The Value of Home Inspections When Buying a Home – Part 1
May 12, 2009
I TOLD THE BROKER I’M SELLING MY HOUSE “AS IS”
Homeowners want to sell their homes with the least amount of work possible. Since they live in the homes they do find troublesome many issues that a new buyer and her engineer will find objectionable. A seller will always try to sell their homes in AS IS condition to avoid paying for repairs or lowering the price. Usually a buyer makes an offer on a house she has seen only once or twice. She expects the house to be in working order and is not always aware of the state of the major mechanical systems. A major question that usually runs across the buyers mind at this point in the purchasing process is “Do I need an engineers inspection when buying a home?”. So after a binder is signed (but before the contract), buyers do an engineer’s inspection. Scheduling an inspection can take several days which leads to quite a bit of frustration for sellers. “What do you mean the buyer won’t sign the contract until he has an engineer’s inspection, I am selling the house “AS IS”. Then after the inspection the buyer’s attorney sends a list of repairs the buyer’s wants completed. “But I’m selling AS IS”, laments the seller. While a seller is certainly within his rights to say no inspection he must remember that until the contract is signed he has no deal. The condition of the house is an important deal term. Sellers must be prepared for an inspection because even though the seller may have told him broker “AS IS” this does not mean that the buyer will agree.
When selling your home in Staten Island, a seller must be aware of current market conditions. With the bad economy and record number of foreclosures now is certainly a buyer’s market. During the boom times in 2004-2006 a seller could say AS IS and stick to it. With homes receiving multiple offers sellers could tell buyers to take the house AS IS and sign the contract quick or risk losing the home to another buyer. Usually when a buyer asked for repairs or a reduction in price a seller could say no and be fairly certain that another buyer could be found quickly who would take the house AS IS. In the current climate buyers have much more leverage to demand (and receive) repairs and/or price reductions. Today a seller must be prepared to make his house as attractive as possible and to eliminate any reasons a buyer may have to reject his house. Before putting the house on the market a prudent seller will try to remedy as many defects as possible.
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HOW TO SELECT THE RIGHT REAL ESTATE BROKER
May 5, 2009
Being friendly and helpful are important qualities, but experience coupled with industry knowledge and negotiating skills are of more importance. Your broker will help guide you in finding houses to view and to make a suitable offer. Select with care as she will assist you in making an expensive decisions. You must have confidence in her honesty, truthfulness and ability to help you find the right house. Important things to ask before you hire a realtor include
1) EXPERIENCE – is this her full time job? How many deals has she closed.
2) INDUSTRY KNOWLEDGE – Which neighborhoods does she specialize in
3) BOARD OF REALTORS – is she a member of the local board of realtors
4) CLIENTS -does she work with developers and builders or with buyers
5) NEGOTIATION SKILLS – will she make sure the reasons behind your offer are communicated to the seller to present it properly?
6) DEMEANOR- do feel comfortable discussing your business with her
BUYERS BEWARE
Most buyers purchase homes with the assistance of realtors and develop a good relationship with their agent but many are not aware that the broker is still working for the seller. This does not mean that the broker is not being helpful or getting the buyer a good deal, but it does mean that his primary loyalty is to the seller. Before selecting your realtor discuss this with your attorney and sure your agent is doing her best for you.
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FIVE MISTAKES THAT CAN RUIN THE PURCHASE OF YOUR HOME: MISTAKE # 1 HIRING THE WRONG REALTOR PART 1
May 5, 2009
I wrote my book about the 5 myths that can ruin your purchase including
1) ANY REAL ESTATE BROKER WILL GET ME A GOOD PRICE
2) ANY ATTORNEY CAN HANDLE A REAL ESTATE DEAL
3) I DON’T NEED AN INSPECTION THE HOUSE IS VERY CLEAN
4) ANY MORTGAGE BROKER CAN GET ME THE BEST RATE
5) I WILL BE IN THE HOUSE ON THE DATE IN THE CONTRACT
THE MOST IMPORTANT THING TO REMEMBER IS TO UNDERSTAND THE PROCESS BEFORE YOU CHOOSE YOUR REALTOR!
Why Hiring the Wrong Broker can cost you Thousands of Dollars
Since they get paid by the seller some Real Estate Brokers don’t protect a buyer’s interest. Since they get paid on the sale they need to get you into a house and since they get paid based on the price of the house they have every incentive to get you to pay the highest price possible. This does not mean all brokers are bad or that the process is broken but it does mean a smart buyer finds an agent who will work to get a fair price.
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GETTING A MORTGAGE IN 2009: BUYING A HOME IN THE NEW WORLD OF FINANCING
May 5, 2009
Recent underwriting changes have made mortgage lending decisions look more like the 1990 ’s which makes getting a mortgage harder. These new policies should inject some needed sanity into the lending process and make lenders and borrowers more secure which will help the real estate market and the economy as a whole. Expect to be asked about your credit, income, down payment and the value of the house and if the answers are not sound your loan request will be denied.
In response to the current lending/foreclosure crisis lenders have seriously increased the amount of paperwork and qualifying requirements needed to get a new mortgage. Today a lender make an informed decision on the qualifications free of the need to re engineer the American social contract. Just like the pre-Bush days a borrower needs to show good credit, a reasonable down payment and the ability to afford your mortgage payment based on your income. Let the wailing begin. Didn’t groups like ACORN and politicians like Barney Frank declare that owning a home is a basic constitutional right even if you can’t afford it? Lender’s refusing to lend based on sound underwriting practices, it almost seems un- American! But what about all the defaulting homeowners and all the people who still want to be homeowners even though they can’t afford to, doesn’t the Government owe these people something? I’ll leave fixing those problems to the next Obama bailout but for now lets hope that the new banking rules make sure that the mistakes of the 2000’s are not repeated again. Hopefully a return to sound lending practices will prevent the large scale destruction caused by the wild lending practices of the past.
From 2002 until mid 2008 getting a mortgage to purchase a new home was relatively easy as government policies were crafted to helped more Americans to become homeowners. Fannie Mae and Freddie Mac loosened underwriting guidelines and introduced new products with lower credit score, income and down payment requirements. Unfortunately the new underwriting rules coupled with an increase in exotic variable rate products combined with a general weakening in home values lead to a perfect storm for many homeowners. With lowered property values owners who used low down payment variable rate loans found themselves unable to take advantage of low interest rates as they did not have enough equity in their homes to allow them to refinance. Unable to refinance and with the interest rate on their adjustable rate mortgages increasing from the low initial rates mortgage payments increased. Unable to refinance and without equity many homeowners found themselves unable to afford their payments and unable to sell their homes. The downward spiral began and the foreclosure crisis struck. Banks found themselves with thousands of bad loans and lost billions of dollars and many stopped writing loans. Without writing new loans the struggling real estate market came to a halt as potential buyers could not find a place to get their loans. It came back to the federal government to realize that its goal of encouraging homeownership without regard to ability to pay was a misguided policy. While money to lend was made available to banks it came with a general tightening of underwriting requirements. Now your lender wants to make sure before you get a loan that
1) GOOD CREDIT – – no more crazy products which sought to qualify every deadbeat for a loan. Once again your banker can say if your credit is bad you are not a good risk so maybe you should get approved for a mortgage.
2) INCOME THAT CAN BE VERIFIED – no more stated income products where the borrower just signed a paper saying how much he made. Just like in the old days, your lender wants to see actual tax returns, pay stubs and confirm with your employer that you are gainfully employed and make enough money to pay the loan back.
3) A DOWN PAYMENT – no more borrowing the purchase price plus the closing costs. The days of 106% mortgages and people getting into a house for NO MONEY DOWN are over.
4) TOUGH APPRAISAL STANDARDS – the bank appraiser can’t do the mortgage broker any favors. No more exceptions or using dissimilar comparable sales. The new (old) rules make sure the appraiser uses the best up to date valuations and any questions lead to lower appraisals.
Hopefully with a return to sane underwriting rules lenders will feel secure that the loans will actually be repaid and in the event of a default a conservative appraisal will not expose a lender to thousands of dollars in losses. I can only hope that ACORN and Barney Frank leave mortgage lending to lenders and their social engineering skills are focused on less costly areas.
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DID I DO THE RIGHT THING BY REFINANCING
May 5, 2009
The key question is “Did I save money by refinancing?” If you are able to get a better interest rate and save closing costs (mortgage tax, bank and title fees) does this refinance make financial sense? It is possible that the cost of the refinancing process can outweigh the monthly savings. The easiest way is to determine the amount of money you are saving on your mortgage payment by getting the lower rate. Then look at the total closing costs and divide them by the monthly savings. This number will tell you how long it will take to recover the closing costs. Examples
1) Monica had a mortgage of $200,000.00 at 6.25%. She was able to use a modification with her existing lender HSBC to reduce her interest rate and lower her payment by $140/month. Her closing costs, (no mortgage tax on modification) to $2300.00 so by dividing the cost ($2300) by the monthly savings ($140) it shows that it will take her 16.5 months to recover her closing costs. If Monica intends to be in the house for more than 17 months the refinance makes sense.
2) Lesley couldn’t do a modification and would have to pay mortgage tax again (1.8% on $200,000 = $3600.) so her closing cost was $5900.00. Taking the closing cost ($5900) divided by the monthly savings ($140) it would take her 42 months to recover the closing costs. Her plans were to remain in the home for a long period so the refinance made sense.
3) Sandra would be able to do a modification (like Monica) but her timeframe for remaining in the house was only 12 months. After discussion she investigated an adjustable rate (ARM) but ultimately decided that since she intended to move that any monthly savings could not justify paying the closing costs.
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HOW DO I GET STARTED ON MY REFINANCE
May 5, 2009
Call me and let me know your plans. I will ask you to send me a copy of your current mortgage statement to determine your interest rate and principal balance and we will discuss your goals. Depending on your credit and income I will suggest a couple scenarios and different lenders to contact. I will tell you what to ask the lenders so you can obtain a few different GFEs which we will review. These steps are done prior to you selecting the lender to whom you will make your application. If rates are comparable your current lender is the choice because a modification will ordinarily be the cheapest way. A modification can be best but you still should shop around (get GFE) to make sure the rate is in line with other lenders. While it may pay to take a slightly higher rate from your current lender and do a modification to avoid closing costs, we must determine whether the closing cost savings outweighs the additional interest costs. If another lender’s refinance is more cost effective the option of doing an assignment (and CEMA) needs to be explored to save mortgage tax. Finally I usually can point out several items on a GFE that can be waived by a lender and its title company when you understand how to request them.
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HOW CAN MY ATTORNEY SAVE ME MONEY ON MY REFINANCE
May 5, 2009
Besides making you clear on the goals of your refinance your attorney should be able to review your GFE and point out where potential cost savings may occur. From suggesting potential lenders to trying to get the lender to accept a modification or assignment your lawyer’s familiarity with lending practices should help you understand the process and save money on closing costs. From the big money items like interest rate to closing costs saved by doing a modification or assignment and CEMA through suggestions on how to reduce bank and title fees it cannot hurt to ask your attorney to look at your particular situation to discuss ways to save you money.
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SAVING MONEY ON CLOSING-MODIFICATIONS, CEMAS and ASSIGNMENTS
April 29, 2009
When taking a mortgage the borrower will incur closing fees. When refinancing some of the fees can be avoided as they were paid when the original mortgage was taken. To avoid some fees ask about mortgage modifications and assignment of the existing mortgage. Existing mortgage lenders can save their current borrowers money by doing loan modifications which entails merely changing loan terms without the need for a full closing. A borrower who is switching her lender may be able to save money by doing an assignment of mortgage from her prior lender. If the borrower is trying to refinance and borrow extra money a consolidation and modification (CEMA) can be used to save closing costs. Modifications, CEMAs and assignments can all save money but the lenders must be willing to allow them.
1) Modifications – if a borrower is looking to merely change the rate on his loan it may be possible to do a Loan Modification to avoid many closing fees. A modification can be a simple agreement between the borrower and lender whereby the terms of the loan are changed. It is up to the lender to determine whether or not anything other that a credit report and appraisal are needed and if not the whole process can be completed without the costs of title insurance, recording and legal fees. This is the first avenue a borrower should inquire about as it should be the quickest and least expensive way to change your mortgage payment. The issue will come down to the rate of interest because if it is not a lot worse than other lenders the closing cost savings of doing a modification can be substantial.
2) CEMA- Consolidation, Extension & Modification Agreement – this is a modification where the borrower increases his loan amount. When a mortgage is taken out there is a NYS mortgage tax which is charged to the borrower. The mortgage tax is at least 1.8% of the loan amount (can be higher if loan amount exceeds $500,000) and this tax is paid when the mortgage is recorded. When refinancing if the original mortgage is cancelled and a whole new mortgage is recorded a mortgage tax on the entire amount of the new mortgage is paid. To avoid paying the mortgage tax on the amount outstanding on the original mortgage the original mortgage is not cancelled but merely modified. If new money is to be added to your existing loan the lender will have the borrower sign an additional mortgage for the amount of the extra. The 2 mortgages (the original and the additional) will be combined into one mortgage by way of a CEMA and the loan terms modified. This allows the borrower to avoid repaying the mortgage tax again on the amount left on the original mortgage while getting the benefit of new loan terms detailed by the modification agreement.
3) Assignment of Mortgage- if a borrower decides to refinance with a new lender it is still possible to save the mortgage tax paid on his current mortgage by doing an assignment of mortgage and then a modification. An assignment of mortgage is when the original lender transfers the mortgage to the new lender. The new lender now can add more money onto the original (by doing the CEMA process) or merely changed the existing loans terms by doing a modification. To do an assignment the original lender and the new lender must agree to the process. Ordinarily there are additional legal and processing fees incurred by the borrower with both lenders but an assignment would only be done when the mortgage tax savings exceeded the additional costs. This process must be investigated prior to making your loan application with the new lender. If an assignment cannot be done the mortgage tax on the new mortgage will be based on the full amount and your closing costs can be quite high.
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REDUCING MY INTEREST RATE AND PAYING CLOSING COSTS
April 29, 2009
If extra borrowing is not a priority and the purpose of the refinancing is merely to reduce the interest rate it may still be necessary to increase the principal balance to cover the closing costs of the refinance. In refinancing a borrower will normally incur bank (application, appraisal), title and legal fees which can cost quite a bit. Unless the borrower is prepared to bring a check to the closing these costs are normally rolled into the refinancing leading to a higher principal balance. Since these costs are included in the mortgage they are paid back with interest over the term of the loan and can result in thousands of dollars of added interest costs over the term of the loan. Get a GFE to so you can determine the fees and whether to pay them upfront or incorporate them into the principal balance of the new mortgage.
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HOW TO GET A GOOD FAITH ESTIMATE
April 29, 2009
When discussing a client’s refinance I usually go over a script on what to say to the mortgage brokers to get a GFE. When you call the right type of lender you should only need to answer a few general questions about your income and credit in order to get a GFE. Because a GFE is not binding until the borrower makes an official application (and the lender is able to verify their creditworthiness), it is not necessary for a borrower to give much information to get a GFE. When shopping for a loan ask for a GFE but make sure the broker does not to run a credit report until you have decides to make an application. You are shopping for a loan so if the broker can’t give you a GFE without running your credit report then you should call another lender. Your lender will ask you about the following 3 items-loan term, loan type and loan amount.
1) LOAN TERM -the number of years that the borrower has to repay the loan is called the term. The term can vary but most common is 30 and 15 year terms (although so lenders will allow you to do 10 or 20 or 40 years). When looking at the term remember that the shorter the term the higher the monthly payments. When looking at the 15 or 30 year mortgages the 30 year mortgage will have lower monthly payments while a 15 year mortgage will have higher payments which will save a substantial amount of interest over the life of the loan. Another issue to look at is flexibility. While a 15 year mortgage will normally have a lower rate (and higher payment) a 30 year mortgage allows the borrower to make lower payments. Once taken a 15 year mortgage requires higher monthly payments which can’t be lowered. A 30 year mortgage can be shortened to 15 years at the borrower’s option by making prepayments. Remember to weigh the interest rate savings of a lower rate on a 15 year mortgage term versus the payment flexibility of the 30 year mortgage term with lower monthly payments and the option to make prepayments.
2) INTEREST RATE TYPE- FIXED or ADJUSTABLE RATE-While most borrowers appreciate the security of a fixed rate loan for some an adjustable rate mortgage can make sense. Whether to consider an adjustable rate will be determined by your estimate of how long you may keep the mortgage. Fixed rate loans offer a principal and interest payment that remains constant. Adjustable Rate Mortgages (ARMs) allow the interest rate to change periodically and are based on an index. The index and change periods can vary greatly and take particular care to understand them before entering into an ARM. Change dates can be as quick as monthly and as long as 7 years. The shorter the change date the lower the initial rate but the risk is that over time the changing rates may be higher than a fixed rate. The index can be a bank prime rate or US Treasury Bill rate or other published rate. Homeowners who do not see themselves keeping their mortgages for a long period of time can save money using an ARM. It is important to remember that an ARM can be tricky as many people who bet that they could refinance their ARMs (or whose plans to sell the home changed) are now stuck as falling property values make refinancing impossible. Before taking an adjustable rate it is quite important to be clear on your goals and discuss with your attorney or accountant before approaching a lender.
3) LOAN AMOUNT – before starting your loan search try to determine if you are seeking to increase the amount you have borrowed. Home Improvement, College Costs and Debt Consolidation are all reasons people seek to refinance and borrow more on their homes. While any borrowing must be looked at from tax and financial perspectives it is often cheaper to borrow mortgage money than other types of loans and given the deductibility of mortgage interest this may be a good option for some homeowners. But remember you have to pay it back.
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