Issue I: The First Step in
the Home Buying Process
By Howard Taub, Certified Buyer Representative (CBR),
Realtor (R)
Whether you're a first-time
buyer looking for a condominium in the city or a seasoned professional
moving to a house in the suburbs, most of us eventually buy a home. Unfortunately,
most of us will also make this decision, one of the most important financial
decisions in our lives, with less research than we would in buying a DVD
player.
Many of us have horror stories about home buying that we share at family
barbecues or cocktail parties . We have looked at hundreds of homes, panicked
at finding major structural problems after having plunked down a five-figure
down payment, tossed and turned for nights waiting to hear about mortgages,
and cursed the real estate broker (worse than a used car salesman!). The
purpose of this column is to give you some advice to optimize your home
search and to minimize the number of aspirins consumed in the process
of buying your new home.
RealTime Real Estate, Inc.
concentrates in buyer brokerage-advising buyers on home buying and assisting
them through the entire home buying process. If you've never heard of
buyer brokerage for homes, it's because it's relatively new to the Boston
area. Basically a buyer broker works as your personal housing consultant
(as opposed to traditional listing brokers, who help sellers sell their
properties). Of course, our first piece of advice to every home buyer
is to work with the appropriate buyer broker in your home hunting effort.
The focus of this series of articles, however, is the other steps you
can take to make finding your home a dream-and not a nightmare.
Many people start looking
for a home by opening the Sunday paper and running to open houses. Instead,
the first step in looking for a home should be to go to a bank or mortgage
company and becoming pre-approved for a mortgage.
Pre-Approval
A pre-approval is basically
the same process as formally applying for a mortgage-without the house
picked out. Pre-approval requires that you provide financial information
(tax returns, pay stubs, savings account records, etc.) to the bank or
mortgage company. The bank checks your credit history. You sometimes pay
an application fee, perhaps $250, payable toward your closing if you finance
with the bank. For a pre-approval, the bank determines how much money
they will lend you.
With a pre-approval in hand and an accepted offer on a house, basically
the only major financing piece that remains is for the bank to appraise
the home. The appraisal is done to make sure the home is worth the money
the bank is investing in the property.
If you are not prepared for
the pre-approval process or suspect you may have outstanding credit issues,
you can get copies of your credit reports. Massachusetts requires that
each of the three major companies which chart credit provide you with
one free credit report each year. Many people are surprised at what they
find on their credit reports. Often, closed-out issues are not documented
on the report - you really did pay off that college bill - and you need
to make sure your record is current and accurate.
Why should you bother with this whole bank process? Isn't this putting
the cart before the horse? The answer is an emphatic, "NO!" First, finding
out what you can afford will focus your home search substantially and
give you the right expectations. With a price range, area, and housing
type in mind (and realistic goals), at any one time there are probably
only about a half-dozen properties which actually meet your
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criteria.
With a good buyer broker, you can see all these properties in one afternoon.
If you do not find something you like in the group of homes meeting your
criteria, you either modify your criteria (such as price, location, etc.),
or wait until the next property meeting your criteria comes on the market.
One of the reasons people view "hundreds of homes" in a futile home search
is that they are totally browsing, not seriously looking. They can't afford
many of the homes they are visiting! A true, and all too common, story follows:
A young couple insisted,
"We used one of those mortgage calculators on the internet and found we
can afford houses up to $350,000." They went with a broker and looked
carefully to find a house which really fulfilled their dreams. Then they
went to the bank and found out that the bank will only finance them for
a property worth up to $275,000, their dreams dashed to the ground. Why
did this happen? In their calculations, the young couple did not include
car payments, "which we will have paid off in a year." How will they make
their house payments for the first year while they are paying off the
car? Also not calculated was the $6,000 on their Mastercard left over
from the wedding and honeymoon, since "we are paying this off every month."
The satisfied, but not documented, judgment from their past for an unpaid
bill certainly did not help, either. This whole tragic scenario could
have been avoided by the couple spending even one hour at the bank in
the beginning of the home buying process.
A second strong reason for
pre-approval is that the pre-approval letter makes your offer to purchase
a house much stronger-both in the eyes of the seller and in comparison
to other offers that may be made on the property. In the current housing
market, most sellers insist on the buyer submitting a written pre-approval
with offers to purchase houses.
With the proper professional advice, most buyers place a mortgage contingency
clause in their offers to purchase a home. These contingencies usually
state that by the appropriate date and for certain terms, the buyer will
apply for a mortgage to finance the purchase of the home. If the buyer
cannot obtain a mortgage for the stated amount by a certain date, the
buyer gets back the down payment placed with the Purchase and Sale Agreement
(with proper written notice by the stated deadline). The down payment
placed with the Purchase and Sale Agreement is usually 5% of the purchase
price (10% in certain sections of Boston and its suburbs), or several
thousand dollars. For example, $17,500 of your money would be at risk
on a $350,000 home. |
