Two often confused terms in the home buying process are a mortgage loan pre-qualification and a home loan pre-approval. Even some loan officers and real estate agents will use the terms incorrectly, so here's what you really need to know about each one.
A mortgage loan pre-qualification is simply an estimate of how much house you can afford and how much money a lender would be willing to loan you. The best time to get a pre-qualification is right at the beginning of your home buying process, before you even start looking at houses. This involves either sitting down with a lender or talking with one on the phone, and providing information on your income, assets, debts, and a potential down payment amount. The lender would then provide you with a ballpark figure in writing of how much he thinks you could afford to pay for a monthly mortgage. There is no cost involved and there is no commitment on either side. This estimate is just helpful in helping you figure out if buying a home is a viable option, and if so, what your price range would probably be.
Getting pre-approved means that you have a tentative commitment from a specific lender for mortgage funding. In this case, you provide a home loan lender with actual documentation of your income, assets, and debts. This process typically requires an application fee as well, since the bank will run a credit check and work to verify all your employment and financial information. Once you are approved, the lender will give you a letter of commitment, stating how much money her bank is willing to loan you for a home purchase. With a pre-approval in hand you can start your shopping - real estate agents and sellers will take you much more seriously when they see you have your mortgage funding in place.
It is important to understand, however, that even a pre-approval is not a guarantee that you will be approved for a mortgage loan. The funding will only be given when the property appraisal, title search, and other verifications check out on the home you have chosen to buy. Neither is the pre-approval binding; you can still obtain a mortgage from a different lender. If you do stick with the same company that pre-approved you though, the application process will be much shorter once you find the right house.
This is one of the best times to get a fixed-rate mortgage. A fixed rate simply means that the mortgage lender charges you a fixed rate of interest that doesn't ever change over the life of the loan.
If you get a fixed rate of 4.00 percent, you will be paying four percent in interest until you sell the home. At such a low rate, it's unlikely you'd refinance.
You can see how much you pay in interest in an amortization schedule. The longer you pay on a fixed rate, the more interest you pay down because your interest payment is front-loaded into the beginning years of your loan schedule.
The longer you own your home and pay on your mortgage, you'll see that a greater percentage of your monthly payment goes to reduce principal, helping you to build equity or ownership in the home.
An adjustable rate mortgage is initially lower than a fixed rate, but the loan will adjust periodically according to market rates after one year, three years, five years, or whatever you and the lender have agreed to.
The danger is that the new adjusted rate could become too expensive for you, especially if it adjusts higher every year. Part of your terms can include ceilings that limit the number of times and the amount your loan can increase. Adjustments can add as much as two percentage points more to your interest rate, or as much as several hundred dollars more to your monthly payment.
Rates first hit historical lows in 2011, and have retouched those lows several times since. Any time the national average for fixed rate mortgages is below four percent, that's a gift to homebuyers. Adjustable rates are certain to be higher down the road, making fixed rates a lower risk.
Even with a fixed rate mortgage, your monthly payment can change in other ways. You may decide to roll the costs of your mortgage into your loan, in which case you'll be paying the APR rate because the loan amount is higher, yet is still being compressed into a 30, 15 or ten-year term, depending on your loan.
Another way your monthly payment can change is by adding private mortgage insurance (PMI). If you put less than 20 percent of your home's purchase price as a down payment, lenders will require that you pay for PMI. Rates on PMI vary, but you can expect your payments to rise by 0.3 percent to 1.2 percent of the loan amount.
Last, your monthly payments can include escrows for hazard insurance and for property taxes. You should receive a statement from your insurer when it's time to renew your insurance, and your lender will divide the annual amount into monthly payments.
Your property tax authority will send you a new statement annually, usually in the spring or early summer. If you're basing your future payments on what the previous owner paid, you may be in for a surprise. Your tax basis will be based on the purchase price of the home. Most communities limit the amount that the taxing authority can raise property taxes every year.
Mortgage interest, PMI and property taxes are deductible from your income taxes if you itemize, but you still have to make the payments. For these reasons, you want to stick closely to borrowing guidelines such as loan-to-income and debt-to-income ratios.
Your mortgage should be no more than 28 to 32 percent of your gross income or 36 to 42 percent of your income including your monthly debts. That way you'll be able to handle any future changes in your monthly mortgage payments.
What will a home inspector be looking at and how you can prepare for a home inspection? The below listing may be helpful in preparing for a home inspection. Many of these items can be done with little or no cost and many are regular maintenance items for a home.
If you’re working with a couple interested in buying a second home as an investment property, you might suggest they talk to a lawyer about setting up a limited liability corporation or other legal entity before they buy. That way, if they’re sued by someone who was on the property after they bought it, they can limit their damages and protect their personal assets against losses.
Suppose a contractor they hire makes negligent repairs to a deck and it collapses while tenants and guests are having a barbecue. The judgment in a case like this could easily exceed the equity the owners have in the property and even the coverage limits on their insurance policy.
Or perhaps they rent the property to a person who owns a dog not covered in a typical landlord policy and the dog bites someone on the property. State Farm, for example, determines risk based on a dog's bite history not its breed. The company paid $121 million in dog bite claims in 2016 at an average of $33,000 a claim. A claim of that amount might exceed the equity the homeowners have in their property. That could make their personal assets vulnerable to the judgment.
Or let’s say the carbon monoxide detector is faulty and the property has a 20-year-old furnace that develops cracks, releasing gas indoors. Tragically, a family of four staying in the property is killed. The owners could face four wrongful death actions caused by negligence.
These are rare occurrences, to be sure, but they point to the gravity of risks that investment property owners can face. In fact, the scenarios illustrate one of the main differences between real estate and other types of investments like stocks or bonds: real estate can carry risks that exceed the investment in the asset.
Of course, an owner’s first layer of protection is insurance, but owners might fail to recognize that their losses can exceed coverage limits. Or there may be exceptions or carve-outs in the coverage that exclude or limit the losses. These gaps in coverage might expose the owner to unlimited liability. In today’s litigious world, $100,000, $300,000, or even $500,000 liability coverage may be inadequate. Also, owners converting their home to an investment property might not think to take out landlord or vacant property coverage.
To get the right amount of protection, buyers should strongly consider a personal liability umbrella policy with $1 million to $2 million in coverage. But they should also consider forming and running a corporation or LLC. The type of entity they can form varies and is governed by state law, but nearly all states allow incorporated entities like limited liability corporations, partnerships, C corporations, and subchapter S corporations.
Deciding which type of entity to set up and how to structure it should be done with advice of counsel. The process may not be expensive. Depending on the area and particularities of the household, the legal work can be done for a few hundred dollars. There are also do-it-yourself forms online, but self-help isn’t recommended; these entities, whether for your own investments or your clients’, have to be set up correctly to get the maximum protection.
Investing in real estate can be a smart decision. The right property can outperform other investment vehicles. But because real estate investment comes with potential pitfalls, it makes sense to have sufficient insurance and for investors to consider setting up an LLC or other type of entity to separate their liability from their personal assets.
As concrete shrinks during the curing process, vertical cracks form in the concrete or block, some so small they can hardly be seen. This generally does not affect the basement wall structurally, but could allow moisture to enter if the outside wallâ€™s waterproofing isnâ€™t flexible enough to span the crack. If moisture is seeping through, you might consider having a basement waterproofing contractor review the leakage. Often a concrete crack can be injected with a sealer to limit further moisture infiltration.
Basements may have hairline to 1/16 in wide vertical cracks. Prominent vertical cracks 1/8 in wide or larger could be a sign of distress that may need reviewing.
Sometimes a concrete or block basement wall will bow inward and develop a horizontal crack mid-height; this is where the wall feels the maximum stress from the force of the earth pushing against it. If the wall is plumb (straight up and down and not tilting inward), you can potentially monitor it to see if the size of the crack changes. If the crack continues to enlarge or the wall is out of plumb, a structural engineerâ€™s review is recommended. Again, call the foundation contractor for estimates if it's not out of plumb.
There are several common types of diagonal cracks in basement walls. One of the most common is when the crack begins at the top of the concrete basement wall and moves diagonally down to a corner. This is usually accompanied with inward tilting of the top of the foundation wall. It can be caused by the earth pushing against the basement wall and an inadequate connection (i.e. missing anchor bolts) between the basement wall and the first floor framing.
Another type of diagonal crack can appear anywhere in the wall and is usually wider at the top and tighter at the bottom. This type of crack is usually caused by the foundation settling.
A third type of diagonal crack appears at the corner of a window or door opening. This can have several causes, but one of the most common is concrete shrinkage similar to that described in the vertical cracks section.
There is no quick rule for diagonal cracks or for your foundation wall tilting inward. If you are experiencing these in your basement walls, we recommend a review.
Stair stepping cracks are very similar to diagonal cracks except stair stepping cracks occur in concrete block basement walls and diagonal cracks occur in concrete walls. Causes are similar to the diagonal crack issues listed above.
These spaces typically have more shallow depth foundations than basements and are more affected by soils that dry and shrink during extended dry summer weather. If there are interior cracks in the drywall or in the foundation wall that open in the summer and close in the winter, then the foundation wall might need additional support. A structural engineer can assess the situation and make recommendations.
Most houses with brick veneer have triangular shaped cracks on both sides of at least one corner of the foundation wall â€“ occasionally the concrete corner will pop off. This is caused when the brick veneer expands and the concrete foundation below contracts, which is normal. Typically no engineer review is necessary for this situation.
When concrete cures (dries and hardens) it shrinks and wants to crack into relatively square sections; this is why you see control joints on sidewalks to provide weak spots where the concrete can crack without affecting the aesthetics, strength or safety.
Cracks may form with or without control joints. Tight cracks are not considered a structural problem. However, because basement and garage slabs are supported by the ground, Â¼ in wide or larger cracks, vertical displacement at a crack line (the slab on one side of the crack line is higher than the other), or slab settlement can be a sign of a failure of the ground below and a review is recommended.
Cracks may be harmless or may be an indication of a significant structural problem. It is important to pay attention to your home and monitor any changes to existing cracks or the development of new cracks in your basement walls.
An appraisal is an important part of many real estate transactions. An appraisal is typically done if a buyer requires a mortgage loan to purchase a property. The appraisal is done by an appraiser (who is licensed), and it's based on multiple data gathered during an inspection by the appraiser. When it comes to appraisals, there are many myths or misconceptions around them. Whether you're looking to buy a home, looking to refinance a current mortgage, or you're looking for more information about all that goes into real estate transactions, here are some of the most common myths when it comes to appraisals.
Assessed Value, Appraised Value and Market Value are all the Same
For many properties and in many states, the idea that the assessed value, appraised value and the market value are equal is understandable. But, in many areas and instances, this isn't the case. Assessed value is determined by an assessor (who works for a city, town or county) and is usually used to levy taxes; if the assessor doesn't actually physically inspect the property, s/he won't know if any improvements (remodeling projects, interior updates, additions, etc.) have been done. The same can also be said if nearby properties have not been reassessed for a long period of time or they don't reflect the area's current real estate market. Appraised value is determined by an appraiser, and is a result of a detailed physical inspection of a property and research done on the neighborhood and any nearby recently sold properties. Market values are consumer-driven and can be influenced by a buyer - if a buyer is willing and able to pay more for a property, then the market value is what the buyer is willing to pay. While all three values can be similar, all three also have the chance of being vastly different.
The Appraisal Varies Whether it's For the Buyer or Seller
Typically, an appraiser has no vested interest in the price of a property - s/he doesn't represent any particular person. The appraiser should complete an independent and objective appraisal, simply performing the service of determining a property's appraised value. Appraisals can be done for a number of reasons: insurance, home loans, tax losses, estates, liquidation and net worth. Because of this, depending upon the purpose of the appraisal, the market value and appraised value can vary, but the appraiser does not complete an appraisal in favor of the seller or the buyer.
In today’s market, with home prices rising and a lack of inventory, some homeowners may consider trying to sell their home on their own, known in the industry as a For Sale by Owner (FSBO). There are several reasons why this might not be a good idea for the vast majority of sellers.
Here are the top five reasons:
Recent studies have shown that 95% of buyers search online for a home. That is in comparison to only 17% looking at print newspaper ads. Most real estate agents have an internet strategy to promote the sale of your home. Do you?
Where did buyers find the home they actually purchased?
The days of selling your house by just putting up a sign and putting it in the paper are long gone. Having a strong internet strategy is crucial.
Here is a list of some of the people with whom you must be prepared to negotiate if you decide to For Sale By Owner:
The paperwork involved in selling and buying a home has increased dramatically as industry disclosures and regulations have become mandatory. This is one of the reasons that the percentage of people FSBOing has dropped from 19% to 8% over the last 20+ years.
The 8% share represents the lowest recorded figure since NAR began collecting data in 1981.
Many homeowners believe that they will save the real estate commission by selling on their own. Realize that the main reason buyers look at FSBOs is because they also believe they can save the real estate agent’s commission. The seller and buyer can’t both save the commission.
A study by Collateral Analytics revealed that FSBOs don’t actually save anything, and in some cases, may be costing themselves more, by not listing with an agent. One of the main reasons for the price difference at the time of sale is:
“Properties listed with a broker that is a member of the local MLS will be listed online with all other participating broker websites, marketing the home to a much larger buyer population. And those MLS properties generally offer compensation to agents who represent buyers, incentivizing them to show and sell the property and again potentially enlarging the buyer pool.”
If more buyers see a home, the greater the chances are that there could be a bidding war for the property. The study showed that the difference in price between comparable homes of size and location is currently at an average of 6% this year.
Why would you choose to list on your own and manage the entire transaction when you can hire an agent and not have to pay anything more?
Before you decide to take on the challenges of selling your house on your own, sit with a real estate professional in your marketplace and see what they have to offer.
As states reopen, buyers are reemerging faster than expected, proving market resiliency against the COVID-19 pandemic. Applications to purchase a home posted their fourth consecutive weekly increase, rising 11% last week, the Mortgage Bankers Associations reported Wednesday
Applications are still 10% lower than a year ago but the annual loss continues to shrink each week. For example, last week’s purchase volume was down 19% annually. A month ago, purchase volume was down 35% compared to a year earlier.
“There continues to be a stark recovery in purchase applications, as most large states saw increases in activity last week,” says Joel Kan, MBA economist. “We expect this positive purchase trend to continue—at varying rates across the country—as states gradually loosen social distancing measures, and some of the pent-up demand for housing returns in what is typically the final weeks of the spring homebuying season.”
Among the 10 largest states that the MBA tracked in its mortgage application survey, New York led purchase demand with a 14% increase in applications. Other states posting double-digit increases last week were Illinois, Florida, Georgia, California, and North Carolina.
Mortgage rates remain near historical lows, which offers buyers a chance to lock in record-low rates. The MBA reports that the average contract interest rate for a 30-year fixed-rate mortgage was 3.43% last week.
Meanwhile, mortgage applications for refinancings are diverging, dropping another 3% last week, the fourth consecutive week for declines. Lenders reportedly are not offering the same low rates on refinances as they are for home purchase applications. Still, refinance applications remain 201% higher than a year ago.
If you are one of the many homeowners looking to list your home for sale, how do you stand out to the millions of pet parents searching for their dream home?
Whether a dog person, a cat person, or someone who prefers the company of another pet species, 99% of pet owners say that they consider their animal to be family. When finding a home, 95% of animal owners believe it is important that a housing community allows animals.
A study by the National Association of Realtors (NAR) revealed that there are many aspects of the home buying, selling and owning experience that have been greatly impacted by our love for our pets.
This should come as no surprise, as $72 billion was spent on pets in the U.S in 2018. NAR’s PresidentWilliam E. Brown shed some light on the impact of pet owners and their home search.
“It is important to understand the unique needs and wants of animal owners when it comes to homeownership. REALTORS® understand that when someone buys a home, they are buying it with the needs of their whole family in mind; ask pet owners, and they will enthusiastically agree that their animals are part of their family.”
New home builders have actually begun installing retractable pet gates that tuck away neatly inside door jams as a highly requested feature in new homes to attract pet-parents.
So, if you are a homeowner looking to sell in today’s pet-friendly environment, point out the features of your home that will attract pet owners: