Purchasing Real Estate - the Easy Way vs. the Hard Way

Real estate can comprise some of the most powerful investments you make in your lifetime. That’s why it’s so important that you understand exactly what you get yourself into with every purchase.

But there are easy ways and hard ways to purchase real estate, which anyone experienced in the field will tell you. The easy way to make a real estate purchase is to rely on time-tested legal forms that apply to your specific situation, guaranteeing a quick and relatively easy transaction.

The hard way? Well, let’s put it this way: the hard way involves unclear documentation, unwritten contracts, and a lot of legal mumbo jumbo.

You need to avoid the hard way. Here’s how.

Getting Everything in Writing

There are a number of ways to get your real estate purchase in writing because there are so many different ways to actually acquire real estate. So it’s important that if you’re starting out in this new field of endeavor, you need to consult with experienced experts who can point you in the direction of the right forms to use, the right contracts to sign, and the right paperwork to file.

After all, getting everything in writing does compromise the core premise of purchasing real estate the easy way. Having everything in writing doesn’t necessarily make an agreement much more ironclad than a verbal agreement – but it does, for all intents and purposes, provide just that. How? Because a written agreement also doubles as proof of the agreement. It’s hard to get more ironclad than that.

That’s the easy way to purchase real estate: get everything in writing. But there’s one type of situation you’ll want to avoid…

Common Pitfalls to Beware Of

Although having everything in writing seems like a single, one-stop principle to ensuring every real estate purchase works smoothly, remember that not all paperwork is created equal. There are some written contracts that might promise you the sale of the property – but don’t necessarily promise that the person selling you the property even owns the property. In other words, you need to match the paperwork you’re using with the specific situation you face.

That’s why you’ll want to know the individual uses of forms like quitclaim deeds and every other piece of paperwork you come across in the real estate field. It might sound like a lot to study at first but believe us – it will start to make sense as you draw the distinctions between each type of real estate form that you use.

If this sounds like the “hard way” to buy real estate, you’re not looking at things from a long-term perspective. Sure, doing a lot of research to ensure that all your paperwork is on the up-and-up is time-consuming at first, but it will lead to a lot less headaches in the long run. If you remember that medicine doesn’t always taste good, you can prevent yourself a lot of potential future troubles. Get the paperwork right and your real estate purchase should go off without a hitch.

Are You Ready to Buy?

There are many reasons that make buying your own home a good idea. You can deduct the cost of your mortgage loan interest from your federal income taxes, and usually from your state taxes, too. Interest will compose nearly all of your monthly payments, for over half the number of years you’ll be paying your mortgage. This adds up to hefty savings at the end of each year. You’re also allowed to deduct the property taxes you pay as a homeowner. If you rent, you write your monthly check and it’s gone forever. Another financial plus in owning a home is the possibility that its value will go up through the years.

If you have had bad credit, and don’t have much for a down payment, you may still be able to become a home buyer. You may be a good candidate for one of the federal mortgage programs that are available. A good place for you to start is by contacting one of the HUD-funded housing counseling agencies (HUD is the U.S. Department of Housing and Urban Development) [www.hud.gov]. They can help you sort through your options. In addition, contact your local government to see if there are any local home ownership programs that might work for you. Look in the blue pages of your phone directory for your local office of housing and community development.

Most people who rent the home that they are living in can afford to buy a home with the right planning. In order to know about your home-buying potential, it will be useful for you to take a look at your income, savings, monthly expenses, and debt. All of these are important factors in how much mortgage you can afford and also in how purchasing a home can affect your monthly budget. Together the following four categories are a guide that will give you a better understanding of your financial situation.

Income: Review your income. Purchasing a home may require that you have a certain amount in savings that can be applied to your down payment and closing costs. If you don’t have a lot of cash available, there are loan programs available, especially through FHA (Federal Housing Administration) and VA (Veteran’s Administration) mortgage programs that do not require much cash payment at closing. Some questions to consider:

• On average, what is your monthly income?
• Will your income remain stable in the near future?
• Are you expecting any increase or decrease in income in the near future?

Savings: Review your savings. A little savings can help a great deal when planning to purchase a home. There are some costs that you cannot finance through your loan; you have to pay those at closing, the day that you buy your home. Some questions to consider:

• What portion of your income are you saving?
• Can you save more money than you are now?

Monthly expenses: Monthly expenses may increase. The purchase of your home will likely change how much you will need to spend on expenses every month. If you have trouble saving now, your finances may be too tight after the purchase of a home. Some questions to ask yourself:

• How will buying a home affect my monthly budget and my ability to save?
• Can I support the additional expenses that the purchase of a home will bring?
• Do I expect to maintain a stable income for the foreseeable future?

Debt responsibilities: Review your debt responsibilities. Consider how your debt, in relation to your income, will influence a lender’s decision on your mortgage loan amount. Carefully consider how additional debt from house payments, on top of your existing debt, will restrict your lifestyle. Some questions to ask yourself:

• How much debt can I afford to manage comfortably?
• Will I be able to manage my debt responsibilities through the life of my loan? **

Common Mortgage Definitions And Calculations

Following are some definitions and calculations that will help you understand some of the terms and figures that lenders use to determine if you can afford to purchase a particular home. Mortgage lenders use many of the following basic mortgage calculations in their mortgage qualification process.

- Cash Required (or funds required at closing): This is the total of a buyer’s closing costs and down payment amount.

Total Closing Costs + Down Payment = Cash Required

- Debt Ratio: This is the percentage of monthly income that can be applied toward monthly long-term debt obligations. Loan programs have different guidelines on debt ratio percentages. Government loan programs typically have higher debt ratio percent- ages, allowing more home-buyers to qualify for loans.

Debt Ratio = PITIO ÷ Total Monthly Income

- Down Payment: The Down Payment can be shown as the difference between the Home

- Front-End Ratio: This is the percentage of your monthly income that can be applied toward monthly house payments. Each loan program has different guidelines on front- end ratio percentages. Typically, government loan programs have higher front-end ratio percentages, allowing more home-buyers to qualify for loans.

Front-End Ratio = PITI ÷ Total Monthly Income

- Interest Rate: The interest rate determines the monthly interest payments over the lifetime of the loan.

- Interest Rate Point: A “point” or “discount point” is equivalent to 1 percent of the loan amount and usually reduces or “discounts” the loan rate by an eighth of a percentage point. For example: You want to get a loan for $100,000 to buy a home. Each “point” would cost you 1 percent of $100,000 or $1,000 but would reduce your loan’s interest rate by .125 percent. The lender might offer you an 8.0 percent loan with zero points, a 7.875 percent loan with one point, or a 7.75 percent loan with 2 points. Points are an up-front payment, in addition to the down payment that is required upon closing. In some cases, lenders will allow borrowers to finance the points over the term of the loan. Lenders sometimes use points to make their interest rates appear lower. Be aware that lower interest rate offered by a lender may translate into higher points requirements.

- Maximum Loan Amount: This figure is the sum of the total loan amount and other financed fees. It represents the maximum amount that the lender is willing to offer based on constraints including income, debt, and cash available. This maximum loan amount is set by the lender or by the specific type of loan. For example, a lender offering to finance a $100,000 home with a LTV (Loan to Value ratio) of 97 percent approves a maximum loan amount of $97,000. The buyer must include the remaining 3 percent ($3,000 in this example) in the down payment.

Home Sales Price × Loan to Value (LTV) percent = Maximum Loan Amount

- PITI: This figure is the sum of Principal, Interest, Property Taxes, and Insurance payments. For most homeowners, PITI represent the amount of their monthly mortgage payment.

Principal + Interest + Property Tax + Insurance = PITI

- PITIO: This figure is the sum of Principal, Interest, Taxes, Insurance, and Other monthly non-housing costs, basically all of the money that you usually spend in a month.

Principal + Interest + Property Tax + Insurance + Total Other Costs = PITIO

- Sales Price and the Loan Amount: This is one of the main parts of the “up-front” cash required at closing. It represents a percentage of the home sales price paid at closing. For example: a 20 percent down payment on a $100,000 sales price is equivalent to a down payment of $20,000 at closing.

Home Sales Price – Loan Amount = Down Payment

Finding the Perfect Home

Your home should fit the way you live, with spaces and features that appeal to the whole family. Before you begin looking at homes, make a list of your priorities, including things like location and size. For example, should the house be:

• Close to certain schools?

• Close to your job?

• Close to public transportation?

• How large should the house be?

• What type of lot do you prefer?

• What kinds of amenities are you looking for?

Establish a set of minimum requirements and a “wish list.” Minimum requirements are things that a house must have for you to consider it, while a “wish list” covers things that you’d like to have but that aren’t essential. Select a community that will allow you to best live your daily life. Many people choose communities based on schools. When you find places that you like, talk to people who live there. They know the most about the area and will be your future neighbors. More than anything, you want a neighbor- hood where you feel comfortable. For example:

• Do you want access to shopping and public transportation?

• Is access to local facilities like libraries and museums important to you?

• Do you prefer the peace and quiet of a rural community?

If you ever feel that you are being excluded from certain neighborhoods, sections of a community, or a particular house, immediately contact the U.S. Department of Housing and Urban Development (HUD). Also, contact HUD if you believe you are being discriminated against on the basis of race, color, religion, sex, nationality, familial status, or disability. HUD’s Office of Fair Housing has a hotline for reporting incidents of discrimination: 1-800-669-9777 (or on the HUD website at: www.hud.gov).

You can get information about school systems by contacting the city or county school board or the local schools. Your real estate agent may also be knowledgeable about schools in the area. Contact the local chamber of commerce for promotional literature or talk to your real estate agent about welcome kits, maps, and other information. You may also want to visit the local library. It can be an excellent source for information on local events and resources, and the librarians will probably be able to answer many of the questions you have.

You should look at each home for its individual characteristics. Generally, older homes may be in more established neighborhoods, offer more ambiance, and have lower property tax rates. People who buy older homes, however, shouldn’t mind maintaining their home and making some repairs. Newer homes tend to use more modern architecture and systems, are usually easier to maintain, and may be more energy-efficient. People who buy new homes often don’t want to worry initially about upkeep and repairs. In addition to comparing the home to your minimum requirement and wish lists, consider the following:

• Is there enough room for both the present and the future? • Are there enough bedrooms and bathrooms?

• Is the house structurally sound?

• Do the mechanical systems and appliances work?

• Is the yard big enough?

• Do you like the floor plan?

• Will your furniture fit in the space?

• Is there enough storage space? (Bring a tape measure to better answer these questions.)

• Will the seller repair or replace the items?

• Imagine the house in good weather and bad, and in each season.

• Will you be happy with it year-round?

• Does anything need to be replaced?

• What things require ongoing maintenance (e.g., paint, roof, heating, air conditioning, appliances, carpet)?

• Also ask about the house and neighborhood, focusing on quality of life issues.

Be sure the seller’s or real estate agent’s answers are clear and complete. Ask questions until you understand all of the information they’ve given. Making a list of questions ahead of time will help you organize your thoughts and arrange all of the information you receive. Take your time and think carefully about each house you see. Ask your real estate agent to point out the pros and cons of each home from a professional stand- point. Many of your questions should focus on potential problems and maintenance issues. If possible, take photographs of each house: the outside, the major rooms, the yard, and extra features that you like or ones you see as potential problems. And don’t hesitate to return for a second look. Visit as many homes as it takes to find the one you want. On average, home buyers see fifteen houses before choosing one. Just be sure to communicate often with your real estate agent about everything you’re looking for. It will help avoid wasting your time. **

Home Buyer’s Rights

Here is an overview of some important rights you have as a homebuyer: • Consumer Credit Protection Act (1960): Guarantees confidentiality of credit reports and allows customers to correct inaccurate information in their reports.

• Equal Credit Opportunity Act of 1975 (ECOA): Prohibits the discrimination in any credit action based on race, sex, marital status, color, religion, age, handicap, or national origin.

• Equal Housing Opportunity Act: Prohibits housing discrimination based on race, sex, marital status, color, religion, age, handicap, family status or national origin.

• Fair Housing Act: Prohibits the discrimination based on race, sex, marital status, handicap, or national origin in any real estate transaction.

• Federal Consumer Credit Protection Act (commonly known as the Truth in Lending Act) (1969): Requires that lenders disclose the actual terms and conditions of a loan before an applicant commits to the loan.

• Federal Interstate Land Sales Disclosure Act (1968): Requires land developers to register subdivisions of 100 or more non-exempt lots with HUD and to provide each purchaser with a disclosure document that contains relevant information about the subdivision.

• Home Mortgage Disclosure Act (1975): Provides information to help determine whether public institutions are assisting the housing needs of their communities and neighborhoods.

• Real Estate Settlement Procedures Act of 1974 (RESPA): Encouraging home ownership through consumer protection, this act regulates certain lending actions related to closing/settlement. Some of its provisions are:

-RESPA requires lenders to provide buyers a good faith estimate of the cost of the loan, including disclosure of the Annual Percentage Rate (APR).
-RESPA requires lenders to provide buyers with general information about settlement costs. Lenders must provide buyers a copy of the Mortgage Servicing Disclosure Statement, regarding loan servicing and transfer. Within three days after receiving the loan application, lenders must provide the buyer with an estimate of closing costs and monthly payments.
-RESPA provides the borrower the opportunity to see the HUD-1 Settlement Statement one day before the actual settlement. Prohibits kickbacks between Real Estate professionals for referrals and prohibits fee-splitting and receiving unearned fees for services not rendered.

• Regulation B of the Consumer Credit Protection Act: Requires lenders to inform potential borrowers of any adverse actions taken on their loan applications.

• Regulation Z: Includes regulations related to consumer credit disclosures identified in the Consumer Credit Protection Act.

• Veterans Housing Benefits Act (1978): Increases the housing benefits for eligible veterans including increased loan amounts. **

Making an Offer on a Home

You have found the right house. Now, there are several things you should consider:

• Is the asking price in line with prices of similar homes in the area?
• Is the home in good condition or will you have to spend a substantial amount of money making it the way you want it? You probably want to get a professional home inspection before you make your offer.
• How long has the home been on the market? If it’s been for sale for awhile, the seller may be more eager to accept a lower offer?
• How much mortgage will be required? Make sure you really can afford whatever offer you make.
• How much do you really want the home? The closer you are to the asking price, the more likely your offer will be accepted. In some cases, you may even want to offer more than the asking price, if you know you are competing with others for the house.

If you use a real estate agent, they will assist you in making an offer, which will include the following information:

• Complete legal description of the property
• Amount of earnest money
• Down payment and financing details
• Proposed move-in date
• Price you are offering
• Proposed closing date (date when you will pay final price and seller will give you the keys to the home)
• Length of time the offer is valid
• Details of the deal

If your offer is rejected, you begin negotiating. You may have to offer more money, but you may ask the seller to cover some or all of your closing costs or to make repairs that wouldn’t normally be expected. Often, negotiations on a price go back and forth several times before a deal is made. Just remember, don’t get so caught up in negotiations that you lose sight of what you really want and can afford.

Remember that a sale commitment depends on negotiating a satisfactory contract with the seller, not just making an offer. Other ways to lower insurance costs include insuring your home and car(s) with the same company, increasing home security, and seeking group coverage through alumni or business associations. Insurance costs are always lowered by raising your deductibles, but this exposes you to a higher out-of-pocket cost if you have to file a claim.

Unless you have a buyer’s agent, remember that the agent works for the seller. Make a point of asking him or her to keep your discussions and information confidential. Listen to your real estate agent’s advice, but follow your own instincts on deciding a fair price. Calculating your offer should involve several factors: what homes sell for in the area, the home’s condition, how long it’s been on the market, financing terms, and the seller’s situation. By the time you’re ready to make an offer, you should have a good idea of what the home is worth and what you can afford. Be prepared for give- and-take negotiations, which are very common when buying a home. The buyer and seller may often go back and forth until they can agree on a price.

Earnest money is money put down to demonstrate your seriousness about buying a home. It must be substantial enough to demonstrate good faith and is usually between 1-5 percent of the purchase price (though the amount can vary with local customs and conditions). If your offer is accepted, the earnest money becomes part of your down payment or closing costs. If the offer is rejected, your money is returned to you. If you back out of a deal, you may have to forfeit the entire amount. If your offer is accepted, your next step is to secure financing from a lender. The issues involved in financing have already been covered. With your financing secure, you then proceed to your “closing” on the property. **

What Should I Expect at the Closing?

Closing is the final step in buying a home. It is the meeting in which the buyer will pay closing costs and sign a mortgage or deed of trust and the seller will turn over the deed to the property and the keys. Before a closing the buyer will have a final walk-through of the home. This will likely be the first opportunity to examine the house without furniture, giving the buyer a clear view of everything. Check the walls and ceilings carefully, as well as any work the seller agreed to do in response to the inspection. Any problems discovered previously that you find uncorrected should be brought up prior to closing. It is the seller’s responsibility to fix them. RESPA stands for Real Estate Settlement Procedures Act. It requires lenders to disclose information to potential customers throughout the mortgage process, By doing so, it protects borrowers from abuses by lending institutions. RESPA mandates that lenders fully inform borrowers about all closing costs, lender servicing, escrow account practices, and business relationships between closing service providers and other parties to the transaction. For more information on RESPA, visit the web page at: http://www.hud.gov/fha/sfh/res/respa_hm.html or call 1-800-217-6970 for a local counseling referral. At your closing, you’ll sit at a table with your broker, the broker for the seller, probably the seller, and a closing agent. The closing agent will have a stack of papers for you and the seller to sign. While he or she will give you a basic explanation of each paper, you may want to take the time to read each one and/or consult with your agent to make sure you know exactly what you’re signing. After all, this is a large amount of money you’re committing to pay for a lot of years. Before you go to closing, your lender is required to give you a booklet explaining the closing costs, a “good faith estimate” of how much cash you’ll have to supply at closing, and a list of documents you’ll need at closing. If you don’t get those items, be sure to call your lender before you go to closing. Don’t hesitate to ask questions. You can also look over all of the forms included in this book to get an idea of the basic type of forms that you will be signing at your closing. You’ll present your paid homeowner’s insurance policy or a binder and receipt showing that the premium has been paid. The closing agent will then list the money you owe the seller (remainder of down payment, prepaid taxes, etc. ) and then the money the seller owes you (unpaid taxes and prepaid rent, if applicable). The seller will provide proof of any inspection, warranties, etc. Once you’re sure you understand all the documentation, you’ll sign the mortgage, agreeing that if you don’t make payments the lender is entitled to sell your property and apply the sale price against the amount you owe plus expenses. You’ll also sign a mortgage note, promising to repay the loan. The seller will give you the title to the house in the form of a signed deed. You’ll pay the lender’s agent all closing costs and, in turn, he or she will provide you with a settlement statement of all the items for which you have paid. The deed and mortgage will then be recorded in the state or county Registry of Deeds, and you will be a homeowner. At closing, you should get the following: • HUD Settlement Statement (itemizes services provided and the fees charged; it is filled out by the closing agent and must be given to you at or before closing). • Truth-in-Lending Statement • Any required disclosure statements (Many states require various disclosures about the condition of the property, home, or local problems, such as proximity to a landfill. • Promissory Note • Bill of Sale for any personal property included with the sale • Mortgage or Deed of Trust • Keys to your new home! **