Buying a Home
Buying a New Home
If you are thinking of buying a new home, you must pay close attention to a great many details to ensure that you find one that will suit your needs and preferences. Before you start shopping, you should sit down with the members of your household to discuss the features you would all like in a new home. You should also determine how much you can afford to pay for a new home.
To organize your thoughts, write each separate feature that you want on a 3X5 card, and arrange the cards in order of their importance to you. For instance, if you like to cook, you may want a home with a large, well-equipped kitchen. Or you may settle for a small kitchen so that you can have extra space for a library, office or computer room. Some home buyers seek large, open interior spaces, while others prefer traditional rooms that afford more privacy. Some choose homes with large yards. Others opt for condominiums where they can avoid yard maintenance entirely. While looking for a home, consider whether your needs are likely to change over time. If you plan to add rooms, find out if there is enough space on your site for such expansion and whether such additions are permitted by your local jurisdiction.
A Note on Condominiums and Cooperatives
A condominium is a home in a multi-unit complex, such as an apartment building or a townhouse cluster. You own the home, and you and your neighbors jointly own the common elements, such as the land around the complex, the parking areas, building exteriors, hallways, utility pipes and recreational facilities. A condominium owners association is responsible for maintaining the jointly owned elements. The day-to-day business of the complex is generally handled by a managing agency. The owner of each condominium unit has a vote in the affairs of the community. Each owner pays a fee to cover the operating expenses of the property and usually contributes to a reserve fund for replacements (such as a new roof) or improvements (such as decorative landscaping to improve the value of the property). Changes and improvements to the complex may be made only as you and your co-owners desire. You are responsible for maintaining the interior of your condominium unit. Typically, you will not have to perform outdoor chores. Cooperatives offer lifestyles similar to condominiums, but rather than owning your unit, you own shares of the stock of the complex. Stock owners are jointly liable for the cooperative's debts.
Closing and Settlement Process
Settlement (or closing) is the process which passes ownership of a property from seller to purchaser. Going to settlement on a new home can be bewildering. Home buyers are usually required to sign a seemingly endless pile of documents, most of which are written in legalese.
Before you go to settlement, there are certain important items you should know about so that you can achieve the best possible terms for yourself in the transaction.
Ask a lender for a copy of the HUD pamphlet, Settlement Costs. Most lenders are required to provide their loan applicants with a copy of this document under the Real Estate Settlement Procedures Act (RESPA), but you will be able to shop more wisely for settlement services if you have read the pamphlet before you apply. It provides a good description of the settlement process and explains most of the expenses you will encounter.
When you apply for a loan, the lender is required by law to provide you with a good faith estimate of settlement costs. Shortly before settlement, you will be told exactly how much you owe so that you can get a bank check. A personal check is generally not acceptable. In some instances, you may have money returned to you instead of having to pay.
Before your settlement, familiarize yourself with these terms:
An appraisal is an estimate of the fair market value of your home. Appraisals help both the lender and the buyer to determine if the sales price is consistent with the actual value. An appraiser inspects the house and the neighborhood and makes an estimate based on the price of comparable houses and other factors.The appraisal provides no guarantee that the property is free of defects. Lenders insist on an appraisal to see how much they could recover by selling your house if you default. The fee for this service may vary considerably depending on the specific characteristics of your house.
If the lender requires an attorney to draw up any of the settlement documents, you may be charged a fee – a flat amount or a percentage of the loan. If you hire a lawyer to assist with the settlement, you will have to pay an additional fee at or immediately following settlement.
The lender may charge a fee for investigating your credit history.
Earnest money is a deposit paid to a seller to show you are serious about buying a house. Your receipt for this payment is called a binder. If you later buy the home, the earnest money is applied to your downpayment. If not, the earnest money is returned, minus expenses for processing. Be sure that you understand the refund procedures before you make a deposit.
Escrow Fees and Accounts
Escrow involves having a third party hold funds and/or documents until you and the seller complete settlement. Depending on the circumstances of your loan, you may be asked to make monthly payments to an escrow account after you purchase your home. Money in the account may be used to pay taxes, insurance, and any other regular assessments as they fall due. Such accounts serve a similar purpose to withholding income tax from your paycheck; by putting aside money each month, you avoid large annual or semiannual payments. You may be charged a fee for the service. In some states, escrow accounts draw interest. Sometimes, escrow agents handle settlements. Rather than you and the lender meeting to sign all of the documents and transfer money, the agent works with you and the lender separately to ensure that everything is done properly. Once again, a fee is required for this service.
Loan Origination Fee
A lender will charge a fee for the cost of processing the loan, usually calculated as percentage of the loan amount.
Loan Discount (Points)
The largest of your settlement cost may be the "points" lenders require to make the yield on your loan more profitable. A point is one percent on your loan amount. If you are borrowing $50,000, one point equals $500. Points are tax deductible if they are paid separately and not deducted from the loan amount. For VA loans, you can be charged a maximum of one point, but the number of points can be higher for FHA and conventional loans.
On a 30-year loan, each point that you pay reduces your interest rate by roughly 1/8 of a percent. You may be faced with a choice between two mortgages in which one has lower monthly payments but involves paying more points up front. Annual percentage rate calculation include buyers’ points, so ask for the APR to help you make your assessment. Keep in mind that an APR is calculated on the basis of the total life of the loan. For a 30-year loan, the APR is a 30-year composite figure. If you sell your new home after a few years, the average annual cost of your points will be much higher than is reflected in the APR. If you plan to move soon, you might be better off with a loan that has a slightly higher rate but fewer points.
Property Survey Fee
You may have to pay to have your lot surveyed, especially if there is a question about the boundaries. The cost will depend on the complexity of the survey.
Because title is changing hands, the transaction must be recorded with your city, county, or other appropriate branch of government. The fee covers administrative costs.
State and Local Transfer Taxes
Some jurisdictions levy taxes on the transfer of property or on real estate loans.
Settlement Costs Between Buyer and Seller
Your builder may have already paid the annual property taxes on your new home or filled up your fuel tank. When title changes hands, you must reimburse the builder for a proportional share of the taxes, any fuel that remains in the tank, and any other prepaid costs.
Title Search and Insurance
A title search involves having someone look through public records to see if anyone else has a claim to your property. A lender does not want to lend you money only to learn in the event of foreclosure that somebody other than you has a prior claim to the property.
You will normally be required to purchase lenders’ title insurance to guard against a faulty title search as well as hazards that even the most thorough search will not reveal – such as a forged deed that does not transfer title, a claim by a previously undisclosed relative of a former owner, or a mistake in the records. For a one-time premium at closing, title insurance will clear up title problems, pay the lender’s legal expenses for defending against an attack on title, or pay claims on property the lender may lose.
Lenders’ title insurance does not compensate buyers for any legal expenses they might incur, or the value of property they might lose. A separate owners’ title insurance is available to safeguard the buyer. Whether the seller or the buyer pays for owners’ title insurance depends on local custom. This list of settlement terms is not all-inclusive. You may also be charged fees for notarizing documents and other miscellaneous items.
Once all the forms have been signed, you can move into your new home. But before ending the settlement session, make sure that you have received or will be sent copies of all the important documents, including:
- Sales contract
- Land survey
- Warranties and instruction booklets from manufacturers for equipment in the house
- All tax payment receipts
- Certificate of occupancy (required in some areas)
- Certificates from the health department for plumbing and sewer installations (required in most areas)
- Other certificates of code compliance (required in most areas)
- All insurance polices (some might be sent later after they have been properly endorsed)
- The note and deed to your property (which will probably be mailed to you after being placed on record in your local registry of deeds office)
Deciding Where to Live
Location is one of the most important considerations when shopping for a new home. Weigh the pros and cons of living in the city, the suburbs or the country. Compare locations as carefully as you compare houses.
Consider practical aspects such as time and distance to work, schools and shopping, and the availability of public transportation. Make personal observations, but also consult with your builder, local government, friends, and if possible, people in the neighborhood.
As you explore each home, use the following checklist to help determine whether the location suits your needs.
- Are adequate shopping facilities nearby?
- Police and fire protection
- Are police and fire protection adequate?
- Medical facilities
- Is there a hospital or medical center nearby?
Schools and day-care
- Are schools in a convenient location?
- Are convenient day-care facilities available?
- Are the streets quiet enough?
- Does the speed limit on the streets suit you? I
- f you have children, will they be safe from traffic hazards?
- Is the home located close to your job?
- Are parking and garage facilities adequate?
- Is public transportation frequent and convenient?
Trash and garbage collection
- Are trash and garbage collection adequate?
- Are there suitable parks and recreational facilities nearby?
Places of worship
- Are places of worship available and convenient?
- Do the lot and house offer adequate privacy?
- Does the community have a reliable source of drinking water with adequate capacity to meet present and future needs?
- Is the sewer system or septic tank adequate and reliable?
- Does it meet present and anticipated future needs?
- Is the land well-drained?
- Has proper landscaping been done to prevent erosion?
- Is the landscaping attractive and likely to enhance the value of the home?
- Are the property tax rates reasonable?
- Is either the tax rate or the value of the house likely to change enough to cause a substantial increase in your tax payment?
Courtesy of the National Association of Home Builders
A mortgage is a long-term loan that uses real estate as collateral. Mortgage loans are usually fully-amortizing, which means that the monthly principal and interest payment will pay off the loan in the number of payments stipulated on the note. Mortgage loans are also described by the length of time for repayment, such as 15, 30 or 40 years, and whether the interest rate is fixed or adjustable. A mortgage loan where the downpayment is less than 20% usually requires private mortgage insurance (PMI) or government insurance or guarantee.
Most mortgage loans require monthly payments of principal and interest plus additional payments that are set-aside in escrow accounts to pay property taxes, homeowners (hazard) insurance, and any condominium or homeowner association assessments. Monthly mortgage insurance premiums for loans that have private or government mortgage insurance are generally included as part of the regular monthly principal and interest payment.
Some lenders offer "nontraditional" mortgage loans such as interest-only loans, in which case the borrower pays only the accrued interest and none of the payment is used to reduce the principal balance, or loans where the borrower chooses each month whether to make a minimum payment, pay the accrued interest only, or pay the accrued interest and a portion of the principal.
Home buyers who opt for a nontraditional mortgage should be aware that, depending on the terms of the loan, sudden and significant changes can occur in the monthly payment due to changes in the interest rate and/or payment terms. It is the home buyer's obligation to fully understand the terms of their loan.
Some lenders offer bi-weekly mortgages, which call for 26 payments per year. The details of bi-weekly mortgages can differ, so it's best to ask the lender to outline the details of how these programs work. A word of caution regarding bi-weekly mortgages. A number of companies offer bi-weekly mortgage programs that require the borrower to send their mortgage payment to a party that is not the lender. Borrowers should exercise caution to ensure that these payments will be sent to the lender on a timely basis and that the borrower, not the third party, receives the benefit of making bi-weekly payments.
Homebuyers who can afford the higher monthly payment sometimes prefer a 15-year mortgage to a 30-year mortgage. Interest rates on 15-year mortgages usually are slightly lower than 30-year rates. In addition, a homebuyer financing a home purchase with a 15-year mortgage will repay principal substantially faster and will pay far less total interest over the term of the loan.
A conventional mortgage is one that is not insured or guaranteed by the government. Conventional loans with a downpayment of less than 20% typically require private mortgage insurance (PMI), which protects the lender if the homeowner defaults on the loan. For more information about conventional loans, please check the Web sites of Fannie Mae and Freddie Mac, the two primary puchasers of conventional loans. Please note that Fannie Mae and Freddie Mac do not lend money to home buyers, rather, these organizations and other investors purchase loans that have been made to home buyers by mortgage lenders.
The Federal Housing Administration (FHA), which is a part of the US Department of Housing & Urban Development (HUD), operates several low-downpayment mortgage insurance programs that buyers can use to purchase a home. FHA-insured loans generally require the buyer to make a three percent cash contribution to the down payment and closing costs. FHA-insured loans are available from most of the same lenders who offer conventional loans.
The maximum FHA-insured loan amount for a one-family home ranges from $200,160 to $362,790 depending on local area median home prices and other factors. The Economic Stimulus Act of 2008, which was signed into law by President Bush on February 13, will temporarily raise FHA loan limits. Under the provisions of this law, FHA limits will range from $271,050 to $729,750 for loans approved through December 31, 2008. These limits will be effective when published by HUD in March. Your lender can provide more details about FHA-insured mortgages and the maximum loan amount in your area, or find information on FHA’s loan limits directly from HUD’s web site.
If you are a veteran of military service, reservist, or on active military duty, you may be able to obtain a loan guaranteed by the Department of Veterans Affairs (VA), which requires little or no down payment. Get more information about the VA Loan Guaranty program.
Rural Housing Service Loans
The Rural Housing Service (RHS), which is a part of the US Department of Agriculture, offers Section 502 Direct and Guaranteed Rural Housing loans to home buyers located in rural areas. Section 502 Direct loans offer reduced interest rates to lower-income borrowers who qualify, and are arranged directly through local USDA County Agents or through USDA Rural Development state offices.
A limited amount of funding is available for Section 502 Direct loans, so some lenders also offer “Leveraged Loan” programs. Leveraged loans combine a Section 502 Direct loan that carries a low interest rate with a conventional, market-rate loan. The “blended” interest rate on the resulting loan is lower than the current market rate as a result of the combination of the rates on the two loans.
The Section 502 Guaranteed Rural Housing Loans are arranged through participating local lenders and are available to a broader range of borrowers. Click here to find out more about RHS loan programs.
Louisiana Housing Finance Agency Loans
Louisiana residents buying their first home are eligible for other special incentives through the Louisiana Housing Finance Agency's First Time Home Buyer Program, including a 30-year, fixed-rate mortgage at a below-market interest rate. In the City of New Orleans, the Finance Authority of New Orleans offers a Pathway to Home Ownership soft second mortgage program, that can provide gap financing for consumers looking to buy a home.
Adjustable Rate Mortgages (ARMs)
With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. But with an ARM, the interest rate changes periodically, usually in relation to a specific index such as a cost of funds rate or the Treasury bill rate. Payments may go up or down accordingly. Adjustable-rate mortgages (ARMs) are characterized by the time frame for adjustment, such as 1 year, or 3, 5, 7, or 10 years. Hybrid ARMs have grown in popularity because they may offer a favorable fixed rate of interest for a time, such as 3, 5, 7, or 10 years, after which the loan becomes a 1-year ARM.
Lenders generally charge lower initial interest rates for ARMs and Hybrid ARMs than for fixed-rate mortgages. This makes the ARM easier on your pocketbook at first than a fixed-rate mortgage for the same amount. It also means that you might qualify for a larger loan because lenders sometimes make this decision on the basis of your current income and the anticipated monthly payments for the few year or two. Moreover, if interest rates remain steady or move lower, your ARM could be less expensive over a long period than a fixed-rate mortgage.
Against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It's a trade-off: you get a lower rate with an ARM in exchange for assuming more risk.
Here are some things to consider with an ARM or a Hybrid ARM:
- Is my income likely to increase enough to cover higher mortgage payments if interest rates go up?
- How long do I plan to own this home? (If you plan to sell soon, rising interest rates may not present the risk they do if you plan to own the house for a long time.)
- Can my payments increase even if interest rates generally do not increase?
- What index will be used to adjust the mortgage rate? Ask the lender for a table showing movements in the index over the previous 10 years to see how your mortgage payments would have changed.
- How often will the interest rate be adjusted? Every year? Three years? Five years? The longer the adjustment period, the better you will be able to plan your future loan cost.
- What is the initial mortgage interest rate? Does it include a special discount or “teaser?” If so, you could face a large increase in your monthly payments when the interest rate is adjusted for the first time.
- What is the margin on the interest rate? The margin is the amount that the lender adds to the index rate to calculate your mortgage rate. For instance, if the index rate is 7 percent and the margin is 2 percent, your overall interest rate would be 9 percent.
- What limits or caps have been placed on the adjustments? One of the most important items to discuss with your lender is the maximum amount that your mortgage rate can increase in any single adjustment period and over the life of the loan. Find out the "worst case" situation in the event of a sharp increase in your index rate.
- Is the loan convertible? If so, is there a cost to convert? Convertibility allows you to change your ARM to a fixed-rate loan at some designated time in the future.
- Is there a prepayment penalty? If you refinance your loan with a new loan, you may be assessed a fee.
For more information about mortgages, please contact William Renner with the National Association of Home Builders at 800-368-5242 x8597 or via e-mail at firstname.lastname@example.org.
Pre-Settlement Walk Through Tips
Courtesy of the National Association of Home Builders
Before you go to settlement on a new home, you and your builder will "walk through" the house to conduct a final inspection. The walk-through provides an opportunity for you to learn how your new home works and to spot items that need to be corrected or adjusted.
Often, a builder will use the walk-through to inform buyers about:
- The operation of the house's components.
- The buyer's responsibilities for maintenance and upkeep.
- Warranty coverage and procedures.
- The larger community in which the home is located.
When you buy a new appliance or piece of equipment, such as a washing machine, you usually have to read the instructions before you can understand how to use all of the features. With a new house, you will be receiving a stack of instruction booklets all at once. It helps if someone can take the time to show you how to operate all of the kitchen appliances, the heating and cooling systems, the water heater, and other features in the home. Such an orientation is particularly useful considering that when moving into a new home, people often are so busy that they have trouble finding time to read instruction booklets.
Learning about maintenance and upkeep responsibilities is very important. Most new homes come with a one-year warranty on workmanship and materials. However, such warranties do not cover problems that develop because of failure to perform required maintenance. Many builders provide a booklet explaining common upkeep responsibilities and how to perform them.
Should a warranted problem arise after you move in, the builder is likely to have a set of warranty service procedures to follow. Except in emergencies, requests for service should be in writing. This is not because the builder is trying to be bureaucratic. Rather, it is to ensure that everyone clearly understands the service to be performed. The person receiving a service request is not likely to be the person performing the work, and you don't want to rely on word of mouth for transmission of your service order.
Many builders schedule two visits during the first year -- one near the beginning and the other near the end -- to make necessary adjustments and to perform work of a non-emergency nature. You should not expect a builder to rush out immediately for a problem such as a nail pop in your drywall. Such problems occur because of the natural settling of the house and are best addressed in one visit near the end of the first year.
If you have moved to a new home from a nearby area, you probably will not spend much time at the walk-through talking about the larger community in which the home is located. However, if you are moving to a new community, a builder can often provide a packet of material to help you become acclimated.
With respect to inspecting the house, an effective way to handle this is with a checklist. The list should include everything that needs attention, and you and your builder should agree to a timetable for repairs.
Builders prefer to remedy problems before you move in, because it is easier for them to work in an empty house. Some items may have to be corrected after move-in. For instance, if your walk-through is in the winter, your builder may have to delay landscaping adjustments until spring.
It is important that you be very thorough and observant during the walk-through. Carefully examine all surfaces of counters, fixtures, floors and walls for possible damage. Sometimes, disputes arise because a buyer may discover a gouge in a counter top after move-in, and there is no way to prove whether it was caused by the builder's workers or the buyer's movers.
Many builders ask their buyers to sign a form at the walk-through stating that all surfaces have been inspected and that there was no damage other than what has been noted on the walk-through checklist. Ask a lot of questions during the walk-through and take notes on the answers.
Never be afraid to appear stupid by asking too many questions. That is how you learn. It is important to view the walk-through as a positive learning experience that will enhance your enjoyment of your home.
For more information about this item, please contact Gwyn Donohue at 800-368-5242 x8447 or via e-mail at email@example.com.