Hello everyone and thanks again for reading. I am writing this op-ed due to a recent increase in pressure by realtors to take short cuts. It’s important to do your homework before you enter any market.
List of basic terms to understand
Realtor: A licensed agent who works for you.
Seller: The person selling the home, not the agent.
Buyer: The person buying the home.
Lender: This is the bank of the mortgage company. Not all loans go through banks, some lending programs only deal in home loans but are still FDIC insured.
Earnest money: According to dictionary.com, earnest money is given by a buyer to a seller to bind a contract. Contrary to belief, this is not mandatory.
Down payment: Money the bank will ask the buyer to give them up front before they approve a loan.
Discount points or points: An option a buyer can use to afford a more expensive home without a larger loan. By paying a point, the buyer pre-purchases a guaranteed locked interest rate. As of August, 25, 2019, a point costs $850.
For example, a single point will lower the interest rate from 4.75% to 3.75%. The interest saved allows the buyer to afford more house or to pay off a smaller loan faster. For home purchases below $175,000, this is a good option.
Debt-to-income ratio: Total debts per month, including mortgage, should not exceed 31%. Some lenders will go as high as 40% but you will pay for this option and it is not a good idea.
Note: Banks got in trouble before by selling loans they knew would default sooner or later. Some brokers did this on purpose and would wait until the bank issued a foreclosure and would buy the property back only to sell again to another victim.
Credit history: Documented record of how an individual consumer manages debt. The better a consumer manages debt and makes on-time payments, the better the interest rate will be on a home loan. You can buy a home with a credit score of 500, but I don’t recommend it.
Escrow: An account the mortgage broker will set up to hold funds for property taxes and other related costs.
Pre-payment or sale agreement: Subprime lenders will often add a clause in the loan agreement that the buyer agrees not to sell your home for three, five or even 10 years.
Avoid these agreements since you may buy a home that gains 30% value in one year and you wish to sell. The house can still be sold, but the buyer-turned-seller must pay a penalty to the lender.
Seller disclosure: According to redfin.com, a seller disclosure is “a set of documents completed by the seller of a home, listing any known issues with the property and any remodel projects completed during the time they owned the home. In most states, the seller is required to provide this disclosure within a few days of mutual acceptance.”
Read this carefully and if you do not understand it, find an expert who does.
Closing costs: Costs such as broker fees, real estate agent fees, taxes and liens. You can ask the seller to split the costs with the buyer or even to pay them all; it all depends on the market at the time.
Appraisal: A professional assessment of the value of the home for sale. Appraisal costs are most often part of the closing costs. If you are buying, always get your own appraisal done to protect your investment.
The difference between your appraisal and the realtor’s may vary, but if the amount is more than five percent, stop and ask why. If you can’t get a reasonable answer, it is a warning sign.
Home inspection: Needs to be done before an offer is finalized. A home inspector is a licensed professional trained to see things an ordinary homeowner can’t. Inspectors point out costly problems such as electrical issues or products that contain asbestos.
The buyer or a representative for the buyer should be present at the time of inspection. If an inspector states that you do not need to be, that’s not the inspector you want.
Based on the results of problems found, the buyer can negotiate a price based on the average cost of the repair. If it is a major repair but no other issues are found and the home is given a good grade, the buyer can also ask the seller to pay for part of all of the repair.
The bank will most likely also require a second inspection before closing that they pay for to ensure they are making a good investment.
Loan-to-value ratio: This is a very important number to understand. If you buy a home for $150,000 but the comparable sales don’t match or are trending down every year, or you borrow extra money for repairs, you could find yourself with a home worth less than the principal mortgage.
Never put yourself in an upside-down situation. It could take a decade to reverse or in the worst case, never.
Loan length terms: Loan periods are typically 15 and 30 years. Some lenders offer a 40-year term.
Interest rates: The interest is what you pay the bank for lending you money. There are different types of interest rates such as fixed rates, 1-year ARMs (adjustable-rate mortgages), and 5-year ARMs.
An ARM is a variable rate loan. Unless you have a large savings, any type of ARM payment is a heavy risk. Your payment may be low now but in 10 years, it could triple or more. Avoid ARM loans, unless you have the money to risk.
These are not all the terms to learn but they are the more important ones.
I have seen realtors do things such as get waivers for inspections and septic work. I fully advise against both.
If your home was built before 1949 or between 1971 and 1980, I encourage you to pay extra for a minor invasive inspection as wiring installed before 1949 was knob and tube.
Between 1971 and 1980 many homes were built with aluminum wiring and which is highly subject to fire. Aluminum wiring does not need to be disclosed but should be looked at. Consider copper replacement as part of the purchase negotiations.
To learn more go to fha.gov for more information. Be well-informed before you jump in.