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Home Buyer’s Handout

Introduction

The idea of purchasing a home, whether it be your first or last, is bound to bring many questions to mind. This is a natural reaction, as it is one of the biggest decisions you will ever make. Rest assured, my team and I are here to assist you in understanding the loan process with our goal being to make your experience a pleasant one.

This handout covers the basics about buying a home. It is designed to answer commonly asked questions and provide clear definitions of terms you may be unfamiliar with, even if you have been through the home-buying process before.

Rate Shopping

Shopping for the best interest rate possible has always been the consumer’s primary objective when borrowing money. As well it should be! The challenge with this strategy is that there is much misleading information released on the subject by various media. Internet web sites and email marketing, along with other media such as radio, television and billboard advertising, have brought the importance of interest rates to the forefront of consumers’ minds.

The problem for the consumer with this type of marketing is that it is designed to make the lender’s phone ring. Often, the advertiser offers a ridiculously low interest rate, with the intent of using a “bait-and-switch” technique once the client is reeled in. This is often done through short pricing. Short pricing is a term that is used when a lender offers an extremely attractive interest rate, but that rate is only locked-in for a very brief period of time.

The average consumer enters into a purchase contract to buy a home for at least 30 days. Pricing on an interest rate locked in for a 7-day period is of no use to most prospective home buyers. It simply isn’t enough time to complete the transaction. While the billboard advertising or Internet banner ad may boast a terrific rate, the lock-in period is often not realistic in terms of providing enough time to negotiate a purchase contract and close the deal. Be very careful when shopping for interest rates. Make sure that when you are quoted a rate, you are asking the broker what the lock duration is. Make sure that lock period allows you enough time to complete your purchase transaction.

Another common marketing ploy that makes interest rates appear attractive is geared around the manner in which fees are presented. All lenders are required by law to state the real cost of the financing through the Annual Percentage Rate (APR) each time an interest rate is quoted in advertising. APR takes many of the fees associated with the loan into consideration, and it is usually listed in fine print as a disclaimer.

Advertisers often list a low interest rate in large bold type, but the higher APR indicates in fine print that several points are being charged to get that rate.

While APR can be helpful in comparing rates seen in advertising, it is important for consumers to know that lenders use different methods to calculate APR. Hence it is not an entirely failsafe method for comparing interest rates.

Additionally, the consumer must take into consideration that the interest rate is not the only important factor in obtaining financing. Another equally important question to answer is, “How long do you need to borrow this money?”

The length of time you need to borrow the money has a profound impact on whether or not you should be paying upfront fees (points), and likewise has bearing on your loan program selection.

Statistically, homeowners move every 7 to 10 years. One of the common mistakes made by home buyers is automatically selecting a 30-year fixed rate loan program for financing instead of evaluating other options. The chance of needing the financing for 30 years is actually slim-to-none. If the buyer is somewhat transient in their job or is planning a family in the near future, the home may not really meet their long-term needs.

Buyers are often solicited with programs that are contingent upon 30-year fixed rate financing. The interest rates that are offered, regardless of how low they might be, are often irrelevant as rates are dependent upon several factors, including down payment and credit score.

If a buyer has at least 5% for a down payment (at least 3.5% for an FHA loan), an interest rate that is fixed for three, five or seven years may be a much more realistic option. This often allows the buyer to capitalize on a low introductory rate and save a significant amount of money, which can then go toward the down payment on their next home. As always, current market conditions dictate what the best loan programs will be at the time you want to buy a home. The most important thing is to ask your lender about available programs and look at all of your options.

It is of utmost importance to work with an experienced loan consultant who understands some of the practical aspects of financial planning. A well-versed consultant will ask you many questions about your short- and long-term goals, and assist you in choosing a loan program that is truly suited to those goals.

The Nuances of Your Contract

The process of purchasing a home is often much more complex than the average individual expects it to be. Items involved in your purchase contract can have a significant impact not only on the success of your purchase transaction, but on your stress level as well. We have listed out some of the important items you should be aware of, that require you to make decisions as a buyer entering into a purchase contract.

Loan or Financing Contingency

Loan contingency is the period of time the seller is giving you to obtain full, formal loan approval. It is important to include a financing contingency in your offer, as it makes the transaction dependent on you receiving the mortgage you’ve applied for. It specifies your cancellation rights if you are unable to obtain financing.

This contingency is typically between 15 and 30 days depending on what has been negotiated in the contract. The earnest money deposit you make at the time the offer is accepted will be put in jeopardy once the contingency for the loan has expired. In fact, pursuant to the terms of the contract, if the loan contingency has expired and you fail to close the purchase transaction, you could lose your earnest money deposit and not have the failure of obtaining loan approval to lean on as an excuse. Written pre-approval will help to eliminate problems in this area. Please note: pre-approval is not the same as pre-qualification.

Pre-Approval

Seeking pre-approval for financing prior to making an offer on a property is a sound strategy that can help you get the best deal possible, especially if you plan to make a minimal down payment. The seller is often leery of the stability and reliability of the buyer if the buyer is only capable of making a down payment of 10% or less. This can cause the buyer to lose a significant amount of negotiating ability, by being perceived as a weak buyer rather than a strong one. This is why it is very important to get full loan credit approval in advance and provide a written confirmation of the loan approval when an offer is made. This shows it is a done deal and you are perceived to be a cash buyer.

Contract Period

The contract period is the period of time in which all due diligence must be completed, including obtaining loan approval, property appraisal, home inspection reports, termite inspection, etc. Give yourself enough time for all due diligence to be completed for this very important purchase you are about to make. Typically, purchase contracts are drawn up for a period of 30, 45 or 60 days. However, while it is not typical, a purchase contract can be written for a term in excess of 60 days if the parties involved need that long of a period to complete all aspects of due diligence.

Home Inspection Contingency

As part of the negotiation in your purchase contract you and the seller will mutually agree upon the amount of time needed to complete all the home inspection procedures that are required. Utilizing an outside third party service to complete these inspections is highly recommended.

You will be provided with a report by the home inspection company that you should review very thoroughly to make sure there are no material defects in the property that you were not aware of, and which could subsequently have an impact on the value of the property. Once your home inspection contingency has expired, you no longer have the leverage to go back and renegotiate with the seller to resolve any issues revealed by the home inspection. If there are material defects, you and your real estate agent should renegotiate either a reduction in the purchase price to offset the cost of any necessary repairs or having the seller make the repairs prior to the close of the transaction. Buyers with limited cash reserves should most likely negotiate to have the repairs made prior to closing.

Termite Inspection

A termite inspection may or may not be required by the lender. The lender may require an inspection if the appraisal states there is evidence of termite damage. On FHA loans inspection is required only under the following circumstances: when there is evidence of active infestation, if mandated by the state or local jurisdiction, if customary to the area, or at the lender’s discretion.

If termites are present it is up to both parties to determine who will be responsible for the remedy of the problem. When you negotiate your contract make sure you state up front whether you want the property checked for termites. For your protection and peace of mind, whether or not a termite inspection is a requirement, you may want to order one.

Seller Rent Back

It is often the case that when the buyer and seller are unable to agree upon a specified closing date for the transaction, the real estate agents will negotiate a “rent back” period. This means the transaction closes, the loan funds and ownership of the property is transferred into the buyer’s name, but the buyer does not take occupancy of the property until several days later. In this scenario, the buyer sets up a rental agreement, in which the property is leased back to the seller.

Home Buyer’s Handout

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