Homeowners
Two Basics For First-Time Buyers
By IncomeProperties
Nov 26, 2005, 15:35

REAL ESTATE AGENTS

What Agents Do

A real estate agent can give you an overview of the buying process and make you feel secure in the knowledge that an expert will prevent you from making costly mistakes. The agent can help you to select a mortgage loan, prequalify for that loan, and determine how much house you can afford. Using this information, your agent can guide you in deciding the size, configuration, and features you need in a home, and in developing home search criteria.

Your agent can then survey the market for homes that match your criteria. An agent's time and resources allow him or her to show you more homes than you could find on your own. The agent can access computer databases containing the features of every home available, then prescreen these homes so that you will not waste time looking at homes that don't match. As you shop, the agent can help you evaluate each property by showing you special features, pointing out drawbacks, spotting repair problems, and describing the characteristics of each neighborhood.

When you find a property you like, your agent can prepare a survey of similar homes that were recently sold in the same neighborhood, and help you analyze the survey to determine the price you should offer. He or she can then prepare a risk-free purchase offer and present the offer to the seller and the seller's real estate agent. During the presentation, your agent's knowledge and experience will increase the chance that the offer will be accepted. If the seller responds with a counteroffer, your agent can help you develop and implement a successful negotiation strategy.

After you strike a deal with the seller contingent on your mortgage approval and property inspection, your agent can help you through the loan application process, set up professional home inspections, and handle any renegotiation of price or terms following inspections. As the transaction progresses, your agent can make sure the seller is complying with the terms of the contract, and facilitate tile searches, escrow, and closing.

Payment of Agents

One of the best things about using a real estate agent is that you don't have to pay the fee. Your agent is paid by the seller's agent. Here's how it works. A seller enters into a listing agreement or adds his home to the real estate agent's list of available homes and agrees to pay the agent a commission (usually 6 percent of the sale price) if the home sells. The seller's agent advertises the property and usually holds weekend open houses, If the buyer has an agent, the seller's agent splits the commission with the buyer's agent.

First-time buyers often wonder how their agent can be loyal to them when he/she is being paid (indirectly) by the seller. In fact, divided loyalty is rarely a problem for the buyers' agent. He/she develops a close working relationship with the buyer during the home search and has no working relationship with the seller; in fact, he / she does not even meet the seller until the day an offer is presented. Moreover, he / she knows that his / her key to repeat business and word-of-mouth referrals is the buyer, not the seller, who already has an agent. As long as your agent is not also the seller's agent, you should get loyal and devoted representation.

Selecting An Agent

Buying a home is a major financial and emotional step, and success or failure will rest largely in the hands of your agent. Select an agent just as deliberately as you would a doctor, lawyer, or accountant. Never work with an agent just because he / she happens to be holding an open house at a home you like. Make a list of candidates based on referrals from friends and family. If you attend an open house or seminar and encounter an agent who seems knowledgeable, add him / her to your list. Interview your candidates regarding their qualifications, experience, and services. Make sure you check with at least three past-client references for each agent.

You will get the best service and loyalty if you work with one good agent who knows you are loyal in return. You will know your agent is doing a good job if you hear from him / her regularly, if the advice he / she gives makes sense, and if you are aware of his / her hard work on your behalf. If your agent is not giving you the service and attention you want, fire him / her and find someone else.

WHAT CAN YOU AFFORD?

The Components of Payment

Almost no one pays the full purchase price of real estate in cash. Instead, buyers pay with a combination of two components: (1) a minimum amount of cash, called the down payment, and (2) a loan, called a mortgage. The maximum price that you personally can pay for a home is controlled by the amount of cash you can raise (your maximum down payment) and the amount you can borrow from lenders (the maximum mortgage amount).

Down Payment Sources

To determine what you can afford, begin by calculating your maximum down payment. Remember this important fact: to reduce the risk that you will abandon the home, most mortgage lenders will require the down payment to be your own money. It can come from bank accounts, retirement funds, or gifts, but it cannot be borrowed. When you calculate your maximum down payment, do not include any money you plan to borrow. As we shall see, most lenders count equity sharing funds as down payment cash.

Mortgage Loans

The next step in determining what you can afford is calculating your maximum mortgage amount. A mortgage is a loan secured by a lien on the property. This means that if the borrower does not make payments, the lender can force the property to be sold and use the money to repay the loan. The forced sale process is called foreclosure. Most mortgage loans are due in monthly payments over 30 to 40 years, but can be repaid sooner if the borrower sells the home or refinances by getting a new loan to pay off and replace the old one.

Your maximum mortgage amount is limited by the maximum monthly house payment you can afford. Monthly house payments are often called PITI, which stands for mortgage principal (the portion of the mortgage payment that actually reduces the amount you owe), mortgage interest, property taxes, and homeowner's insurance. Your maximum PITI will be different for each lender and each loan. The best way to determine your maximum mortgage amount is to shop for your mortgage before you shop for your home. After you choose a loan, the lender will set your maximum monthly PITI, loan amount, and home price through a process called prequalification.

SEARCH, COMPARE, AND OFFER

Finding the Right Home

After you know what you can afford, develop home search criteria: neighborhood, size, features, and prices. Asking prices are usually higher than selling prices, especially in a slow market, so set your search price above the amount you actually want to spend. Have your real estate agent make a list of every property on the market that meets your criteria. Include properties that meet most but not all the criteria; you don't want to overlook something special because it doesn't match exactly. Either you or your agent should view every one of these homes. If none seems right, continue your search by having your agent call you immediately each time a new property that meets most of your criteria comes on the market. You may also want to broaden your search criteria, check new neighborhoods, or visit random open houses. It's easy to be mistaken about what you want.

Anatomy of an Offer

Once you determine the value of a property, your real estate agent can prepare a written purchase offer - your promise to buy the home if the seller agrees to your terms and if the contingencies are fulfilled. The contingencies are the requirements and conditions you set that must be satisfied before your promise to buy the home becomes binding. The most common contingencies are:

• Financing contingency - describes the mortgage loan for which you intend to apply, and states that if you are not approved by the lender within a certain number of days, you do not have to buy the home.
• Inspection contingency - gives you the right to have the home inspected by professional inspectors (typically, a termite or structural pest control inspector and a general contractor) within a certain number of days, and states that if you are not satisfied with its condition, you do not have to buy the home.
• Title contingency - gives you time to determine from government records whether the seller really owns the home and whether anyone else might have any interest in it, and states that if you are not satisfied with the seller's ownership, you do not have to buy the home.

Any contingency can be included in an offer. You might require that the seller provide financing, paint the house to your satisfaction, or rent the house until you are ready to move in. You might delay purchase until you successfully sell your old home. You might even condition your offer on the seller's agreement to equity share, or on your ability to find another equity sharing investor.

Your offer and its contingencies will be accepted, rejected, or met with a counteroffer. If and when you and the seller reach an agreement, you make a good faith deposit of $20,00 or $30,000 to show your commitment to the transaction. As more of the contingencies are satisfied, you will be expected to increase the deposited amount.

ESCROW AND CLOSING

Title and Deeds

Title is legal ownership of real estate as shown in government records of ownership. Title is established by a deed, the document that represents real estate ownership. You will become the owner of your new home when the seller signs a deed in your name, delivers it to you, and enters it in the government records. At that point, you hold title to the property.

Escrow Agents

Most real estate transactions involve an escrow agent, a third party who acts as a "neutral zone" between the buyer and buyer's lender and the seller and seller's lender. escrow agents act on written escrow instructions form each of these parties. If a conflict appears in any of the escrow instructions received from either side of the transaction, the escrow agent cannot act until the conflict is resolved.

The escrow agent performs different services for each party. For the buyer, the escrow agent holds the good faith deposit and down payment until closing, then delivers the deed and records the transaction in the government records. For the seller, the escrow agent holds the deed until closing, then gives the seller the sale price less any amount the seller owes on his old mortgage. For the buyer's lender, the escrow agent holds the mortgage money until closing, then creates the lender's lien by recording the mortgage in the government records. For the seller's lender, the escrow agent collects the money the seller still owes, then releases the property from the old mortgage lien by recording a release document in the government records.

The Closing Process

The closing process begins at least a week before the actual closing. The escrow agent gathers all the required documents and instructions from all four parties. If there are no conflicts in the instructions, the escrow agent has the seller sign the deed and has the buyer sign the mortgage documents and deposit the down payment. The escrow agent then sends the signed mortgage documents to the new lender for approval, and waits for the lender to return the approved documents plus a check in the amount of the new mortgage. When he / she has received all the money and all the documents, the money is dispersed, the documents are delivered and recorded, and the closing process ends.

Title Insurance and Closing Costs

In many states, the role of escrow agent is assigned to a title company. Title companies also provide title insurance, which reimburses the buyer's lender and/or the buyer for any losses suffered if a third party claims an interest in the property.

Closing costs, the expenses of a real estate transaction, generally include:

• Inspection fees;
• Loan fees and points
• Escrow agent fees;
• Title insurance premiums;
• Government recording fees;
• Real estate agent commissions (paid by the seller);
• Transfer taxes or stamp fees (a tax based on a percentage of the sale price).

Local customs vary as to how closing costs are split between the buyer and seller. Often, in addition to his share of closing costs, the buyer must prepay some portion of the insurance or property tax at closing.

WHAT IS EQUITY?

In real estate, equity is the difference between property value and mortgage amount:

Property value - Mortgage amount = Equity

When you first buy a home, your equity is the amount of your down payment. Over time, your equity changes as the property value rises or falls and as the mortgage is paid down.