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Basic Overview of Financing and Buying a Home

Tips on Mapping your way through the maze of financing your future investment: Common Questions Asked by Homebuyers

What is a mortgage?

Basically, a mortgage is a loan that is obtained from a lender in order to finance a home. The mortgage works as a lien on the property. The lending company is letting you borrow money to pay for your home and in return the lender is placing a lien on your home. A lien is a form of security interest on a property in order to secure the promise of a payment for a debt or performance of some kind of obligation).

What are the types of mortgages?

Fixed Rate Mortgage: Payments for a fixed-rate mortgage remain the same throughout the life of the loan. The advantage of a fixed rate mortgage is that it is predictable because your housing cost is not affected by interest rate changes or inflation. Types: 10-year, 15-year, or 30-year Mortgages, etc. Adjustable Rate Mortgages (ARM): Payments for an adjustable rate mortgage increase or decrease regularly with changes in interest rates. The advantages of obtaining an ARM when buying a home is that it offers lower initial interest rates. Even the monthly payments can be lower than a fixed-rates mortgage. There is also a possibility that the borrower is able to qualify for a larger loan amount if they choose to go with an Adjustable Rate Mortgage. Types: Balloon Payment Mortgage, Two-Step Mortgage, ARMS linked to a specific index or margin.

Which type of mortgage is right for you?

ARMS might be a better choice for you when you know with certainty that your income will continually increase in the future or if you are planning to resell your home in the near future and are not concerned about the potential increases in interest rates.

Are there special mortgages for first-time homebuyers or homebuyers with less than favorable credit ratings?

Yes. There are a number of affordable mortgage options that are helpful for first-time homebuyers. When shopping for mortgages let your potential lenders know that you are a first-time buyer, and they may have options for those who don't have a significant amount of money saved up for the down payment and closing costs, have no or poor credit history, have quite a bit of long-term debt, or have experienced income irregularities. FHA is also a good source for assistance.

What is a subprime mortgage?

A subprime mortgage is a type of loan that is available to those who do not qualify for prime rate loans because of reasons such as low credit ratings or a history that shows a reasonable possibility of defaulting on mortgage payments. Lenders often charge interest rates that are higher than a traditional mortgage in order to compensate for their burden of carrying more risk in lending to a less than ideal borrower.

What is an Escrow Account?

An escrow account is a place to set aside a portion of your monthly payments in order to cover annual charges that you will need to pay as a homeowner. It is basically a writing given to a third party (the escrow company) giving them the right to collect and hold onto a specific amount of your money in an escrow account until the performance of an act is required by the written agreement (the writing generally entails an agreement that the escrow company set aside your money for the monthly payment of your property taxes and home insurance premiums).

Do I need an escrow account?

An escrow account is usually required by the mortgage documents you sign. Lending institutions have a legal right to require an escrow account. Escrow accounts are a good idea for you and the lender because they assure that your money is being set aside for the payments you will certainly have to pay in the future, so you have the peace of mind of knowing that at least a portion of your home costs will be paid.

What You Should Know about Homeowners Insurance

Homeowners Insurance is a contracted agreement between the homeowner and the insurance company. So long as the homeowner promptly pays all the premiums and meets the policy requirements, the insurance company guarantees to reimburse the owner for losses incurred due to natural disasters or human-caused damage. Oftentimes, buying a home is the largest purchase people will make, so it is reasonable to want to protect the value of their home.

Do you have to have homeowners insurance?

Yes. Mortgage companies require homeowners insurance when they lend you the money to purchase a home. Keep in mind that mortgage institutions are making a huge investment as well when they are handing you thousands of dollars to pay for your home. Mortgage companies are concerned with protecting your home because, in the unfortunate case that they are forced to reclaim your home for reasons such as defaulting on payments, they want to be able to resell the home at its true market value.

What determines the cost of homeowners insurance?

  1. The age and type of your home
    The price of your monthly payments for your home insurance is partially determined by things like the square footage of your home, the age of your home, and the type of materials used to build your home. Factors such as whether the home has had any recent additions, updates, or renovations are all considered by the insurance adjuster when determining the policy price for your homeowners insurance. Insurance companies look at all the various aspects of the home, in order to estimate the level of risk they are going to carry by insuring it. They will look to see how much it would cost to rebuild your home in the case of a disaster. The more expensive the rebuilding costs, the more expensive your insurance policy will be.
  2. The location of your Home
    Location is one of the factors that determine to cost of your home insurance policy. Insurance companies consider what home protections are available in the local area. For instance, if your home is next to a fire station, then it is more likely to survive a potential fire outbreak. If your home is in an area that is subject to hurricanes or tornadoes, your homeowners insurance costs will be higher to account for this increased risk. Take note that earthquake and flood protections are not included in a standard policy, so you would have to pay more to add these protections. Since part of the homeowner's insurance policy covers the cost of damage or loss of personal property due to theft or vandalism, the local crime rates will also be considered when figuring out your premium price.
  3. Extra protections on your policy
    There are many homeowners insurance coverages that are not generally provided by a standard home insurance policy. If you add any additional protections to your policy, you should expect to pay higher premiums.

Tips on how to reduce the cost of homeowners insurance

  1. You can raise your homeowners insurance deductible. Your deductible is the amount of risk you agree to take on (i.e. how much you are willing to pay) before the insurance company starts paying on a claim.
  2. Sometimes it is cheaper if you can insure you car as well as your home from the same insurance company. Some insurance providers offer discounted rates for those who buy both types of coverages from them. Also, insurance providers often give longevity discounts for those they have been insuring for a long time.
  3. Make sure you are not getting frivolous coverages. You may want to opt out of earthquake coverage if the home is in a location that does not experience earthquakes, or you may not want to get coverage for flooding if your house is sitting in the middle of a desert.
  4. Improve your credit score. Insurance providers are starting to use your credit information to set your insurance policy rates.

What to prepare for when it's time to make an offer for your new home

You have submitted your loan application. What now?

It may take anywhere from a week to over a month for the lender to complete the evaluation of your loan application. If your loan is approved, an offer can be made and a closing date can be set. Your lender will review the closing process with you. You will also need to do a final walk-through. This will be your opportunity to make sure that the seller has fixed all the work he or she would have agreed to after the completion of the initial home inspection. Any unfixed problems in the homes should be brought up prior to closing the deal. It is the seller's responsibility to fix them.

A glance at how to make an offer.

Once you have a set price range that is affordable to you, it will narrow down the search for your future home, and when you find the home that you can't live without, the next step is to make your offer. This will be the beginning of your negotiations process with the seller. This is where savvy bargaining skills should be put to use. Your offer should include not only the price you are willing or able to pay but other terms of the purchase as well. An offer should consist of details regarding how you plan on financing your home, the amount of your downpayment, what closing cost items you are willing to pay, what inspection performances you are demanding, terms of cancellation, a timeline/timetable, when you will get physical possession of the property, etc.

Sellers Agent v. Buyer's Agent: Is the Real Estate Agent working for you or the seller?

Making an offer can be a complicated task, and many homebuyers choose to work with an agent during the process. However, unless you have hired a buyer's agent, you should know that generally, the agent works for the seller and has the seller's best interest in mind. It would be wise for you get assurances from the agent to keep your information and conversations with him or her strictly confidential. Carefully consider your agent's advice since he or she is a professional in regards to buying and selling real estate, but don't throw your instincts out the window when deciding on a reasonable price for your potential home. Making an offer can be a complicated task, and many homebuyers choose to work with an agent. Your real estate agent can help you make an offer.

What you should know about home inspections before making your offer

What does a home inspector do?

The home inspector is there to make sure your potential real estate investment is safe and habitable. Their main purpose is to evaluate whether the property's structure, construction, and mechanical systems meet the state standards. More specifically, the inspector should look to find if there are any repairs that are needed on your potential home's: electrical system, plumbing and waste disposal, water heater, insulation and ventilation, HVAC system, water source and quality, potential presence of pests, the foundation, doors, windows, ceilings, walls, floors, and roof. If the home inspector finds any issues with the home, he or she will give you the prices for the repairs.

Does it matter who inspects your home?

Yes. Do your research. Make sure you find a home inspector that is qualified and experienced. Purchasing a new home is an extraordinary investment. The end result can be an invigorating experience if you take shrewd, planned steps or it can end up a nightmare if you cut corners during the process. You should make sure you know what you buying. Make sure you find a home inspector that is qualified and experienced. A good place to start your search is with the American Society of Home Inspectors.

Why it is in your best interest to have an inspection before you sign a written offer.

  1. Homebuyers find that most homes have some issues, but anything serious can be fixed by hiring a trained and experienced home inspector. Significant problems you find during the inspection can be a reason for you and the seller to negotiate a price reduction in the home. When making your offer, you can use the findings of your home inspection as an aid to deciding the what the fair home price is.
  2. Once you have closed the deal, you have purchased your new home as it is. It would be wise for you to have every nook and cranny checked before you make you final decision to purchase your real estate property. Don't make any rash decisions.

Bringing it All Home: Closing a Home Purchase

What can I expect to happen on closing day?

  1. You'll present your paid homeowner's insurance policy or proof showing that the premium has been paid. The closing agent will then list the money you owe the seller and the money the seller may owe you (if applicable). As a homebuyer, it is essential that you pay close attention to what you are committing yourself to.
  2. Once you are comfortable with all the documentation, you'll sign the mortgage and a mortgage note. By signing the mortgage, you are agreeing that if you do not make your payments to your lender, the lender will then be entitled to sell your home and apply the home-sale price against the amount you owe plus expenses incurred by the lender.
  3. Once the mortgage is signed, the seller will give you the title to your home in the form of a signed deed. Then you'll pay the lender's agent all the closing costs, which is when he or she will hand you the settlement statement stating all the items for which you have paid (like a receipt).
  4. What makes up closing cost?
    • Attorney's or escrow fees
    • Pro-rata property taxes
    • Interest (paid from date of closing to 30 days before your first monthly payment)
    • Loan origination fee: costs lender incurred while processing your application
    • Recording fees: payment to a government entity for entering an official record of change of ownership of the property (i.e. recording the deed) (paid by either home buyer or seller)
    • Survey fee: for a survey of the lot and all structures on it to confirm lot size and to check for encroachments. (paid by either home buyer or seller)
    • First premium of mortgage Insurance payment: a mortgage premium is the amount of your monthly mortgage payment.
    • Title Insurance: this is to make sure you are safe from financial loss due to defects in title to your home
    • Loan discount points: Discount points are a form of pre-paid interest as an alternative to charging a higher interest rate
    • First payment to escrow account for future real estate taxes and insurance
    • Paid receipt for homeowner's insurance policy
    • Any other documentation preparation fees
  5. The deed and mortgage will then be recorded in the state Registry of Deeds, and you will no longer be a home buyer but a homeowner!