You spent weeks touring homes and finally at last you found the perfect one for your family. Now that there is no time to waste, you ask your real estate agent to put an offer on that house tonight. Before you do that or get this far, ask your self if you and your real estate agent have done your pre due diligence. Before you start the clock on the due diligence period and potentially loose your deposits and pay for home inspections consider the following tips outlined for home buyers.
1. Understand how much you can afford
More often than not couples have champagne dreams on beer budgets and before it becomes a reality they already spent time looking at homes they can not reasonably afford. For most of us shopping for a home is so much more fun than shopping for a loan. It is highly advisable not to waste time looking at homes one can’t afford and instead get pre-qualified or even better pre-approved by a lender before one dives in. It will save time and potentially lot of money if done in the correct order. A lender pre-qualification will be required by most sellers before considering an offer. Imagine putting an offer on a house, submitting the due diligence and earnest money only to find out a few days before before closing that no lending institution will approve you for that house payment or financing falling through for other reason discussed later in this article. At this point you not only lost time but also your due diligence deposit, earnest money deposit and money paid for any inspections and services performed during this period. The Due Diligence deposit is not refundable if the financing falls through nor is the Earnest Money if that discovery is made after the due diligence period ends. These costly mistakes can be avoided by getting the buyer pre-qualified or even better pre-approved before starting to look at any homes to stay in the price range the buyer can afford. An experienced real estate agent will direct home buyers to get pre-approved before getting started on discussion of what they are looking for. On the flip side, a good listing agent will not accept an offer without verifying pre-approval of funds. However, there are always exceptions depending on who you work with as there are no regulations or standards on steps that are in buyer’s hands with the advice and direction of their real estate agent.
2. Understand your loan costs
Shopping for a loan should be like shopping for a car but more often than not it is the last step in the home buying process. Lenders offer different interest rates that can make a significant impact on your monthly mortgage payment. For instance, at 6% interest rate your $100K loan have a monthly payment of $600 while the same loan at 5% will be $537 per month for a total monthly saving of $63. If you consider the same for a larger transaction of $500K that 1 percent is a difference of $314 savings per month or $3,763 per year. Getting the best interest rate and lowest closing costs requires getting credit inquiries done by multiple lenders. This is often times a concern for most home buyers but it shouldn’t be. According Experian, one of top 3 credit reporting institutions, when the inquires while shopping for a loan are done within a short period of time, they are counted as just one when calculating the credit score. This applies to credit inquiries on mortgage loans, car loans and student loans. That’s why it is important to get the loan shopping done in short period of time preferably less than 14 to 30 days to avoid having an impact on your credit score.
3. Understand how much you need at closing
Unless you are refinancing you will be responsible for paying closing costs out of pocket on settlement date – meaning you can’t add them to the total loan amount and finance it rather it will be paid separate. This sum covers loan origination fee, appraisal, credit report, owners’ and lender’s title insurance, attorney and recording fees. The closing costs can start at around $3,000 for homes at $150K and go up from there dependent on the loan origination fee of the lender financing your loan which is a percentage of the loan amount usually between 0.5 to 2 percent. You will also be responsible for down-payment at closing unless you are getting a VA loan that allows for 0% down but borrowers pay a funding fee of several thousand dollars in lieu of mortgage insurance. FHA loans require as little as 3.5% down but will tie you with life long Mortgage Insurance Premium (MIP). Conventional loans typically require 10% to 20% down to avoid the Private Mortgage Insurance depending on lenders used. If your down payment is less than the minimum required by the lender you will be responsible for paying monthly Private Mortgage Insurance (PMI) which insures lender’s payments in case of default. The PMI unlike the MIP does drop of automatically once you reach lender’s minimum equity in the house usually around 20%. Your lender be able to provide you with all information you need to pay before and at closing.
4. Understand the HOA Fees
HOA or Home Owners Association Fees are typically recorded by the listing agent in the MLS listing of the property with details on whether they are monthly, quarterly or annual. HOA fees are typically monthly on condos and town-homes and range usually from $50 to $300. For single family homes they are typically annual and range from $25 to $1,000 but for larger estates can be in the several thousand. HOA fees typically cover common area maintenance like lawn care, garbage and recyclable pickup, electric, pool maintenance, tennis courts, etc. Understand that for every $100 in monthly HOA fees you could buy $16,680 more of a house at 6 percent annual interest rate. This is especially noticeable for smaller transactions in the $150,000 to $200,000 range. For example, a town house for $150,000 with $200 monthly HOA fee would be equivalent to a single family home for $183,358 at 6% interest rate as that monthly HOA fee can be rolled into a larger home loan. When lenders qualify buyers for a home loan, HOA fees are always included in the monthly house expense qualification calculation.
5. Understand Deed restrictions
Don’t loose your Due Diligence money on an item that can be cross checked before you put an offer on a house. Restrictive covenants or deed restrictions are one of the more frequently overlooked items when buying a home. Typically these are either ignored all together or they are validated rather late in the game after an offer on a house is already submitted during the Due Diligence period. Restrictive covenants can not be ignored as courts take these very seriously. They overlay local county and city zoning laws and regulations and are always more restrictive. When they are ignored they often end up as legal civil dispute in courts sorting these out with real estate attorneys. The real estate agent representing the buyer should by this time be familiar with what the buyer is looking for and how they plan on using the property. Do they plan on conducting business out of the house’s garage, build a fence, raise animals, or add a loud work shed? Any of these may be in violation with the local subdivision rules or the declaration of restrictions. If the buyer has any special requirements, the agent should scan the covenants to confirm that they won’t interfere with the buyer’s plans. The buyer should be advised by the agent to read the restrictive covenants and get questions answered by a real estate attorney so that expectations of how they are going to use the property will not be in conflict with the restrictive covenants.
6. Understand the school choice
The elementary, middle and high schools listed on the MLS listing information sheet may not be accurate as school boards make annual zoning changes to residential neighborhoods. Always validate the assigned schools with the local county school district. These are many times available as a lookup on the county website. School rating and performance can be researched on several websites like Greatschools.org that provides performance ratings on public and private schools nationwide.
7. Understand your potential losses during Due Diligence period.
The Due Diligence Fee is paid directly to the seller within 3 days of the effective date of the contract. This fee assures the seller that the buyer is serious about buying the house and provides compensation in case the buyer pulls out for any reason. On smaller transactions in the $150K range you are looking at about $500 for Due Diligence fee while on larger transactions it can be in the few thousand dollars. What is a reasonable amount depends on the market’s supply and demand. If the house has been sitting on the market for some time, the seller will take smaller amounts, while if the house is very marketable with potentially multiple offers, the Due Diligence fee will need to be higher on even for smaller transactions. This is the amount that the buyer will need to provide in a form of a personal check or cashier’s check. If the buyer pulls out for any reason after the check has been given to the seller, they forfeit this amount as liquidated damage to the seller for loss of time on locking the house temporarily with this buyer’s contract even if they continue showing the property. There are other costs that a buyer might incur during this period. For example, an appraisal fee can be another $500, house inspection depending size of the home can run from $300 on smaller homes to $800+ on larger homes. Other inspections that are common are water and septic, pest inspection $70, structural integrity inspections and even surveys whose cost is dependent on the property size and those again can range from $350 on quarter acre lots to thousands for multiple acres..
8. Understand your potential losses after Due Diligence period ends.
Depending how large of Earnest Money deposit you have made this can be additional loss if you pull out once the Due Diligence period ends and would be in addition to Due Diligence fee, appraisal on the house, house and any other inspections performed. If you have had attorney involved you may be charged some portion of the pre-work on the title search and preparation of the documents.