiencies are resolved.
With the buyer, the attorney explains the deed of trust or mortgage; the deed of trust note or mortgage note; VA, FHA, or lender forms; and settlement sheets. Buyer signs all these and pays the balance of the down payment and buyer’s closing costs with cashier or certified check.
Open Look At Closing Costs
“Closing costs” have lost much of their mystery in recent years.
Under the Real Estate Settlement Procedure Act (RESPA), the homebuyer is furnished an estimate of closing costs by the lender, in advance of the closing. In some cases, some of the closing costs may be paid by the seller; this is particularly true for new housing, where the seller is the builder.
Settlement fees vary widely depending on price, location, and other factors, but overall the buyer’s costs usually average between 3% and 7% of the sales price. Items that are usually included in the settlement fees are the loan origination fee, mortgage insurance premium (M.I.P.), attorney fees, owner and lender title insurance, recording fees, county tax stamps, state tax stamps, and the survey fee. In addition, the lender will require an appraisal fee and a credit report fee in advance of the closing.
A few other items, not required to be listed under the law, may also have to be paid at a closing. These include advance deposits held in escrow for real estate property taxes and insurance. The lender collects a portion of these every month and then pays the insurance and taxes when they are due.
Because specific closing costs vary from area to area, and transaction to transaction, we encourage you to consult with your Long & Foster Sales Associate. Sometimes closing costs can amount to a sizable sum. Remember that some of the items are tax deductible. Check with your tax advisor.
Signing On The Dotted Line
With the seller, the attorney explains the settlement sheets and gets the home seller’s signature on them and the deed. Seller pays appropriate closing costs.
If the seller’s taxes or insurance have been escrowed, the seller will receive any money accumulated in the account for bills not yet due. Additionally, the seller will be reimbursed for any money paid in advance and not used, such as property taxes. The seller will receive these refunds at or after settlement, depending on the area. Taxes and homeowners association dues or condominium fees will be prorated on a daily basis. Seller, buyer, and brokers are supplied a copy of settlement sheets for their records.
The house keys are passed. You are now the proud owner! Congratulations!
Different Mortgage Strategies
When it comes to paying for a home, buyers today have numerous financing options. This is a summary of the primary alternatives. Information about rates and programs is available from your Long & Foster Sales Associate through your Prosperity Home MortgageLoan Originator. Interest rates are for illustration only.
Conventional Mortgage. A conventional loan is a mortgage made between a lender and a borrower with no other parties involved (such as VA or FHA). Conventional loans customarily require a 20% down payment. Down payments may be as low as 5% with mortgage insurance.
Example: A buyer purchases a $400,000 home. The lender requires a 20% down payment ($80,000). At 7% the $320,000 balance has a monthly P&I payment of $2,391 over 30 years. Mortgage insurance could lower the down payment requirement to 5%, or $20,000, which increases the monthly payment.
Advantage: Conventional mortgages are straightforward and easy to understand. Conventional loans offer the largest variety of financing options.
Fixed Rate conventional loans feature equal monthly payments that are made over the term of the mortgage. The standard time period is 30 years or less. The interest rate remains the same which keeps the principal and interest payments the same over the term. Payments can vary if taxes or insurance escrow payments change.
Adjustable Rate loans are mortgages that allow for payments which change periodically over the life or term of the mortgage. An ARM loan has a set interest rate and payment for a period of time and then adjusts to the market rate at a predetermined point. ARM loans feature lower rates over the initial loan period.
VA Loan. The letters ‘VA’ stand for Veteran’s Administration – a branch of the US government. VA is not a lender but rather guarantees mortgages for lenders to help eligible veterans. VA loans require no down payment up to the VA maximum loan limit. VA loans can be assumed by qualified borrowers.
Example: A veteran purchases a $235,000 home. With no down payment the loan amount is $240,050 including the VA Funding Fee, for a first time veteran’s purchase. At 6% interest over 30 years the monthly P&I payment is $1,439.
Advantage: VA requires no down payment. The seller can (but is not required to) pay all closing costs for a veteran.
FHA Loan. FHA is the Federal Housing Administration, a division of the US Department of Housing and Urban Development. FHA does not lend money; instead, like VA, it insures mortgages allowing lenders to make loans that might not be eligible for conventional financing. Down payments are as low as 3.5%*. Both fixed-rate and ARM mortgages are available. FHA loans are assumable by qualified borrowers. FHA mortgages have credit standards and other rules that are more flexible than typical conventional mortgages.
Example: A buyer of a $200,000 home makes a down payment of $7,000. The loan amount including up-front MIP would be $199,755. At 6% interest over 30 years the monthly P&I payment is $1,198.
Advantage: FHA offers a low down payment.
Long & Foster® REAL ESTATE, INC. is not a mortgage lender. These figures are provided by Prosperity Home Mortgage. The actual terms of any financing are subject to the requirements of each individual case. Choosing the “best” mortgage depends upon the circumstances of the individual borrower. Your Long & Foster Sales Associate will be happy to refer you to a Prosperity Home Mortgage loan officer to explain the options available to each buyer for mortgage financing.
Words To The Wise
A person acting on behalf of another, called the principal.
Agreement of Sale
Known by various names, such as “contract of purchase”, “purchase agreement”, “sales agreement”, or “binder”, according to location or jurisdiction. A contract in which a seller agrees to sell and a buyer agrees to buy, under certain specific terms and conditions spelled out in writing and signed by both parties.
Annual Percentage Rate (APR)
Includes quoted interest rate on the loan plus all additional service and finance charges associated with the loan. Includes all costs of financing; those paid at the time of closing and those paid over the term of the loan. The APR is usually slightly higher than the note rate.
An expert judgment or estimate of the quality or value of real estate as of a given date.
The valuation placed upon property by a public tax assessor as the basis for taxes.
Bill of Sale.
An instrument which transfers title to personal property (chattels); a “Deed” transfers real property.
Certificate of Title.
A document signed by a title examiner or attorney, stating that the seller has a good marketable and insurable title.
Closing Statement (Settlement).
The computation of financial adjustments between the buyer and seller as of the day of closing a sale to determine the net amount of money which the buyer must pay to the seller to complete the purchase of the real estate and seller’s net proceeds. Also, “Settlement Sheets”, “HUD-1”.
Payment to a real estate broker for services performed.
To deed or transfer title of property from one person to another.
A formal written instrument by which title to real property is transferred from one owner to another. Also, “conveyance”.
Deed of Trust.
Like a mortgage, a security instrument whereby real property is given as security for a debt. However, in a deed of trust there are three parties to the instrument: the borrower, the trustee, and the lender (or beneficiary).
The money given to the seller by the potential buyer (usually held in escrow) upon the signing of the agreement of sale to show that buyer is serious about buying the house. Also, “Deposit”.
The interest or value which the owner has in real estate over and above the debts against it. (Sales Price – Mortgage Balance = Equity.)
Funds, property, or other things of value left in trust to a third party. The escrow may be released upon the fulfillment of certain conditions or by agreement of the parties.
What was formerly personal property which is now permanently attached to real property and goes with the property when it is sold.
Protects against damages caused to property by fire, windstorms, and other common hazards.
Between a homeowner (as principal) and a licensed real estate broker (as agent) by which the broker is employed to market the real estate within a given time for which service the owner agrees to pay a commission. Also, “listing agreement”.
The highest price which a buyer, ready, willing and able but not compelled to buy, would pay, and the lowest price a seller, ready, willing and able but not compelled to sell, would accept. Basis for “listing price”, or “asking price”.
The actual amount for which a piece of property is sold. Also, “Sales Price”, “Purchase Price”.
A lien or claim against real property given by the buyer to the lender as security for money borrowed.
A written agreement to repay a loan. The agreement is secured by a mortgage, serves as proof of an indebtedness, and states the manner in which it shall be paid. Also, “Deed Of Trust Note”.
Principal, interest, taxes, and insurance. Most residential mortgage payments include the above and are therefore referred to as P.I.T.I.
Sometimes called “Discount Points”, a point is one percent of the amount of the mortgage loan.
Penalty for the payment of a mortgage note or deed of trust note before it actually becomes due.
This word has several meanings:
- to denote the most important;
- a capital sum lent on interest;
- one who appoints an agent to act on their behalf;
- either party to a contract.
The operation of real property, including the leasing of space, collection of rents, selection of tenants, and the repair and renovation of the buildings and grounds.
To allocate between the seller and buyer their proportionate share of an obligation paid or due. For example, a prorate of real property taxes, fire insurance, or condominium fee.
A person with a real estate license and associated with a specific real estate broker.
A map or plat made by a licensed surveyor showing the results of measuring the land with its elevations, improvements, boundaries, and its relationship to surrounding tracts of land. A survey is often required by the lender to assure a building is actually sited on the land according to its legal description.
As generally used, a document that indicates rights of ownership and possession of a particular property.
A summary of the public records relating to the title to a particular piece of land. An attorney or title company reviews an abstract or title to determine whether there are any title defects.
Protects lenders and homeowners against loss of their interest in property due to legal defects in title.
Title Search or Examination.
A check of the title records, generally at the local courthouse, to make sure the buyer is purchasing a house from the legal owner and there are no liens, overdue special assessments, or other claims.
State tax, local tax (where applicable), and tax stamps (in some areas) required by law when title passes from one owner to another.
Ask your Long & Foster Sales Associate for a copy of the “Understanding the Role of the Real Estate Agent” (LF1192, for use in the state of Maryland only) or “A REALTORS® ROLE” (LF1193, for use in the state of Virginia only).