10 Things a Buyer Must Know

Buying a home can be an emotional, time-consuming, and complex process. There are a few things that you can do to help make the process go as smooth as possible:

1.) Check your credit.
Before you apply for a home loan, regardless of your credit, it’s a smart idea to obtain a copy of your credit report from the three major credit bureaus and review the information. If there are errors or things that need to be addressed, it’s easier to address them before you have found a house, than after you have found a house and are trying to close your loan.

If you know that there are a few blemishes on your credit, let your lender know what they are, why they are there, and why you are a still good credit risk. Lenders look at your credit to determine how likely you will pay back the loan. If you had extenuating circumstances - like a loss of a job or medical bills - let them know so that they understand that it is not likely to happen again in the future.

2.) Get approved before you buy.
An approval means that a lender has reviewed your credit history, verified your assets and employment, and has approved your loan before you have found a home to purchase. As long as the home appraises for at least the purchase price, the loan should close.

Getting approved also gives you an advantage over other buyers. Your firm approval makes it easier for you to negotiate on the price of a home, than a person who is not approved or is pre-qualified.

While getting pre-qualified may sound official, it is really just getting an idea of what you can afford. Its having a person plug in a few numbers that you give them - your monthly income and your monthly debt - and getting an approximate payment calculated. From the payment, the calculator can approximate the house price range that you can afford. No information is verified. Because your assets, income or credit is not verified, a pre-qualification has little value when purchasing a home.

3.) Find a great buyer’s agent.
Traditionally real estate agents represent the sellers in a transaction. When you are not working with a buyer’s agent, they are less likely to negotiate the best price or contingencies for you.

A buyer’s agent’s job and fiduciary responsibility (meaning legal duty) is to you, the buyer. Before working with an agent, establish if they are a buyer’s agent or a seller’s agent. After spending a lot of time with a Realtor, it’s natural to feel like you’re a team. But if they are not negotiating for you, then they are not on your team.

4.) Learn about the neighborhood.
Often times the house you find may be in a neighborhood that you’re not familiar with, which is ok. It just means that you’ll have to do a little more research. If you find a house that you like, ask for a list of the neighborhood properties that sold in the last year. How does your home rank? Is it at the top of the price range? If so, it might be hard to resell. Is it average or on the low end? If so, great - as the other home prices go up in value, they will pull your home’s value up as well.

Check out the schools - are they sought after? A good school district means your neighborhood will always be valued by families which is a great reassurance to purchase, not to mention the value-add if you have school-age children.

Next, contact the police station and obtain crime statistics? Are they acceptable to you? Sometimes, if they won’t give them to you, it could be a cause for alarm.

Talk to the neighbors. The more people you talk to, the better sense you will get of who makes up the neighborhood and how they will effect your time spent in it.

Check out the location of the shopping, police and fire stations, schools, and air traffic overhead. These are all things that might affect your property value or quality of your life.

5.) Protect Yourself.
Ask your Realtor for a copy of the documents you will be asked to sign if you decide to buy the house. Read them ahead of time so that you’ll understand the questions that you will be asked, the things you need to know, and the decisions you will need to make.

6.) Have reasonable expectations.
There is a lot of money at stake. No house is perfect. Understanding and remembering these two statements will help diffuse the negotiation stage, the inspection stage and the closing stage.

Emotions are high for both buyers and sellers. - The seller may have loving memories and years of sweat equity in the house. Maybe they are being relocated and don’t want to go. Understanding their motivations for selling will help you appreciate their situation and predicament during these emotional times.

There is a lot of money at stake for all the parties involved (and that includes the realtors) - Just remember that market value (the value of a home) is the price that a willing buyer and a willing seller can agree to. If you can not agree on a price, ask yourself: Is there something you missed? Are there comparables that support the price that they want? Are there motivations that might factor into the price they are demanding? In the end, does it matter? What is the house worth to you today and what do you think you can reasonably sell it for based on the amount of time you plan to spend in it? Think about the answers to those questions before you make your move.

No house is perfect - Always get an inspection. It might be a few hundred dollars, but it’s worth it. It’s the inspector’s job to find any problems with the house that could cost you thousands to repair down the road. Some inspectors have a tendency to over play the importance of their role and the items that they find. Get objective opinions that you trust before making a decision on an inspection report. Likewise, if an inspector says a foundation is cracked but its nothing to worry about - get a second opinion. Ask a handyman for an idea of how much repairs will cost and how complicated they are. The home buying process is an emotional, complex and time-consuming process, but it is worth it. Nothing compares to owning your own home in a neighborhood that you chose.

7.) Learn to Negotiate Everything

The ability to negotiate successfully is crucial not only for successful real estate transactions, but also for daily life events in general. When negotiating, keep these rules in mind:

Challenge the ideas that are presented to you. Negotiating requires you to be assertive and question what you are being told. If you disagree with someone regarding the price, value or condition, speak your mind. Of course, be sure to do so diplomatically.
Become a good listener. Listening carefully and critically thinking about what you are being told can prevent a considerable amount of confusion and ensure that the negotiations run smoothly.
Be prepared. If you're buying, what exactly does the property have that could take away from its value? What is community like? What is the average selling price in the neighborhood? If you're selling, know your property extremely well; you cannot allow yourself to be taken aback by what a prospective buyer might say.
Aim high. If you're selling, try marking the price of your home about 5% above what you would actually want. This will leave you some negotiating space to come down. If you're a buyer, offer a price that is lower than what you normally would; enter negotiations with the optimistic attitude that the seller will come down.
Just a little patience. Relax. This could take a while.
Be diplomatic. Because negotiations may be a long and tedious process, it can be very easy to get irritated. Getting frustrated with negotiations that seem to be going nowhere will only perpetuate any difficulties you may be having, and may even result in an end to all talks. Keep your cool.
Be aggressive. While you don't want to be hostile, you do want to be assertive and dominate negotiations. When meeting with the prospective buyer or seller, be sure to try to take control of the negotiations. Talk with a strong and confident voice, and be sure to have responses for any potential arguments that may be thrown your way.
Don't get nothing for something. Whenever you agree to give something, be sure to get something in exchange. For example, if you are the seller and you agree to lower the price, you may want to hold back on any additional goods that you may have initially been willing to give away (like furniture).
Always give the appearance of being willing to walk away. Even if you are in love with the property as a buyer or are dying to sell as the owner, never reveal your desperation. Always give the impression that you will be willing to walk away.
Time is on your side. It's most likely that you and the other party are eager and pressured to resolve the transaction. Acting calm and under control, in addition to taking time to think rationally, will help you in the long run. In short, just think before you speak.

8.) Do Not Call the Sign

That agent represents the SELLER and at best can act as a DUAL AGENT (like a mediator). So if you want or need help and/or real estate advice in writing an offer to your benefit, negotiating price, conditions, repairs, sewer repair, termite treatment or repairs, and the myriad of other bumps along the way - HIRE YOUR OWN AGENT-- one that agrees to represent you and your interests exclusively.

Please note - ads are created to make the seller agent’s phone ring! Many of the homes have some drawback that's not mentioned in the ad, such as traffic noise, power lines, or some maintenance concern.
For this reason, I want you to be very careful when reading ads. Remember that the person writing the ad is representing the seller and not you! The most important thing you can do is have someone on your side looking out for your best interests. Your own agent will critique the property with an eye towards how well it meets your needs and will point out any drawbacks you should know about. So whether you decide to work with me or not, pick an agent you feel comfortable with and enlist the services of that agent as a buyer's broker. Then you become a client with all the rights, benefits, and privileges created by this agency relationship, and you're no longer just a shopper. Did you know that many homes are sold WITHOUT A SIGN ever going up or an AD EVER BEING PUT IN THE PAPER? These "great deals" go to those people who are committed to working with one agent. When an agent hears of a great buy, who do you think he's going to call? His client, who he has a legal obligation to work hard for you, or someone who just called on the phone and said "keep your eyes open"? So to get the best buy on a property, I always recommend that you hire your own agent and stick with him or her .

9.) Have a Home Inpspection Done by a Professional

Dad may be wonderful but unless he has the tools, instruments, and skills hire a professional. In Louisiana, Home Inspectors must be licensed and trained, with yearly continuing training requirements. They cannot by law and their Code of Ethics do any repairs for you to prevent any conflicts of interest. Ask your Realtor for the names of Home Inspectors they have worked with before. You can also hire a plumber, electrician, roofer, heat/AC company, etc. and inspect each system separately. Price it out. You need to be present during any inspections, with your Realtor, asking questions.

10.) Price Compare Home (hazard) Insurance

Start with your present insurance company or your auto insurance company. But don't stop there -- get at least 2 more quotes.

Also, click here to use CLUE Report - A Five year insurance claim history of a property. The report is free to homeowners once a year.

11.) Lagniappe – Understanding Mortgage Insurance

Mortgage insurance has no connection to any kind of life insurance, and pays no benefits to borrowers. The sole benefit received by the borrower is that, with mortgage insurance, lenders are willing to make loans with down payments smaller than 20% of purchase price or appraised value.

Copyright Jack Guttentag 2006

Measuring the Cost of Mortgage Insurance: An Example

Q.) "I have been advised not to borrow more than 80% of the value of my property so that I won’t have to purchase mortgage insurance. The insurance premiums I have been shown, however, only amount to about ¾ of 1% of the loan balance per year, which seems like small potatoes. Am I wrong?"

Is a 4-ounce potato "small?" Anyone can weigh a potato, but judgments of "small" and "large" are in the eyes of the eater. It is similar with mortgage insurance.

Since measuring the cost of mortgage insurance is more difficult than weighing a potato, I’ll show you how to do it. But the measurement is just step one. Step two is deciding what it means for you, which you have to do for yourself. But to help in that, I am also going to show you how to convert the mortgage insurance decision into an investment decision, with which more people are familiar.

Lets take a concrete example. Assume I can obtain a 15-year fixed rate mortgage at 7.5% and zero points to purchase a $100,000 house. Without mortgage insurance, I could borrow up to $80,000 (80% of property value), whereas with mortgage insurance I could borrow up to $95,000 (95% of property value). The insurance premium on the $95,000 loan is .79% of the balance per year for the first 10 years, after which it drops to .20%.

The best approach to measuring the cost of the insurance premium is to view the loan of $95,000 as consisting of 2 loans: one for $80,000 which has an interest cost of 7.5% consisting solely of the interest rate; and one for $15,000 the cost of which includes both the interest rate and the insurance premium. The interest cost on the $15,000 loan turns out to be 12.7% if you stay in your house for up to 10 years, declining slowly after that to 12% if you stay a full 15 years.

Since the insurance premium is only .79%, how can the cost of the $15,000 loan be 5.2% higher than the cost of the $80,000 loan? The reason is that while you are borrowing an additional $15,000, you pay the premium on the entire $95,000.

Factors Affecting the Cost of Mortgage Insurance

The cost calculation above assumes that you take a fixed-rate mortgage with a loan-to-value ratio of 95%, and pay mortgage insurance for 10 years. Change the assumptions and you change the cost. For example:

*On 85% and 90% loans, the cost is 13.4% and 12.5%, respectively. While the insurance premiums are smaller, the incremental loans are also smaller.

*On smaller loans within the same mortgage insurance premium bracket, the cost is higher. For example, the cost of insurance on a 91% fixed-rate loan, which has the same premium as a 95% loan, is 14.3%.

*Adjustable rate mortgages have higher insurance premiums, and therefore higher costs, than fixed-rate mortgages.

Mortgage insurance costs can be reduced if you manage to get the insurance removed early. For example, if the insurance on a 95% fixed-rate mortgage is removed in 5 years but you stay with the mortgage for 10, the cost falls to 10.8%. However, if you move in 5 years and pay off the mortgage, there is no saving.

A Rule of Thumb For Estimating Incremental Cost

Here is a handy rule-of-thumb for estimating the interest cost on the incremental loan made possible by mortgage insurance, assuming the loan runs 10 years. Divide the total loan by the incremental loan and multiply the result by the annual insurance premium, e.g., 95,000 divided by 15,000 equals 6.33 which multiplied by .79% equals 5%. Adding that to the interest rate gives an estimated cost of 12.5% on the incremental $15,000 loan.

Viewing the Avoidance of Mortgage Insurance As an Investment Decision

Is an increase in interest cost of 5 percentage points on the incremental loan "small potatoes"? The best way to answer this question is to view the choice between the smaller loan without insurance and the larger loan with insurance as an investment decision. Taking the smaller loan means investing $15,000 in a larger down payment that provides a risk free return of 12.5%. Is this an attractive investment?

Not if you don’t have the $15,000. Even if you have it, you would be locking it up for an indefinite period, although you might borrow against it using a home equity loan. Or you may not be impressed with a 12.5% return if you can earn more than that in your business, or are paying more on credit card loans. On the other hand, if you have a bond portfolio earning 7%, you might well want to liquidate it to invest in the larger down payment.

In short, a 12.5% cost on an incremental loan made possible by mortgage insurance is like a 4-ounce potato. It will be "small" to some and "large" to others.

Typical Monthly Private Mortgage Insurance Premiums, Revised September 12, 2005

Down Payment as Percent of the Lower of Sale Price or Appraised Value
	0 to 4.99%	5 to 9.99%	10 to 14.99%	15 to 19.99%
FRMs
30-40 Years	.96	.78	.52	.32
25 Years	.85	.67	.41	.21
20 Years	.80	.56	.23	.19
15 Years	.80	.56	.23	.19

ARMs 1
30 Years	1.17	.88	.61	.33
25 Years	1.06	.77	.50	.22
20 Years	1.06	.77	.50	.22
15 Years	1.06	.77	.50	.22

ARMs2
30 Years	1.21	.92	.65	.37
25 Years	1.10	.81	.54	.26
20 Years	1.10	.81	.54	.26
15 Years	1.10	.81	.54	.26

Notes: Premiums are higher on investment and vacation properties, manufactured houses, and cash-out refinances.

ARMs that have 5 years or more of level payments are considered FRMs. ARMs 1 are those with rate adjustment caps of 1% or less. All other ARMs are ARMs2. ARMs2 that allow negative amortization may have higher premiums.

Down payments of less than 3% are likely to have credit score requirements.

The premiums are for coverage required by Fannie Mae and Freddie Mac. No refunds are available. The premium rates are applied to the original loan balance, and hold for 10 years, after which they fall uniformly to .20% of the original loan balance unless they were already less than .20%, in which case they remain unchanged.

Premiums are annual rates paid monthly. To obtain the monthly premium in dollars, multiply the figure shown in the table by the loan balance and divide by 1200. If the premium rate is .92 and the loan is for $100,000, for example, the monthly premium is $92000 divided by 1200, or $76.67.

Under Federal law, premiums are automatically terminated when the loan balance falls to 78% of the original property value, and may be terminated earlier at the borrower's initiative when the balance reaches 80% of appreciated value.

12.) Lagniappe – Understanding Title Insurance

13.) Lagniappe - Don't Be Pushed Into Any House

Your agent should show you everything available that meets your requirements. Don't make a decision on a house until you feel that you've seen enough to pick the best one.

A few years ago, homes were selling quickly, usually a few days after listing. In that kind of market, agents advised their clients to make an offer ON THE SPOT if they liked the house. That was good advice at the time. Today there isn't always this urgency, unless a home is drastically underpriced, or in a hot area and you'll know if it is.

Don't forget to check into the SCHOOL DISTRICTS of the area you're considering. Information is available on every school; such as class sizes, % of students that go on to college, SAT scores, etc. You can get this information from this web site.

When house hunting, keep in mind the difference between "STYLE AND SUBSTANCE". The SUBSTANCE are things that cannot be changed such as the location, view, size of lot, noise in the area, school district, and floor plan. The STYLE represents easily changed surface finishes like carpet, wallpaper, color, and window coverings. Buy the house with good SUBSTANCE, because the STYLE can always be changed to match your tastes. I always recommend that you imagine each house as if it were vacant. Consider each house on its underlying merits, not the seller's decorating skills.

10 Things a Buyer Must Know

Copyright Jack Guttentag 2006

Factors Affecting the Cost of Mortgage Insurance

A Rule of Thumb For Estimating Incremental Cost

Viewing the Avoidance of Mortgage Insurance As an Investment Decision

Buyers Links