Before you begin looking at homes, you need to find out how much you can spend.
First you should decide how much of your cash you
want to earmark for the up front expenses incurred in purchasing a home
. Keep in mind that you will need a significant chunk of cash to
cover closing cost in addition to a down payment. You may not want
to use all your available cash but hold some in reserve for other
priorities.
Then, you should consider what percentage of your
income you can spend each month on mortgage payments, property tax
and insurance, collectively referred to as PITI (principal, interest,
taxes and insurance). lending institutions have recommended
guidelines (generally 28% to 36% of gross income), but you may
decide to allot less to housing to preserves certain aspects of your
life style, such as travel or season tickets to sporting events.
The following factors determine how much you can
offer for a house:
Gross income:
salary, bonuses, interest income, social security benefits,
alimony and child support, and any other source of income you would
report on your tax return.
Monthly debts:
regular monthly payments such as car loan, student loan, alimony
and child support, and any required payments on outstanding credit
card balances.
Available cash:
checking, savings, money market funds, mutual funds, and other
investments you can liquidate within a few days.
Interest rates:
lower interest rates mean smaller monthly payments, which could help
you qualify for a larger mortgage. These rates are advertised in the
real estate sections of most major newspapers.
Type of mortgage:
whether you get a fixed or adjustable rate mortgage may affect how
large a mortgage you can afford.
Loan term:
a longer repayment period means your monthly payments are lower but
your overall interest cost are higher.
Many lenders will indicate they are likely to give
home buyers a loan up to a certain amount before they have found a
home. This is call prequalification. It gives you an edge over
buyers who are not prequalified.
Benefits of Prequalifying
The lender gives you a written document stating the amount of the
loan. This signals that you are financially capable of buying a
home in a given price range. It assures the real estate agent you
are serious and worth his or her time. Sellers prefer pre-qualified
buyers because the loan process goes faster, bringing the sale to a
quicker close. In a bidding war for an attractive property,
prequalifying can make the difference.
The Basis of Prequalification
Lenders look at two figures to determine you prequalification amount:
Front Ratio
The percentage of your gross monthly income (i.e. before social
security, taxes, etc. are deducted) that will go toward monthly
housing costs (mortgage payments, property taxes and insurance,
often referred to as PITI). The precise ratio that a lender will
use varies from region to region and from one loan program to
another, but usually falls between 28% and 36%.
Back Ratio
The percentage of your gross monthly income that will be used to pay
your combined monthly housing cost and regular monthly payments (car
and student loans, required credit card payments, alimony, etc.)
Again, the precise ratio will vary from one lender to another but
typically lies between 32% and 45%.
How to Prequalify
Ask the lending institution in your area what Front and Back Rations
they use. If the prevailing proportions in your area are too high
for the comfort, adjust them downward. Your local lender may allow
you to spend 33% of your monthly income on housing costs, but you may
decide to devote some of that money to other items.
Seller Agency
The most common arrangement is for an agent to represent the seller.
The agent works on behalf of the seller to market the property, and
the seller compensates the agent in the form of a commission. The
rate in most states is typically 6% of the sales price of the home,
but it is negotiable either side of that.
In this situation, the agent's fiduciary
responsibilities are to the seller. The agent's obligations to you
(as a buyer) are honesty and disclosure of material facts. A
material fact is anything that may affect your decision to buy or
the price you would pay for the house. Examples include changes in
property zoning or new developments that may alter the property
values, improvements which are not up to code, severe structural
defects, and loction in a flood-prone area. Failure to reveal this
information is unethical and, in some states, illegal.
Buyer Agency
An agent who represents the buyer exclusively is known as a buyer's
agent. In this situation, the agent's fiduciary responsibilities
are to you as the buyer. Typically, the agent's compensation is a
portion of the commission paid by the seller. However, some buyer's
agents charge a fixed fee for their services.
If you choose to work with a buyer's agent, you should
expect the agent to:
- Develop a list of homes which meet your specifications and price
range.
- Provide detailed printouts of information about those homes.
- Act as an additional pair of eyes and ears in visiting homes,
calling attention to pros and cons which may not have occurred to you.
- Perform a comparative market analysis.
- Help you evaluate financing options.
- Negotiate on your behalf to obtain the best possible deal.
- Recommend other trustworthy professionals such as lenders,
mortgage brokers, escrow companies and property inspectors.
There are several types of buyer agency contracts.
If you sign up for exclusive representation, you owe the agent a fee
even if you end up buying a home that you locate through another
source. Alternatively, some contracts allow you to freelance,
requiring payment only if you purchase a home located by the agent.
Dual Agency
Because agents actually work under a broker, it is possible for a
single broker to represent both the buyer and the seller. Most
states allow dual agency as long as both parties give their informed
consent. However, common law and state administrative rules usually
favor single agency representation.
Searching for the Right Agent....
You should look for an agent who
has in-depth knowledge of the neighborhood or area that interest you.
Names of prospective agents are available from several sources:
Word of Mouth:
Talk to friends, relatives and co-workers who have purchased
a home recently. If they were happy with their agent, get the name
and phone number. If that agent doesn't work in your desired area,
he or she might recommend someone who does.
Local "for sale" signs:
Drive through the area where you want to buy and note the
agencies and agents most active there.
Yellow pages:
Make some calls to local real estate agencies. If you have
never purchased a home, ask if the office has agents who specialize
in working with first-time buyers and speak with them directly.
Open houses:
These provide an opportunity to meet and talk freely with
agents.