- With falling home prices and near-record low mortgage rates, now really is a good time to buy. First and foremost, buyers need to make sure that they have solid job security before deciding to buy a home. Job security is probably the number-one consideration that people should have when purchasing a home. Buyers that feel comfortable enough about their income are in a great position to take advantage of some very attractive real estate deals.
- Now more than ever it is important for potential buyers to use an experienced real estate professional. There is very little downside and a lot of upside to getting a professional working on your behalf to help you find the right house. Foreclosures and short sales, an increasing large portion of the current market can involve legal and other hassles often best handled by an experienced professional. Look for an exclusive buyer agent who will have your interests at heart and can help you with strategies during the bidding process. Remember, sales commissions are paid by the seller, so there is no cost to the buyer to have their own representation.
- Start by shoring up your credit. Since you most likely will need to get a mortgage to buy a house, make sure your credit history is as clean as possible. Get copies of your credit report. Make sure the facts are correct, and fix any problems you discover.
- Aim for a home you can afford. The rule of thumb is that you should buy a house that will cost about two-and-one-half times your annual salary. There are many calculators available online to get a better handle on how your income, debts, and expenses affect what you can afford. If you have a home to sell, wait to look for your next home until you have a contract on your current home. That way you will know exactly how much you have to spend on your new home.
- Before house hunting, get pre-approved. Getting pre-approved will put you in a better position to make a serious offer when you do find the right house. Pre-approval from a lender is based on your actual income, debt and credit history and is a fairly simple process.
- Use a knowledgeable reputable mortgage lender. Be sure to select a reputable lender that will work with you to get the best deal possible. Look for a lender who will put all costs in writing, carefully explain loan options, encourage you to ask questions, and not rush you into a quick decision.
- 6% is a good rate. With all the headlines about 30-year mortgage rates dipping below 5 percent, many consumers believe they’ll be able to lock in a rate in the high 4’s. But with today’s tighter lending standards, many borrowers won’t qualify for the most attractive rates. Keep in mind, trends of 30-year, fixed-mortgage rates over the past few decades, it’s clear that any rate that starts with a 6 is still very attractive. If you qualify, there are many lenders that offer low-interest mortgages that require a down payment as small as 3 percent of the purchase price.
- Choose carefully between points and rate. When selecting a mortgage, you typically have the option of paying additional points (a portion of the interest that you pay at closing) in exchange for a lower interest rate. If you plan to stay in the house for a long time, five or more year, it’s usually a better deal to pay the points if possible. The lower interest rate will save you more in the long run.
- Don’t buy if you plan to live in the home short term. Purchasing a home in today’s market only makes sense if the buyer plans to live in the home for at least three to five years. Those who plan on selling the property sooner might not provide the property enough time to recover the costs of buying and selling and any lost value that may have occurred in the short term. Even if a home declines in value over a short term, it can still be a good investment if you give the market enough time to recover.
- Before making an offer on a home examine the selling prices of similar, nearby properties. Make sure the sales information is fresh because the market is constantly changing. For an accurate gauge of home prices in a given market, buyers should look for comparable sales data that is as recent as possible. Your opening bid should be based on the sales trend of similar homes in the neighborhood.
Homeowners Insurance Basics
Homeowners insurance exists because a home is a huge investment, often one of the largest purchases many people make in their lifetimes. Naturally, people want to protect the value of their precious property. Homeowners insurance is a contract between a homeowner and an insurance company. As long as the owner pays the required premiums and meets the other policy requirements, the insurance company guarantees to reimburse the owner for any losses incurred due to natural disasters or human-caused damage.
What Does It Cover?
A basic homeowner’s insurance policy protects the owner against any property damage that results from things like fire, lightning, wind or hail storms. It will also provide for motel and food costs if you are forced to leave your home while such damages are repaired.
A typical policy, however, does not cover flood or earthquake damage. Because these issues are usually specific to certain regions of the country and can cause extreme damage, these can be purchased as separate policies. If you live in a flood zone or near an earthquake fault line you may be required by your mortgage company to carry these protections.
A basic policy will also cover homeowners against loss from theft or vandalism as well as reimbursement for personal property destroyed in natural disasters. It will also provide for something that many people may not normally associate with home protection – liability coverage for lawsuits brought against the owner by people who were injured on the property. This includes the cost of legal defense up to the allowed policy limit. Additionally, most policies will have a provision that will cover the basic medical expenses for the parties.
Is It Required?
Homeowners insurance is almost universally required by mortgage companies with the purchase of a home. This is because the investment is almost as big for them as it is for you. They want to make sure the property is protected from major damages so that if you are ever unable to keep up with your payments, the lender can then reclaim ownership and be able to sell it fairly easily. And even if you own your home outright, a good insurance policy is still the best way to protect the value of your home in the face of the unexpected.
New FHA Policies
Most people don’t spend their time tracking FHA policy changes, unless of course you’re in the real estate industry. I received this information regarding some changes in the Federal Housing Administration (FHA) and wanted to share it for the benefit of those in the Tulsa area.
The bottom line is this: FHA is tightening up its policies and instituting stricter requirements for providing mortgages. Their rationale is simple. FHA is no longer a cash-flushed organization, quickly handing out loans to all who ask. After the mortgage crisis, it seemed like nearly everyone wanted an FHA loan. Understandable. But, like any financial institution, the Federal Housing Administration needs to find out how it can serve the underserved while at the same time managing risk, all the while trying to assist the nation’s economic recovery.
Here is a quick snapshot of some of the major changes.
- Up-front mortgage insurance premiums will increase to 2.25% (formerly it was 1.75%). This will help increase the agency’s reserve fund, which is in dire need of replenishing.
- Successful loan applicants will have a minimum credit score of 580 to be eligible for the 3.5% down payment. Borrowers who have lower credit scores will need to find a way to provide a heftier down payment (10%).
- In addition, sellers get a shorter leash, too. Now, sellers are required to cap at 3% the amount they offer for closing costs. They used to be able to pay closing costs up to 6% of the home’s price. This requirement brings FHA loans in line with typical industry standards, while preventing the practice of inflating appraisals.
- Any lenders offering FHA mortgages must assume liability for the loans. FHA is serious about this new requirement, and will occasionally publish lender performance reports for the general public.
Why all the changes? As I mentioned above, FHA needs to protect its assets (and thus its mortgages) as best it can. Everyone is adapting to the new economic climate—individuals, big business, and government alike. As an indicator of their tenuous status, nearly 15% of all FHA loans were delinquent at the time of last year’s third quarter reports. Don’t worry, FHA will probably not lose its stature as the biggest lending agency. Almost half of all first time homebuyers use FHA loans, and last year, 30% of all loans came through the FHA.
When to Pay Points on a Mortgage
One common question a buyer will always ask us is “should I pay points on my home loan?” The answer is “it depends on a few factors.”
The reason why you pay points on a loan is to get a lower interest rate. A point on a mortgage is equal to 1% of the loan amount. Therefore, if you are receiving a loan of $200,000 one point would cost $2000.
Paying points may seem like the obvious choice because everyone wants lower monthly mortgage payments, but it is not that simple from a cost analysis standpoint though. The main deciding factor whether to pay points or not is how long you plan on staying in the home. Getting a lower interest rate from paying points is a trade off between paying money now versus paying money later.
Let’s look at an example using the a $200,000 loan. We will assume that the interest rate on a loan with no points will equal 6% and a loan with 2 points will equal 5.5%.
- Monthly Payment without Points $1,199.10
- Monthly Payment with Points $1,135.58
- Monthly Savings from Points $63.52
- Cost of Points $4,000.00
- Savings Rate of Return 2.000% (keeping the money in a bank account)
- Monthly Income from Investment $6.67
- Net Monthly Savings $56.85
By dividing the amount the buyer paid for the points ($4000) by the monthly savings ($56.85) we see that it would take the borrower five years and ten months before they would be at the break even point.
If a borrower is going to be in the home for more than five years and 10 months it would make sense for them to pay points. If they are going to be in the home for a shorter period of time the no points option would make more sense. When refinancing, you can also opt to pay points.
Another important consideration is that points are fully deductible in the tax year of your closing. This however, only applies to purchases and not when you refinance a property. In the case of a refinance, the IRS requires you to spread out the loan deduction over the course of the loan. Using the $4000 for points in the above example you would be able to deduct 1/30 of $4000 over 30 years. If you happen to pay off the loan early you can deduct the remaining balance in that tax year.
In any situation regarding taxes, I always recommend you speak with a tax professional.