Tip
Your "Loan To Value (LTV) Ratio" is the ratio of the loan to the price of the house. If your loan to value ratio exceeds 80%, most lenders require Private Mortgage Insurance (PMI). This PMI insures the lender against possible losses should you default on the loan. PMI effectively adds about .4% to your interest rate, though it varies with the loan to value ratio.
Tip
The monthly expenses of a home are referred to as "PITI." This stands for "Principal, Interest, Taxes and Insurance." The principal and interest (PI) together equal your mortgage payment. The taxes (T) are the property taxes, which vary dramatically depending on your location. The insurance (I) is your hazard insurance. Annual premiums for basic policies are about .3% of the cost of the house.
Tip
You do not need to pay off all your monthly debts before applying for a home loan. If the lender's long term debt ratio is 36%, and the lender's housing expense ratio is 28%, then long term debts, such as car payments and student loans, can consume up to 8% (=36% - 28%) of your gross monthly income before impacting the loan amount for which you qualify.
Tip
Lenders limit the portion of your gross monthly income that may be dedicated to the Principal, Interest, property Taxes, and property Insurance (PITI).
Typically PITI must absorb less than 28% to 33% of your gross monthly income. Furthermore, PITI plus other long term debts must absorb less than 36% to 40%.
Tip
A safe estimate for closing costs is 5% of the loan amount. For example, the closing costs on a home loan of $100,000 are approximately $5,000. If you have $25,000 to put down, you can afford a home of about $120,000.
Tip
Seattle has one of the highest appreciation rates in the country, with over 12% annual appreciation between 1987 and 1993. With a median home price of over $360,000, Honolulu has the most expensive home prices in the United States.
Tip
The interest rate of an adjustable rate mortgage is tied to an index. The most popular indexes are listed below, along with their average over the past twelve years:
- 7.0% Six-Month Treasury Bil
- 7.1% One Year Treasury Security
- 7.7% Six-month CD
- 8.2% 11th District Cost of Funds
Tip
". . . I have never looked upon ease and happiness as ends in themselves-this ethical basis I call the ideal of a pigsty. The ideals which have lighted my way . . . have been Kindness, Beauty, and Truth." Albert Einstein
Tip
Fannie Mae's "3/2 loan program" provides loans to first-time buyer of 95% of the house price. The buyer may put down as little as 3%, with the additional 2% down payment in the form of a gift from family members, a government program, or nonprofit agency. Call (800) 732-6643.
Tip
If the home you are considering is for sale by the owner, presenting offers and entertaining counter-offers may be less emotional through the US mail, instead of face-to-face negotiations.
Tip
The following eight states are "community property" states:
- Arizona
- California
- Louisiana
- Idaho
- Nevada
- New Mexico
- Texas
- Washington
Tip
Before making a purchase offer on a home, you do not need to be 100% committed to purchasing the house. Concerns and questions are only natural. To account for these concerns, always include an inspection contingency in the offer. This contingency might read:
"This offer contingent upon buyer's or his/her representative's complete inspection and approval of the property."
Tip
Moving to an unfamiliar town? Subscribe to the local paper to get a flavor for the area.
Tip
Federal Housing Administration (FHA) loans are not limited to low income families. The current FHA loan limit is $152,350. The FHA does not provide the loan directly. Instead, the FHA simply guarantees the loans, which are obtained through local lenders.
Tip
Often a new-home builder will not negotiate on the base price, because the base price will impact the appraisal value of subsequent homes the builder sells.
However, in a buyers market, the builder will negotiate on the options and amenities included in the base price.
Tip
You can limit your competition for homes by making purchase offers during the November to January holiday season.
Tip
A home sold without a real estate agent may not be lower in price. Sellers enduring the headache of marketing their own home are usually trying to save the commission for themselves, not for their buyer.
Tip
Even if you have no children, the quality of the local schools will be important to potential buyers when you eventually sell.
Tip
"The beautiful things that societies do is what survives." Frank Zappa
Tip
Of the many factors influencing the potential profit of home ownership, the most important is appreciation.
Tip
You will probably find a real estate agent to work with while visiting "Sunday Open Houses." Trust your intuition when choosing a real estate agent. If you want to get slightly more scientific about it, you could ask the agent the following three questions:
1. "Could you give me the names and numbers of three buyers you have worked with recently?" Call the references and ask them "Would you use this agent again?"
2. "Will you prepare a comparative market analysis for the type of house I'm looking for?"
3. "Will you provide photocopies or printouts of the multiple listing service information on the properties I am considering?" For confidentiality reasons, the agent may edit out the seller's name and phone number from the listing.
Tip
You can reduce the total amount of interest you pay on the loan by pre-paying some of the principal. The impact of this prepaid principal is to reduce the life of a fixed-rate loan. The monthly mortgage payment remains fixed however. When you prepay the principal of an adjustable rate mortgage, the life of the mortgage stays fixed. The monthly mortgage payment is reduced at the next adjustment date.
Tip
Sometimes the seller must remain in the house after escrow closes. Typically this is because the house that the seller is moving into has not closed escrow. Provide ample motivation for the seller to move out. For example, retain in escrow a substantial amount of the proceeds that are due the seller. Specify that after an agreed upon date, a hefty daily fine will be levied, taken out of the seller's proceeds left in escrow.
Tip
If the current owners keep all items in the basement elevated off the floor, suspect that the basement takes on water in the winter.
Tip 28
The following outlines the percentage of policy holders that filed complaints against their insurance companies following the October 20, 1991 fire in the Berkeley/Oakland hills, according to the California Department of Insurance. The chart is limited to the eight companies that had over 100 homes insured in the fire area. Listed from best to worst:
- 3% SAFECO
- 3% Fireman's Fund
- 4% US Automobile Association
- 6% California State Automobile Association
- 8% State Farm
- 13% Transamerica
- 14% Farmers Insurance
- 27% Allstate
Tip
If the current owners of the home you are considering have beautiful antique armoires and freestanding chests in the master bedroom, the room may lack adequate storage space.
Tip
Three closing costs are tax deductible in the year of the sale:
- Points
- Pro-rated mortgage interest
- Pro-rated property taxes
The other closing costs typically are not deductible in the year of the sale but may be added to your home's adjusted tax basis, thus reducing your tax liability when you sell.
Tip
Keep a shoe box with lid in your closet. Every time you are faced with an unmatched sock, put it in the shoe box. On your birthday, dump out all the socks. You will discover that all of your unmatched socks have magically found their mates!
Tip
As a buyer, typically you do not sign a contract with a real estate agent. You are free to use many agents in your housing search. However, you will find that by working exclusively with one agent, the agent is more willing to invest time and energy to your housing search.
Tip
Within three days of applying for your home loan, the lender must send you a "Good Faith Estimate" of your closing costs. Verify that this estimate agrees with the information that the lender gave you before you applied for the loan.
Tip
If you paid for the appraisal, you are entitled to a copy of it. If it is not offered, request a copy in writing.
Tip
When qualifying you for a loan, lenders typically do not consider income from rooms rented out in a home you are purchasing as a personal residence.
Tip
Verbal agreements aren't worth the paper they're written on.
Tip
Ask the utility company for the average monthly bill of the home you are considering. Ask the same question about your current home, so you can compare.
Tip
If every other roof has snow on it while the home you are considering is clean, it may indicate inadequate insulation
Tip Typically a home should have at least 100 amp electrical service. The amperage of the service is determined by the main circuit breakers. The amperage of the service is usually less than the sum of the individual circuit breakers.
Tip
Review the "property file" at the city building department. Compare the plans and description at the department with the current structure. If the two are grossly different, the home may have been remodeled without obtaining a building permit.
If you suspect this, ask at the counter if the building must be inspected by the city when changing hands. Even if the property does not need to be inspected upon change of ownership, any work performed without a permit may cause problems if the workmanship was sloppy or does not comply with local building code.
Tip
Insurance agents have a wealth of information on any given neighborhood.
Give your insurance agent the address. Ask him or her to tell you everything they know about the area. Request an estimate of your car and hazard insurance premium at the address under consideration.
Tip
A termite report focuses on fungal and pest infestations. The focus of a building inspection report is much broader, including checks of the foundation and appliances, among other items.
Tip
Typically fixed-rate loans are not assumable, and adjustable rate loans usually are.
FHA loans made prior to December 1, 1986 and VA loans made prior to March 1, 1988 are freely assumable. Any loan sold to Fannie Mae before November 10, 1980 is fully assumable.
Tip
Lenders usually qualify borrowers for an adjustable rate mortgage using the maximum possible interest rate at the beginning of the second year. For example, assume that the initial rate is 5% and that the interest adjusts annually. If the annual adjustment cap is 2%, then the lender qualifies the borrower at 7% (=5% + 2%).
Tip
Adjustable loans include a ceiling on the maximum interest rate over the life of the loan. Always get this life-time cap figure as an absolute maximum interest rate (such as "16.5%"), not as a maximum change in interest rate (such as 5%). This prevents any ambiguity.
Tip
The best home owner's insurance policy guarantees "full replacement value," not simply "depreciated value."
If the home is more than a few years old, always include the "code upgrade" option, which covers the cost of meeting new code requirements since construction of the home.
Tip
To find building inspectors, look under "Building Inspection Services" in the yellow pages.
There is no such thing as a "Building Inspector's License." Therefore, always use an inspector that has a "contractor's license."
Sometimes the inspection company is licensed, but the individual that they send to perform the inspection is not. You should insist on an inspector that is a licensed contractor.
Tip
If you intend to live in the home less than seven years, always ask if the lender offers "short-term fixed" loans. These loans are amortized over 30 years, but are due in 5 or 7 years. The interest rate is often .5% lower than a straight 30 year loan.
Tip
For bargains, look for ads that imply cosmetic problems with the house, such as "diamond in the rough" or "has potential." A house that requires a $1,000 face lift is often priced $10,000 below market value.
Tip
Homes listed in the paper in the middle of the week often indicate a more anxious seller than homes listed only on the weekend.
Tip
"You may be disappointed if you fail, but you are doomed if you don't try." Beverly Sills
Tip
Points are tax deductible by the buyer in the year of the sale. Even points paid by the seller can be deducted by the buyer.
Tip
Sellers often include a "Home Repair Warranty" with the home. This shields the seller should problems arise after the buyer moves in. Make sure that the warranty covers pre-existing conditions, not just conditions that arise after the close of escrow.
Tip
When purchasing in a new development, always ask residents who have already purchased if they are satisfied with the quality of construction and with the responsiveness of the builder to complaints.
Tip
These tips are taken from "HomeBuyer - The Book and Software Home Buying Kit" for Windows. $27.95 from Stratosphere Publishing. 1-800-646-6456. Press the "More Info" button for details.
Tip The top three remodeling jobs in terms of "return on investment" are:
- Adding a fireplace to a home without one
- Bathroom addition
- Minor kitchen remodel
Tip
Always request the lender's "document needs" list in writing. This list outlines the documents that the lender requires prior to approving the loan.
Tip
Seven states have no state income tax:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
Tip
For a free copy of your credit report, call TRW at 1-800-392-1122.
Tip
During your regular commute hours, drive from and return to the home you are considering purchasing. This alerts you to potential traffic problems.
Tip
For information on repossessed homes owned by the Fannie Mae, the largest housing finance agency in the nation, call 1-800-553-4636.
Tip
Reap the benefits of Reaganomics! Under the 1989 savings and loan bailout, the Resolution Trust Corporation is responsible for selling off over $100 billion in real estate formerly held by the institutions. About 15% of the properties are single family homes. Phone 1-800-782-3006.
Tip
To eliminate all competition from other buyers, as well as by pass real estate agents and their associated commissions, purchase a home before it is put on the market.
Rental ads are loaded with potential home sellers, waiting to be harvested. Call on rental ads for homes that interest you and ask the landlord if he or she would consider selling the home.
Tip
The local school district office can direct you to the results of school-by-school tests.
Tip
A prequalification letter from a lender may encourage the seller to take your offer seriously. This letter states that, given the preliminary financial information that you have provided the lender, you qualify for a loan of a given amount at a given interest rate.
But a pre-approval letter is even better. This letter states that you are actually approved for a loan of a given amount at a given interest rate, pending only an appraisal on the home of your choosing. To get preapproved by the lender, you must formally apply for the loan and pay the associated loan application fee.
Tip
"Whether you think you can or think you can't, you are right."
Henry Ford
Tip
Your "Loan To Value (LTV) Ratio" is the ratio of the loan to the price of the house. If your loan to value ratio exceeds 80%, most lenders require Private Mortgage Insurance (PMI). This PMI insures the lender against possible losses should you default on the loan. PMI effectively adds about .4% to your interest rate, though it varies with the loan to value ratio.
Tip
The monthly expenses of a home are referred to as "PITI." This stands for "Principal, Interest, Taxes and Insurance." The principal and interest (PI) together equal your mortgage payment. The taxes (T) are the property taxes, which vary dramatically depending on your location. The insurance (I) is your hazard insurance. Annual premiums for basic policies are about .3% of the cost of the house.
Tip
You do not need to pay off all your monthly debts before applying for a home loan. If the lender's long term debt ratio is 36%, and the lender's housing expense ratio is 28%, then long term debts, such as car payments and student loans, can consume up to 8% (=36% - 28%) of your gross monthly income before impacting the loan amount for which you qualify.
Tip
Lenders limit the portion of your gross monthly income that may be dedicated to the Principal, Interest, property Taxes, and property Insurance (PITI).
Typically PITI must absorb less than 28% to 33% of your gross monthly income. Furthermore, PITI plus other long term debts must absorb less than 36% to 40%.
Tip
A safe estimate for closing costs is 5% of the loan amount. For example, the closing costs on a home loan of $100,000 are approximately $5,000. If you have $25,000 to put down, you can afford a home of about $120,000.
Tip
Seattle has one of the highest appreciation rates in the country, with over 12% annual appreciation between 1987 and 1993. With a median home price of over $360,000, Honolulu has the most expensive home prices in the United States.
Tip
The interest rate of an adjustable rate mortgage is tied to an index. The most popular indexes are listed below, along with their average over the past twelve years:
- 7.0% Six-Month Treasury Bil
- 7.1% One Year Treasury Security
- 7.7% Six-month CD
- 8.2% 11th District Cost of Funds
Tip
". . . I have never looked upon ease and happiness as ends in themselves-this ethical basis I call the ideal of a pigsty. The ideals which have lighted my way . . . have been Kindness, Beauty, and Truth." Albert Einstein
Tip
Fannie Mae's "3/2 loan program" provides loans to first-time buyer of 95% of the house price. The buyer may put down as little as 3%, with the additional 2% down payment in the form of a gift from family members, a government program, or nonprofit agency. Call (800) 732-6643.
Tip
If the home you are considering is for sale by the owner, presenting offers and entertaining counter-offers may be less emotional through the US mail, instead of face-to-face negotiations.
Tip
The following eight states are "community property" states:
- Arizona
- California
- Louisiana
- Idaho
- Nevada
- New Mexico
- Texas
- Washington
Tip
Before making a purchase offer on a home, you do not need to be 100% committed to purchasing the house. Concerns and questions are only natural. To account for these concerns, always include an inspection contingency in the offer. This contingency might read:
"This offer contingent upon buyer's or his/her representative's complete inspection and approval of the property."
Tip
Moving to an unfamiliar town? Subscribe to the local paper to get a flavor for the area.
Tip
Federal Housing Administration (FHA) loans are not limited to low income families. The current FHA loan limit is $152,350. The FHA does not provide the loan directly. Instead, the FHA simply guarantees the loans, which are obtained through local lenders.
Tip
Often a new-home builder will not negotiate on the base price, because the base price will impact the appraisal value of subsequent homes the builder sells.
However, in a buyers market, the builder will negotiate on the options and amenities included in the base price.
Tip
You can limit your competition for homes by making purchase offers during the November to January holiday season.
Tip
A home sold without a real estate agent may not be lower in price. Sellers enduring the headache of marketing their own home are usually trying to save the commission for themselves, not for their buyer.
Tip
Even if you have no children, the quality of the local schools will be important to potential buyers when you eventually sell.
Tip
"The beautiful things that societies do is what survives." Frank Zappa
Tip
Of the many factors influencing the potential profit of home ownership, the most important is appreciation.
Tip
You will probably find a real estate agent to work with while visiting "Sunday Open Houses." Trust your intuition when choosing a real estate agent. If you want to get slightly more scientific about it, you could ask the agent the following three questions:
1. "Could you give me the names and numbers of three buyers you have worked with recently?" Call the references and ask them "Would you use this agent again?"
2. "Will you prepare a comparative market analysis for the type of house I'm looking for?"
3. "Will you provide photocopies or printouts of the multiple listing service information on the properties I am considering?" For confidentiality reasons, the agent may edit out the seller's name and phone number from the listing.
Tip
You can reduce the total amount of interest you pay on the loan by pre-paying some of the principal. The impact of this prepaid principal is to reduce the life of a fixed-rate loan. The monthly mortgage payment remains fixed however. When you prepay the principal of an adjustable rate mortgage, the life of the mortgage stays fixed. The monthly mortgage payment is reduced at the next adjustment date.
Tip
Sometimes the seller must remain in the house after escrow closes. Typically this is because the house that the seller is moving into has not closed escrow. Provide ample motivation for the seller to move out. For example, retain in escrow a substantial amount of the proceeds that are due the seller. Specify that after an agreed upon date, a hefty daily fine will be levied, taken out of the seller's proceeds left in escrow.
Tip
If the current owners keep all items in the basement elevated off the floor, suspect that the basement takes on water in the winter.
Tip 28
The following outlines the percentage of policy holders that filed complaints against their insurance companies following the October 20, 1991 fire in the Berkeley/Oakland hills, according to the California Department of Insurance. The chart is limited to the eight companies that had over 100 homes insured in the fire area. Listed from best to worst:
- 3% SAFECO
- 3% Fireman's Fund
- 4% US Automobile Association
- 6% California State Automobile Association
- 8% State Farm
- 13% Transamerica
- 14% Farmers Insurance
- 27% Allstate
Tip
If the current owners of the home you are considering have beautiful antique armoires and freestanding chests in the master bedroom, the room may lack adequate storage space.
Tip
Three closing costs are tax deductible in the year of the sale:
- Points
- Pro-rated mortgage interest
- Pro-rated property taxes
The other closing costs typically are not deductible in the year of the sale but may be added to your home's adjusted tax basis, thus reducing your tax liability when you sell.
Tip
Keep a shoe box with lid in your closet. Every time you are faced with an unmatched sock, put it in the shoe box. On your birthday, dump out all the socks. You will discover that all of your unmatched socks have magically found their mates!
Tip
As a buyer, typically you do not sign a contract with a real estate agent. You are free to use many agents in your housing search. However, you will find that by working exclusively with one agent, the agent is more willing to invest time and energy to your housing search.
Tip
Within three days of applying for your home loan, the lender must send you a "Good Faith Estimate" of your closing costs. Verify that this estimate agrees with the information that the lender gave you before you applied for the loan.
Tip
If you paid for the appraisal, you are entitled to a copy of it. If it is not offered, request a copy in writing.
Tip
When qualifying you for a loan, lenders typically do not consider income from rooms rented out in a home you are purchasing as a personal residence.
Tip
Verbal agreements aren't worth the paper they're written on.
Tip
Ask the utility company for the average monthly bill of the home you are considering. Ask the same question about your current home, so you can compare.
Tip
If every other roof has snow on it while the home you are considering is clean, it may indicate inadequate insulation
Tip Typically a home should have at least 100 amp electrical service. The amperage of the service is determined by the main circuit breakers. The amperage of the service is usually less than the sum of the individual circuit breakers.
Tip
Review the "property file" at the city building department. Compare the plans and description at the department with the current structure. If the two are grossly different, the home may have been remodeled without obtaining a building permit.
If you suspect this, ask at the counter if the building must be inspected by the city when changing hands. Even if the property does not need to be inspected upon change of ownership, any work performed without a permit may cause problems if the workmanship was sloppy or does not comply with local building code.
Tip
Insurance agents have a wealth of information on any given neighborhood.
Give your insurance agent the address. Ask him or her to tell you everything they know about the area. Request an estimate of your car and hazard insurance premium at the address under consideration.
Tip
A termite report focuses on fungal and pest infestations. The focus of a building inspection report is much broader, including checks of the foundation and appliances, among other items.
Tip
Typically fixed-rate loans are not assumable, and adjustable rate loans usually are.
FHA loans made prior to December 1, 1986 and VA loans made prior to March 1, 1988 are freely assumable. Any loan sold to Fannie Mae before November 10, 1980 is fully assumable.
Tip
Lenders usually qualify borrowers for an adjustable rate mortgage using the maximum possible interest rate at the beginning of the second year. For example, assume that the initial rate is 5% and that the interest adjusts annually. If the annual adjustment cap is 2%, then the lender qualifies the borrower at 7% (=5% + 2%).
Tip
Adjustable loans include a ceiling on the maximum interest rate over the life of the loan. Always get this life-time cap figure as an absolute maximum interest rate (such as "16.5%"), not as a maximum change in interest rate (such as 5%). This prevents any ambiguity.
Tip
The best home owner's insurance policy guarantees "full replacement value," not simply "depreciated value."
If the home is more than a few years old, always include the "code upgrade" option, which covers the cost of meeting new code requirements since construction of the home.
Tip
To find building inspectors, look under "Building Inspection Services" in the yellow pages.
There is no such thing as a "Building Inspector's License." Therefore, always use an inspector that has a "contractor's license."
Sometimes the inspection company is licensed, but the individual that they send to perform the inspection is not. You should insist on an inspector that is a licensed contractor.
Tip
If you intend to live in the home less than seven years, always ask if the lender offers "short-term fixed" loans. These loans are amortized over 30 years, but are due in 5 or 7 years. The interest rate is often .5% lower than a straight 30 year loan.
Tip
For bargains, look for ads that imply cosmetic problems with the house, such as "diamond in the rough" or "has potential." A house that requires a $1,000 face lift is often priced $10,000 below market value.
Tip
Homes listed in the paper in the middle of the week often indicate a more anxious seller than homes listed only on the weekend.
Tip
"You may be disappointed if you fail, but you are doomed if you don't try." Beverly Sills
Tip
Points are tax deductible by the buyer in the year of the sale. Even points paid by the seller can be deducted by the buyer.
Tip
Sellers often include a "Home Repair Warranty" with the home. This shields the seller should problems arise after the buyer moves in. Make sure that the warranty covers pre-existing conditions, not just conditions that arise after the close of escrow.
Tip
When purchasing in a new development, always ask residents who have already purchased if they are satisfied with the quality of construction and with the responsiveness of the builder to complaints.
Tip
These tips are taken from "HomeBuyer - The Book and Software Home Buying Kit" for Windows. $27.95 from Stratosphere Publishing. 1-800-646-6456. Press the "More Info" button for details.
Tip The top three remodeling jobs in terms of "return on investment" are:
- Adding a fireplace to a home without one
- Bathroom addition
- Minor kitchen remodel
Tip
Always request the lender's "document needs" list in writing. This list outlines the documents that the lender requires prior to approving the loan.
Tip
Seven states have no state income tax:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
Tip
For a free copy of your credit report, call TRW at 1-800-392-1122.
Tip
During your regular commute hours, drive from and return to the home you are considering purchasing. This alerts you to potential traffic problems.
Tip
For information on repossessed homes owned by the Fannie Mae, the largest housing finance agency in the nation, call 1-800-553-4636.
Tip
Reap the benefits of Reaganomics! Under the 1989 savings and loan bailout, the Resolution Trust Corporation is responsible for selling off over $100 billion in real estate formerly held by the institutions. About 15% of the properties are single family homes. Phone 1-800-782-3006.
Tip
To eliminate all competition from other buyers, as well as by pass real estate agents and their associated commissions, purchase a home before it is put on the market.
Rental ads are loaded with potential home sellers, waiting to be harvested. Call on rental ads for homes that interest you and ask the landlord if he or she would consider selling the home.
Tip
The local school district office can direct you to the results of school-by-school tests.
Tip
A prequalification letter from a lender may encourage the seller to take your offer seriously. This letter states that, given the preliminary financial information that you have provided the lender, you qualify for a loan of a given amount at a given interest rate.
But a pre-approval letter is even better. This letter states that you are actually approved for a loan of a given amount at a given interest rate, pending only an appraisal on the home of your choosing. To get preapproved by the lender, you must formally apply for the loan and pay the associated loan application fee.
Tip
"Whether you think you can or think you can't, you are right."
Henry Ford