| If you're like most people,
purchasing a home is the biggest investment you'll ever
make. If you're considering buying a home, you're likely
aware of the complexity of the endeavor. Because of the
numerous factors to consider when purchasing a home, it's
important to prepare as best you can. Some common home-buying
principles and caveats are presented here for your consideration.
By keeping them in mind, you'll help create a successful
and more enjoyable experience. These Top Ten lists are
by no means exhaustive. Since your home could cost you
25 to 40 percent of your gross income, it's important
to conduct research, ask questions and study the process
Buying a home
1. Looking for a home without being pre-approved.
As a potential buyer competing for a property, you'll
have a better chance of getting your offer accepted
by being as prepared as possible. Consider this hierarchy
- Neither pre-qualified nor pre-approved
The benefits available at each level can be easily
understood when viewed from the seller's perspective.
Imagine you're a seller in receipt of multiple offers
to purchase your property. A complete stranger (buyer)
is asking you to take your property off the market for
at least the next two to three weeks while they apply
for a loan. As the seller, lets consider the type of
buyer you'd prefer to deal with.
Neither pre-qualified nor pre-approved
This buyer provides no evidence that they can afford
to purchase your property. You may wonder how serious
they are since they're not at least pre-qualified.
This buyer has met with a mortgage broker (or lender)
and discussed their situation. The buyer has informed
the broker regarding their income, expenses, assets
and liabilities. The broker may also have seen their
credit report. The buyer provided you with a letter
from the broker stating an opinion of what the buyer
This buyer has provided a broker written evidence of
income, expenses, assets, liabilities and credit. All
information has been verified by a lender. As a result,
much of the paperwork for this buyer's loan has been
completed. This buyer will probably be able to close
quickly. They provide you with a letter (pre-approval
certificate) from the lender. You're as certain as possible
that this buyer can close.
As a potential buyer, you can see that being pre-approved
will give you the best chance of getting your offer
accepted. This is critical in a competitive situation.
2. Making verbal agreements.
If you're asked to sign a document containing instructions
contrary to your verbal agreements--don't! For example,
the seller verbally agrees to include the washing machine
in the sale, but the written purchase contract excludes
it. The written contract will override the verbal contract.
More importantly, your state may require that contracts
for the sale of real property be in writing. Do not
expect oral agreements to be enforceable.
3. Choosing a lender just because they
have the lowest rate. While the rate is
important, consider the total cost of your loan including
the APR , loan fees, discount and origination points.
When receiving a quote from a lender or broker, insist
that the discount points (charged by the lender to reduce
the interest rate) be distinguished from origination
points (charged for services rendered in originating
The cost of the mortgage, however, shouldn't be your
only criterion. Have confidence that the company you
select is reputable and will deliver the loan with the
terms and costs they promised. If in the final hours
of the transaction you determine that the lender has
suddenly increased their profit margin at your expense,
you won't have time to start again with a different
lender. Ask family and friends for referrals. Interview
prospective mortgage companies.
4. Not receiving a Good Faith Estimate.
Within three business days after the broker or lender
receives your loan application, you must receive a written
statement of fees associated with the transaction. This
is both the law and the best way to determine what you'll
pay for your loan. Bring the Good Faith Estimate (GFE)
with you when you sign loan documents. You should not
be expected to pay fees which are substantially different
from those contained in your GFE.
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5. Not getting a rate lock in writing.
When a mortgage company tells you they have locked your
rate, get a written statement detailing the interest
rate, the length of the rate lock, and program details.
6. Using a dual agent--i.e., an agent who represents
the buyer and the seller in the same transaction.
Buyers and sellers have opposing interests. Sellers
want to receive the highest price, buyers want to pay
the lowest price. In the standard real estate transaction,
the seller pays the real estate commission. When an
agent represents both buyer and seller, the agent can
tend to negotiate more vigorously on behalf of the seller.
As a buyer, you're better off having an agent representing
you exclusively. The only time you should consider a
dual agent is when you get a price break. In that case,
proceed cautiously and do your homework!
7. Buying a home without professional inspections.
Unless you're buying a new home with warranties on most
equipment, it's highly recommended that you get property,
roof and termite inspections. This way you'll know what
you are buying. Inspection reports are great negotiating
tools when asking the seller to make needed repairs.
When a professional inspector recommends that certain
repairs be done, the seller is more likely to agree
to do them.
If the seller agrees to make repairs, have your inspector
verify that they are done prior to close of escrow.
Do not assume that everything was done as promised.
8. Not shopping for home insurance until you
are ready to close. Start shopping for insurance
as soon as you have an accepted offer. Many buyers wait
until the last minute to get insurance and do not have
time to shop around.
9. Signing documents without reading them.
Whenever possible, review in advance the documents you'll
be signing. (Even though some specifics of your transaction
may not be known early in the transaction, the documents
you'll sign are standard forms and are available for
review.) It's unlikely that you'll have sufficient time
to read all the documents during the closing appointment.
10. Not allowing for delays in the transaction.
In a perfect world, all real estate transactions close
on time. In the world we live in, transactions are often
delayed a week or more. Suppose you asked your landlord
to terminate your lease the day your purchase transaction
was scheduled to close. A day or two before your scheduled
closing date, you discover your transaction is delayed
a week. In a perfect world, no one is inconvenienced
and your landlord is willing to work with you. More
likely, however, your landlord is inconvenienced and
angry. Will you be thrown out? Will you have to find
interim housing for a week or more? The eviction process
takes a little time, so the Sheriff won't immediately
remove you, but this type of stress-producing episode
can be avoided. How? Terminate your lease one week after
your real estate transaction is scheduled to close.
That way, if there is a delay in closing your transaction,
you have some leeway. This approach might cost a little
more, then again, it might not.
- If you are salaried: provide two years W-2 and
one month of paystubs OR if you are self-employed:
provide two years tax returns and a YTD profit and
- If you own rental property, please provide rental
agreements and two years tax returns.
- If you wish to speed up the approval process, please
also provide three months bank statements for each
bank, stock and mutual fund account.
- Provide recent copies of any stock brokerage or
IRA/401K accounts that you may have.
- If you are requesting a cash out refinance please
provide a letter explaining what you plan to do with
- Provide a copy of divorce decree if applicable.
- If you are NOT a US citizen, provide us with a
copy of your green card (front & back), or if
you are NOT a permanent resident provide us with your
H-1 or L-1 visa.
Refinancing your home
1. Refinancing with your existing lender without
shopping around. Your existing lender may not
have the best rates and programs. There is a general
misconception that it is easier to work with your current
lender. In most cases, your current lender will require
the same documentation as other companies. This is because
most loans are sold on the secondary market and have
to be approved independently. Even if you have made
all your mortgage payments on time, your existing lender
will still have to verify assets, liabilities, employment,
etc. all over again.
2. Not doing a break-even analysis.
Determine the total cost of the transaction, then calculate
how much you will save every month. Divide the total
cost by the monthly savings to find the number of months
you will have to stay in the property to break even.
Example: if your transaction costs $2000 and you save
$50/month, you break even in 2000/50 = 40 months. In
this case you'd refinance if you planned to stay in
your home for at least 40 months.
Note: This is a simplified break-even analysis. If you
are refinancing considering switching from an adjustable
to a fixed loan, or from a 30-year loan to a 15-year
loan, the analysis becomes much more complex.
3. Not getting a written good-faith estimate
of closing costs. See item number four above.
4. Paying for an appraisal when you think your
home value may be too low. Have the appraisal
company prepare a desk review appraisal (typically at
no charge) to provide you with a range of possible values.
Your mortgage company's appraiser may do this for you.
Do not waste your money on a full appraisal if you are
doubtful about the value of your home.
5. Using the county tax-assessor's value as
the market value of your home. Mortgage companies
do not use the county tax-assessor's value to determine
whether they will make the loan. They use a market-value
appraisal which may be very different from the assessed
6. Signing your loan documents without reviewing
them. See item number nine above.
7. Not providing documents to your mortgage
company in a timely manner. When your mortgage
company asks you for additional documents, provide them
immediately. They are doing what's necessary to get
your loan approved and closed. Delays in providing documents
can result in a costly delays.
8. Not getting a rate lock in writing.
When a mortgage company tells you they have locked your
rate, get a written statement which includes the interest
rate, the length of the rate lock and details about
9. Pulling cash out of your credit line before
you refinance your first mortgage. Many lenders
have cash-out seasoning requirements. This means that
if you pull cash out of your credit line for anything
other than home improvements, they will consider the
refinance to be a cash-out transaction. This usually
results in stricter requirements and can, in some cases,
break the deal!
10. Getting a second mortgage before you refinance
your first mortgage. Many mortgage companies
look at the combined loan amounts (i.e., the first loan
plus the second) when refinancing the first mortgage.
If you plan on refinancing your first loan, check with
your mortgage company to find out if getting a second
will cause your refinance transaction to be turned down.
Getting a home-equity loan/line
1. Not knowing if your loan has a pre-payment
penalty clause. If you are getting a "NO
FEE" home-equity loan, chances are there's a hefty
pre-payment penalty included. You'll want to avoid such
a loan if you are planning to sell or refinance in the
next three to five years.
2. Getting too large a credit line.
When you get too large a credit line, you can be turned
down for other loans because some lenders calculate
your payments based upon the available credit--not the
used credit. Even when your equity line has a zero balance,
having a large equity line indicates a large potential
payment, which can make it difficult to qualify for
3. Not understanding the difference between
an equity loan and an equity line. An equity
loan is closed--i.e., you get all your money up front
and make fixed payments until it is paid if full. An
equity line is open--i.e., you can get numerous advances
for various amounts as you desire. Most equity lines
are accessed through a checkbook or a credit card. For
both equity loans and lines, you can only be charged
interest on the outstanding principal balance.
Use an equity loan when you need all the money up front--e.g.,
for home improvements, debt consolidation, etc. Use
an equity line when you have a periodic need for money,
or need the money for a future event--e.g., childrens'
college tuition in the future.
4. Not checking the lifecap on your equity
line. Many credit lines have lifecaps of 18
percent. Be prepared to make payments at the highest
5. Getting a home-equity loan from your local
bank without shopping around. Many consumers
get their equity line from the bank with which they
have their checking account. By all means, consider
your bank, but shop around before making a commitment.
6. Not getting a good-faith estimate of closing
costs. See item number four above.
7. Assuming that your home-equity loan is fully
tax-deductible. In some instances, your home-equity
loan is NOT tax deductible. Do not depend on your mortgage
company for information regarding this matter--check
with an accountant or CPA.
8. Assuming that a home-equity loan is always
cheaper than a car loan or a credit card. Even
after deducting interest for income tax purposes, a
credit card can be cheaper than a credit line. To find
out, compare the effective rate of your home-equity
line with the rate on your credit card or auto loan.
Effective rate = rate * (1 - tax bracket)
Example: The rate of the home-equity line is 12 percent,your
tax bracket is 30 percent, your effectiverateis: .12
* (1 - .3) = .12 * .7 = .084 = 8.4 percent.
If your credit card is higher than 8.4 percent, the
equity loan is cheaper.
9. Getting a home-equity line of credit when
you plan to refinance your first mortgage in the near
future. Many mortgage companies look at the
combined loan amounts (i.e., the first loan plus the
second) when refinancing the first mortgage. If you
plan on refinancing your first, check with your mortgage
company to find out if getting a second will cause your
refinance to be turned down.
10. Getting a home-equity line to pay off your
credit cards when your spending is out of control!
When you pay off your credit cards with an equity line,
don't continue to abuse your credit cards. If you can't
manage the plastic, tear it up!