Buying Process
Buyer Resources
Buying a home can be complicated, but here are some valuable resources that may be helpful as you go through the home-buying process. This info covers the basics, from understanding how real estate agents assist with the process to analyzing your budget and financial status, dealing with inspections, making an offer for that home, and preparing for the paperwork process. For assistance or quick answers to your real estate questions, give us a call at (303) 359-9937 or contact us anytime!
Appraisals & Market Value
Buying into a new-home community may seem riskier than purchasing a house in an established neighborhood, but any increase in home value depends upon the same factors: quality of the neighborhood, growth in the local housing market, and the state of the overall economy. One survey by the National Association of Realtors shows that resale homes do have an edge over new homes.
A home is ultimately worth what someone will pay for it. Everything else is an estimate of value. To determine a property's value, most people turn to either an appraisal or a comparative market analysis (CMA). An appraisal is a certified appraiser's estimate of the value of a home at a given point in time. Appraisers consider square footage, construction quality, design, floor plan, neighborhood, and availability of transportation, shopping, and schools. Appraisers also take lot size, topography, view, and landscaping into account. Most appraisals cost about $700. A comparative market analysis is a real estate broker's or agent's informal estimate of a home's market value – based on sales of comparable homes in a neighborhood. Most agents will give you a comparative market analysis for free. You can make your own cost comparison by looking up recent sales of comparable properties in public records. These records are available at local recorder or assessor offices, through private real estate information companies, or on the Internet.
Appraisers use several factors when estimating a home's value, including the home's size and square footage, the condition of the home and neighborhood, comparable local sales, any pertinent historical information, sales performance, and indices that forecast future value. For detailed information on appraisal standards, contact the Appraisal Institute at 200 W. Madison, Suite 1500, Chicago, IL 60606, 7 a.m. - 5 p.m. CT; 888-7JOINAI (754-4624).
You can get some idea of your home's value by searching the web. A number of websites and services crunch the numbers from historic public records of home sales to produce the statistics. Some services offer an actual estimate of value based on acceptable software appraisal standards. They also depend on historic home sales records to calculate the estimate. Neither of these services produces official appraisals. They also don't factor in market nuances or other issues a certified appraiser or real estate professional might when assessing your home's value.
The list price is a seller's advertised price, which is usually only a rough estimate of what the seller wants to get. Sellers can price high, low, or close to what they hope to get. To judge whether the list price is a fair one, be sure to consult comparable sales prices in the area. The sales price is the amount of money you, as a buyer, would pay for a property. The appraisal value is a certified appraiser's estimate of the worth of a property, and is based on comparable sales, the condition of the property, and numerous other factors.
Comparative market analysis and an appraisal are the standard methods for determining a home's value. Your real estate agent will be happy to provide a comparative market analysis, an informal estimate of value based on comparable sales in the neighborhood. Be sure you get listing prices of current homes on the market as well as those that have sold. You can also research this by checking on recent sales in public records. Be sure you are researching properties similar in size, construction, and location. This information is available at your local recorder's or assessor's office, through private companies, and on the Internet. An appraisal, which generally costs $500 to $900 to perform, is a certified appraiser's opinion of the value of a home at any given time. Appraisers review numerous factors, including recent comparable sales, location, square footage, and construction quality.
Buyers considering a foreclosure property should obtain as much information as possible from the lender, including the range of bids expected. It also is important to examine the property. If you are unable to get into a foreclosure property, check with surrounding neighbors about the property's condition. It also is possible to make your own cost comparison by researching comparable properties recorded at local county recorder's and assessors' offices or through sites specializing in property records.
The appraised value of a house is a certified appraiser's opinion of a home's worth at a given time. Lenders require appraisals as part of the loan application process. Market value is the price the house will bring at a given point in time. A comparative market analysis is an informal estimate of market value based on sales of comparable properties performed by a real estate agent or broker. An appraisal or a comparative market analysis is the most accurate way to determine your home's worth.
Escrow & Closing Costs
Studies show that the closing costs, which can average 2 to 3 percent of a total home purchase price, are often more costly than many buyers expect. But there are some ways to save:
- Negotiate with the seller to pay all or part of the closing costs. The lender must agree to this as well as the seller.
- Get a no-point loan. The trade-off is a higher interest rate on the loan, and many of these loans have prepayment penalties. But buyers who are short on cash and can qualify for a higher interest rate may find a no-point loan will significantly cut their closing costs.
- Get a no-fee loan. Usually, though, these fees are wrapped into a higher interest rate though it will save you on the amount of cash you need upfront.
- Get seller financing. This kind of arrangement usually does not entail traditional loan fees or charges.
- Rent the property in which you are interested with an option to buy. That will give you more time to save for the upfront cash needed for the actual purchase.
- Shop around for the best loan deal. Each direct lender and each mortgage brokerage has their own fee structure. Call around before submitting your final loan application.
Closing costs are either paid by the home seller or the home buyer. It often depends on local customs and what the buyer or seller negotiates.
Closing costs are fees for services, taxes, or special interest charges surrounding the home purchase. They include upfront loan points, title insurance, escrow or closing day charges, document fees, prepaid interest, and property taxes. Unless these charges are rolled into the loan, they must be paid when the home is closed.
For more on closing costs, ask for the "Consumers Guide to Mortgage Settlement Costs," Federal Reserve Bank of San Francisco, Public Information Department, P.O. Box 7702, San Francisco, CA 94120 or call (415) 974-2163.
As much as you as a buyer may want to believe that the home you have found is perfect, a clear title report ensures there are no liens placed against the prior owners or any documents that will restrict your use of the property. A preliminary title report provides you with an opportunity to review any impediment that would prevent a clear title from passing to you. When reading a preliminary report, it is important to check the extent of your ownership rights or interest. The most common form of interest is "fee simple" or "fee," which is the highest type of interest an owner can have in land. Liens, restrictions, and interests of others excluded from title coverage will be listed numerically as exceptions in the report. You also may have to consider the interests of any third parties, such as easements granted by prior owners that limit the use of the property. Some buyers attempt to clear these unwanted items prior to purchase. A list of standard exceptions and exclusions not covered by the title insurance policy may be attached. This section includes items the buyer may want to investigate further, such as any laws governing building and zoning.
Finding the Right Home
Before making a choice between adding on to an existing home or buying a larger one, consider these questions:
- How much money is available, either from cash reserves or through a home improvement loan, to remodel your current house?
- How much additional space is required? Would the foundation support a second floor, or does the lot have room to expand on the ground level?
- What do local zoning and building ordinances permit?
- How much equity already exists in the property?
- Are there affordable properties for sale that would satisfy your changing housing needs?
Choosing between a smaller house in an affluent neighborhood, an older, bigger house in a more working-class community or a brand-new home is not easy. If you're in this situation, start by examining your priorities and asking the following questions:
- Is the surrounding neighborhood or the home itself the most important consideration?
- Is each of the neighborhoods safe?
- Is the quality of the schools an issue?
- Do any of the areas seem to attract more families with children or adult residents? And where do you fit in?
As for the return on your investment, home-price appreciation is hard to predict. In the late 1980s, and again 10 years later, the more expensive move-up housing appreciated wildly. But during the recession that followed, smaller homes tended to hold their value better than more expensive ones.
Homeownership offers tax benefits as well as the freedom to make decisions about your home. An advantage of renting is not worrying about maintenance and other financial obligations associated with owning property. There also are a number of economic considerations. Unlike renters, homeowners who secure a fixed-rate loan can lock in their monthly housing costs and make prudent investment plans knowing these expenses will not increase substantially. Homeownership is a highly leveraged investment that can yield substantial profit on a nominal front-end investment. However, such returns depend on home-price appreciation.
"For some people, owning a home is a great feeling," writes Mitchell A. Levy in his book, "Home Ownership: The American Myth," Myth Breakers Press, Cupertino, Calif.; 1993. "It does, however, have a price. Besides the maintenance headache, the amount of after-tax money paid to the lender is usually greater than the amount of money otherwise paid in rent," Levy concludes.
As for evaluating the risk associated with home ownership, David T. Schumacher and Erik Page Bucy write in their book "The Buy & Hold Real Estate Strategy," John Wiley & Sons, New York; 1992, that "good property located in growth areas should be regarded as an investment as opposed to a speculation or gamble." The authors recommend that prospective buyers spend a few months investigating a community. Many people make the mistake of buying in the wrong area. "Just because certain properties are high-priced doesn't necessarily mean they have some inherent advantage," the authors write. "One property may cost more than another today, but will it still be worth more down the line?"
Home inspections, seller disclosure requirements, and the agent's experience will help. Disclosure laws vary by state, but in some states, the law requires the seller to complete a real estate transfer disclosure statement. Here is a summary of the things you could expect to see in a disclosure form:
- In the kitchen -- a range, oven, microwave, dishwasher, garbage disposal, trash compactor.
- Safety features such as burglar and fire alarms, smoke detectors, sprinklers, security gates, window screens, and intercom.
- The presence of a TV antenna or satellite dish, carport or garage, automatic garage door opener, rain gutters, and sump pump.
- Amenities such as a pool or spa, patio or deck, built-in barbeque, and fireplaces.
- Type of heating, condition of electrical wiring, gas supply, and presence of any external power source, such as solar panels.
- The type of water heater, water supply, sewer system, or septic tank also should be disclosed.
Sellers also are required to indicate any significant defects or malfunctions existing in the home's major systems. A checklist specifies interior and exterior walls, ceilings, roof, insulation, windows, fences, driveway, sidewalks, floors, doors, and foundations, as well as the electrical and plumbing systems. The form also asks sellers to note the presence of environmental hazards, walls or fences shared with adjoining landowners, any encroachments or easements, room additions or repairs made without the necessary permits or not in compliance with building codes, zoning violations, citations against the property and lawsuits against the seller affecting the property.
Also, look for or ask about settling, sliding, or soil problems, flooding or drainage problems, and any major damage resulting from earthquakes, floods, or landslides. People buying a condominium must be told about covenants, codes, and restrictions or other deed restrictions. It's important to note that the simple idea of disclosing defects has broadened significantly in recent years. Many jurisdictions have their own mandated disclosure forms, as do many brokers and agents. Also, the home inspection and home warranty industries have grown.
If you find yourself stumbling over weird acronyms in a real estate listing, don't be alarmed. There is a method to the madness of this shorthand (which is mostly adopted by sellers to save money in advertising charges). Here are some abbreviations and the meaning of each, taken from a recent newspaper classified section:
- assum. fin. -- assumable financing
- dk -- deck
- gar -- garage (garden is usually abbreviated "hard")
- expansion pot'l -- may be extra space on the lot, or possibly vertical potential for a top floor or room addition. Verify actual potential by checking local zoning restrictions prior to purchase.
- fab pentrm -- fabulous pentroom, a room on top, underneath the roof, that sometimes has views
- FDR -- formal dining room (not the former president)
- frplc, fplc, FP -- fireplace
- grmet kit -- gourmet kitchen
- HDW, HWF, Hdwd -- hardwood floors
- hi ceils -- high ceilings
- In-law potential -- potential for a separate apartment. Sometimes, local zoning codes restrict rentals of such units so be sure the conversion is legal first.
- large E-2 plan -- this is one of several floor plans available in a specific building
- lsd pkg. -- leased parking area, may come with an additional cost
- lo dues -- find out just how low these homeowner's dues are, and in comparison to what?
- nr bst schls -- near the best schools
- pvt -- private
- pwdr rm -- powder room, or half-bath
- upr- upper floor
- vw, vu, vws, vus -- view(s)
- Wow! -- better check this one out.
Home Inspections & Warranties
Yes. Buying a home "as is" is a risky proposition. Major repairs on homes can amount to thousands of dollars. Plumbing, electrical, and roof problems represent significant and complex systems that are expensive to fix.
Your realty agent is one source. But keeping them independent from the agent may be a good idea. Inspectors are listed in the yellow pages. You can ask for referrals from friends. Ask for their credentials, such as a contractor's license or engineering certificate. Also, check out their references.
In order to find a home inspector, Dian Hymer, author of "Buying and Selling a Home A Complete Guide," Chronicle Books, San Francisco; 1994, advises looking for someone with demonstrable qualifications. "Ideally, the general inspector you select should be either an engineer, an architect, or a contractor. When possible, hire an inspector who belongs to one of the home inspection trade organizations."
The American Society of Home Inspectors (ASHI) has developed formal inspection guidelines and a professional code of ethics for its members. Membership to ASHI is not automatic; proven field experience and technical knowledge of structures and their various systems and appliances are a prerequisite. One can usually find an inspector by looking in the phone book or by inquiring at a real estate office or sometimes at an area Realtor association. Rates for the service vary greatly. Many inspectors charge about $400, but costs go up with the scope of the inspection.
A home inspection is when a paid professional inspector -- often a contractor or an engineer -- inspects the home, searching for defects or other problems that might plague the owner later on. They usually represent the buyer and or are paid by the buyer. The inspection usually takes place after a purchase contract between the buyer and seller has been signed.
Foreclosures
You can only purchase a U.S. Department of Housing and Urban Development property through a licensed real estate broker. HUD will pay the broker's commission up to 6 percent of the sales price.
A foreclosure property is a home that the lender has repossessed because the owners failed to pay the mortgage. Thousands of homes end up in foreclosure every year. Economic conditions affect the number of foreclosures, too. Many people lose their homes due to job loss, credit problems, or unexpected expenses. It is wise to be cautious when considering a foreclosure. Many experts, in fact, advise inexperienced buyers to hire an expert to take them through the process. It is important to have the house thoroughly inspected and ensure that any liens, undisclosed mortgages, or court judgments are cleared or disclosed.
A judicial foreclosure action is a proceeding in which a mortgagee, a trustee, or another lienholder on property requests a court-supervised sale of the property to cover the unpaid balance of a delinquent debt. Nonjudicial foreclosure is the process of selling real property under a power of sale in a mortgage or deed of trust that is in default. In such a foreclosure, however, the lender is unable to obtain a deficiency judgment, which makes some title insurance companies reluctant to issue a policy.
The U.S. Department of Housing and Urban Development acquires properties from lenders who foreclose on mortgages insured by HUD. These properties are available for sale to both homeowner-occupants and investors. You can only purchase HUD-owned properties through a licensed real estate broker. HUD will pay the broker's commission up to 6 percent of the sales price. Down payments vary depending on whether the property is eligible for FHA insurance. If not, payments range from the conventional market's 5 to 20 percent—one caution. HUD homes are sold "as is," meaning limited repairs have been made, but no structural or mechanical warranties are implied.
If you are strapped for cash and looking for a bargain, you may be able to buy a foreclosure property acquired by the U.S. Department of Housing and Urban Development for as little as $100 down. With HUD foreclosures, down payments vary depending on whether the property is eligible for FHA insurance. If not, payments range from 5 to 20 percent. But when the property is FHA-insured, the down payment can go much lower. Each offer must be accompanied by an "earnest money" deposit equal to 5 percent of the bid price, not to exceed $2,000 but not less than $500. The U.S. Department of Veterans Affairs also offers foreclosure properties that can be purchased directly from the VA, often well below market value and with a down payment amount as low as 2 percent for owner-occupants. Investors may be required to pay up to 10 percent of the purchase price as a down payment. This is because the VA guarantees home loans and often ends up owning the property if the veteran defaults.
If you are interested in purchasing a VA foreclosure, call 1-800-827-1000 to request a current listing. About 100 new properties are listed every two weeks. You should be aware that foreclosure properties are sold "as is," meaning limited repairs have been made, but no structural or mechanical warranties are implied.
In most states, a foreclosure notice must be published in the legal notices section of a local newspaper where the property is located or in the nearest city. Also, foreclosure notices are usually posted on the property and somewhere in the city where the sale is to occur. When a homeowner is late on three payments, the bank will record a notice of default against the property. When the owner fails to pay up, a trustee sale is held, and the property is sold to the highest bidder. The financial institution that has initiated foreclosure proceedings usually will set the bid price at the loan amount. Despite these seemingly straightforward rules, buying foreclosures is not easy as it may sound. Sophisticated investors use the technique so novices may find themselves among stiff competition.
Trustee sales are advertised in advance and require an all-cash bid. The sale is usually conducted by a sheriff, a constable or lawyer acting as trustee. This kind of sale, which usually attracts savvy investors, is not for the novice. In a trustee sale, the lender who holds the first loan on the property starts the bidding at the amount of the loan being foreclosed. Successful bidders receive a trustee's deed.
One good source is their Web page https://www.hud.gov.
Buying directly at a legal foreclosure sale is risky and dangerous. It is strictly caveat emptor ("Let the buyer beware"). The process has many disadvantages. There is no financing; you need cash and lots of it. The title needs to be checked before the purchase, or the buyer could buy a seriously deficient title. The property's condition is not well known, and an interior inspection of the property may not be possible before the sale, says James I. Wiedemer, author of "The Smart Money Guide Bargain Homes, How to Find and Buy Foreclosures." In addition, only estate (probate) and foreclosure sales are exempt from some states' disclosure laws. In both cases, the law protects the seller (usually an heir or financial institution) who has recently acquired the property through adverse circumstances and may have little or no direct information about it.
Buying a foreclosure property can be risky, especially for the novice. Usually, you buy a foreclosure property as is, which means there is no warranty implied for the condition of the property (in other words, you can't go back to the seller for repairs). The condition of foreclosure properties is usually not known because an inspection of the interior of the house is not possible before the sale. In addition, there may be problems with the title, though that is something you can check out before the purchase.
There are few bidders at foreclosure sales because it is next to impossible to get financing for such a property. You generally need to show up with cash and lots of it, or a line of credit with your bank upon which you can draw cashier's checks.
Making an offer
While a typical buyer may look at five to 10 homes before making an offer, an investor who makes bargain buys usually goes through many more. Most experts agree it takes a lot of determination to find a real "bargain." There are a number of ways to buy a bargain property:
- Buy a fixer-upper in a transitional neighborhood, improve it, and keep it or resell it at a higher price.
- Buy a foreclosure property (after doing your research carefully).
- Buy a house due to be torn down and move it to a new lot.
- Buy a partial interest in a piece of real estates, such as part of a tenants-in-common partnership.
- Buy a leftover house in a new-home development.
The list price is how much a house is advertised for and is usually only an estimate of what a seller would like to get for the property. The sales price is the amount a property actually sells for. It may be the same as the listing price, or higher or lower, depending on how accurately the property was originally priced and on market conditions. If you are a seller, you may need to adjust the listing price if there have been no offers within the first few months of the property's listing period.
A low-ball offer is a term used to describe an offer on a house that is substantially less than the asking price. While any offer can be presented, a low-ball offer can sour a prospective sale and discourage the seller from negotiating at all. Unless the house is very overpriced, the offer will probably be rejected. Before making any offer, you should always do your homework about comparable prices in the neighborhood. It also pays to know something about the seller's motivation. For example, a lower price with a speedy escrow may motivate a seller who must move, has another house under contract, or must sell quickly for other reasons.
The list price is a seller's advertised price, which is usually only a rough estimate of what the seller wants to get. Sellers can price high, low, or close to what they hope to get. To judge whether the list price is a fair one, be sure to consult comparable sales prices in the area. The sales price is the amount of money you, as a buyer, would pay for a property. The appraisal value is a certified appraiser's estimate of the worth of a property, and is based on comparable sales, the condition of the property, and numerous other factors.
While your low offer in a normal market might be rejected immediately, in a buyer's market, a motivated seller will either accept or make a counteroffer. Full-price offers or above are more likely to be accepted by the seller. But there are other considerations involved:
- Is the offer contingent upon anything, such as the sale of the buyer's current house? If so, a low offer, even at full price, may not be as attractive as an offer without that condition.
- Is the offer made on the house as is, or does the buyer want the seller to make some repairs or lower the price instead?
- Is the offer all cash, meaning the buyer has waived the financing contingency? If so, then an offer at less than the asking price may be more attractive to the seller than a full-price offer with a financing contingency.
Most offers include two standard contingencies: a financing contingency, which makes the sale dependent on the buyers' ability to obtain a loan commitment from a lender, and an inspection contingency, which allows buyers to have professionals inspect the property to their satisfaction. A buyer could forfeit his or her deposit under certain circumstances, such as backing out of the deal for a reason not stipulated in the contract. The purchase contract must include the sellers' responsibilities, such things as passing clear title, maintaining the property in its present condition until closing, and making any agreed-upon repairs to the property.
It depends. Fixtures, any personal property permanently attached to a house (such as drapery rods, built-in bookcases, tacked-down carpeting, or a furnace) automatically stay with the house unless specified otherwise in the sales contract. But anything that is not nailed down is negotiable. This most often involves appliances that are not built in (washer, dryer, refrigerator, for example), although some sellers will be interested in negotiating for other items, such as a piano.
In most states, it is the seller, but obligations to disclose information about a property vary. Under the strictest laws, you and your agent, if you have one, are required to disclose all facts materially affecting the value or desirability of the property which are known or accessible only to you. This might include: homeowners association dues; whether or not work done on the house meets local building codes and permits requirements; the presence of any neighborhood nuisances or noises which a prospective buyer might overlook, such as a dog that barks every night or poor TV reception; any death within three years on the property; and any restrictions on the use of the property, such as zoning ordinances or association rules. It is wise to check your state's disclosure rules before purchasing a home.
Buyers considering a foreclosure property should obtain as much information as possible from the lender, including the range of bids expected. It also is important to examine the property. If you are unable to get into a foreclosure property, check with surrounding neighbors about the property's condition. It also is possible to do your own cost comparison by researching comparable properties recorded at local county recorders and assessor's offices or through Internet sites specializing in property records.
The more you know about a seller's motivation, the stronger your negotiating position. For example, a seller who must move quickly due to a job transfer may be amenable to a lower price with a speedy escrow. Other so-called "motivated sellers" include people going through a divorce or who have already purchased another home.
Remember that the listing price is what the seller would like to receive but is not necessarily what they will settle for. Before making an offer, check the recent sales prices of comparable homes in the neighborhood to see how the seller's asking price stacks up. Some experts discourage making deliberate low-ball offers. While such an offer can be presented, it can also sour the sale and discourage the seller from negotiating at all.
In some states, you do need an attorney to complete a real estate transaction, but in others, you do not. Most home buyers can handle routine real estate purchase contracts as long as they make certain they read the fine print and understand all the contract terms. In particular, you should be clear on the terms of any contingency clauses that will allow them to back out of the contract. If you have any questions at all, it may be advisable to consult an attorney to avoid future legal hassles. When looking for an attorney, ask friends for recommendations or your real estate agent to recommend several. Call to inquire about fees and to check on their experience. In general, more experienced attorneys will cost more, but real estate fees, as a rule, are small relative to the cost of the property you are buying.
Most purchase offers include two standard contingencies: a financing contingency, which makes the sale dependent on the buyers' ability to obtain a loan commitment from a lender, and an inspection contingency, which allows buyers to have professionals inspect the property to their satisfaction. As a buyer, you could forfeit your deposit under certain circumstances, such as backing out of the deal for a reason not stipulated in the contract. The purchase contract must include the sellers' responsibilities, such as passing clear title, maintaining the property in its present condition until closing, and making any agreed-upon repairs.
Tax Considerations
As of Jan. 1, 1991, homeowners have been able to deduct points paid by the seller. This deduction previously was reserved only for points actually paid by the buyer.
Here are some frequently cited reasons for buying a house:
- You need a tax break. The mortgage interest deduction can make home ownership very appealing.
- You are not counting on price appreciation in the short term.
- You can afford the monthly payments.
- You plan to stay in the house long enough for the appreciation to cover your transaction costs. The costs of buying and selling a home include real estate commissions, lender fees, and closing costs that can amount to more than 10 percent of the sales price.
- You prefer to be an owner rather than a renter.
- You can handle maintenance expenses and headaches.
- You are not greatly concerned by dips in home values.
Any points you or the seller pay to purchase your home loan are deductible for that year. Property taxes and interest are deductible every year. But while other home-buying costs (closing costs in particular) are not immediately tax-deductible, they can be figured into the adjusted cost basis of your home when you go to sell (any significant home improvements also can be calculated into your basis). These fees would include title insurance, loan application fee, credit report, appraisal fee, service fees, settlement or closing fees, bank attorney's fees, attorney's fees, document preparation fees, and recording fees. Points paid when you refinance an existing mortgage must be deducted rateably over the life of the new loan.
The Mortgage Credit Certificate program allows first-time home buyers to take advantage of a special federal income tax credit. This program allows buyers credit in qualifying for the tax advantage they'll receive after they purchase the home. The amount of the credit is tied to a local formula that every city with an MCC program must follow. An MCC credit, which can total $2,000 or more, reduces the borrower's federal tax liability by an amount tied to how much one pays in annual mortgage interest. The borrower's income and the home's purchase price must fall within established guidelines. Call your local housing or redevelopment agency to see if your community has an MCC program. You also may inquire with your real estate broker or the local association of Realtors.
To qualify for a mortgage credit certificate, your income and the home's purchase price must fall within established city guidelines. These guidelines vary by city but generally only permit people who earn an average income or slightly higher than average income. A limited number of cities have authorized the MCC program. Contact your municipal housing department for more information.
Today a vacation home can be purchased for investment purposes as well as enjoyment. And yes, there are tax benefits. Some people buy a vacation home with the idea of turning it into a permanent retirement home down the road, which puts them ahead on their payments. Another benefit is that the interest and property taxes are tax deductible, which helps to offset the cost of paying for a second home. A vacation home also can be depreciated if you live in it fewer than 14 days a year, or 10 percent of the rented days - whichever is greater.
Here are some ways to save money on taxes:
- Mortgage interest on loans up to $1 million is completely deductible for the year in which you pay it to buy, build or improve your principal residence plus a second home.
- Points, or loan origination fees, also are deductible no matter who pays them, the buyer or the seller.
- Most homeowners, except the wealthy and those living in high-priced markets, no longer need to worry about capital gains taxes. The exemption has been raised to $500,000 for married couples and $250,000 for single owners. It can be taken every two years. Homeowners should always keep all receipts of permanent home improvements and of mortgage closing costs. If you do have to pay capital gains taxes, these costs can be added to your adjusted cost basis. Consult your tax adviser for more information.
Resources:
"Tax Information for First-Time Homeowners," IRS Publication 530, and "Selling Your Home," IRS Publication 523. Call (800) TAX-FORM to order.
If you itemize, mortgage interest and property taxes are deductible on a second home. Check with your accountant or tax adviser for specifics.
If you are a buyer, and you or the seller pays points, they are deductible for the year in which they are paid only. You also can deduct any points you pay when you refinance your home, but you must do so rateably over the life of the loan. Consult your tax or financial advisor.
Many city and county governments offer Mortgage Credit Certificate programs, which allow first-time homebuyers to take advantage of a special federal income tax write-off, which makes qualifying for a mortgage loan easier. Requirements vary from program to program. People wanting to apply should contact their local housing or community development office. Here is a list of four general requirements to keep in mind:
- Some credit may be claimed only on your owner-occupied principal residence.
- There are maximum income limits, which vary by locality and family size.
- You must be a first-time home buyer, meaning you must not have had any ownership interest in a principal residence during the past three years. This restriction may be waived, however, if you are buying property within certain target areas.
- Allocations must be available. A local MCC program may have to decline new applications when it runs out of funds.
The mortgage interest deduction entitles you to completely deduct the interest on your home loan for the year in which you paid it. Mortgage interest is not a dollar-for-dollar tax cut; it reduces taxable income. You must itemize deductions in order to do this, which means your total deductions must exceed the IRS's standard deduction. Another point to remember is that the amount of interest on your loan goes down each year you pay on your mortgage (all standard home-loan formulas pay off interest first before significantly paying into principal). That's why paying extra on your principal every year can help you pay off your loan early.
Homeowners association fees are considered personal living expenses and are not tax-deductible. If, however, an association has a special assessment to make one or more capital improvements, condo owners may be able to add the expense to their cost basis. Cost basis is a term for the money an owner spends for permanent improvements throughout their time in the home and is used to reduce eventual capital gains taxes when the property is sold. For example, if the association puts a new roof on a building, the expense could be considered part of a condo owner's cost basis only if they lived directly underneath it. Overall improvements to common areas, such as the installation of a swimming pool, need to be considered on a case-by-case basis but most can be included in the cost basis of any owner who can show their home directly benefits from the work.
To find out more about how the IRS views condo association fees, look to IRS Publication 17, "Your Federal Income Tax," which includes a section on condos. Order a free copy by calling (800) TAX-FORM.
To reach the Internal Revenue Service, call (800) TAX-1040.
Neighborhood News
The best way to stay connected to what's happening in the real estate market in your area.
Property Tax
If you itemize, mortgage interest and property taxes are deductible on a second home. Check with your accountant or tax adviser for specifics.
If you are taking out a FHA or VA loan, the lender can require an impound account to pay real estate taxes and hazard insurance premiums, as with a standard loan. Most conventional loans do not require an impound account.
Property taxes on all real estate, including those levied by state and local governments and school districts, are fully deductible against current income taxes.
Contact your local tax assessor's office to see what procedures to follow to appeal your property tax assessment. You may be able to appeal your assessment informally. Most likely, however, you will have to go through a formal tax-appeal process, which begins with an appeal filed with the appropriate assessment appeals board.
Property taxes are what most homeowners in the United States pay for the privilege of owning a piece of real estate, on average 1.5 percent of the property's current market value. These annual local assessments by county or local authorities help pay for public services and are calculated using a variety of formulas.
An impound account is a trust account established by the lender to hold money to pay for real estate taxes, and mortgage and homeowners insurance premiums as they are received each month.
You have several ways to determine the value of a home. An appraisal is a professional estimate of a property's market value based on recent sales of comparable properties, location, square footage, and construction quality. This service varies in cost depending on the price of the home. On average, an appraisal costs about $300 for a $250,000 house. A comparative market analysis is an informal estimate of market value performed by a real estate agent based on similar sales and property attributes. Most agents offer free analyses in the hopes of winning your business. You can also get a comparable sales report for a fee from private companies specializing in real estate data or find comparable sales information on various real estate Internet sites.
What You Can Afford
Real estate agents would say that the more you tell them, the better they can negotiate on your behalf. However, the degree of trust you have with an agent may depend upon their legal obligation. Agents working for buyers have three possible choices: They can represent the buyer exclusively, called single agency, or represent the seller exclusively, called sub-agency, or represent both the buyer and seller in a dual-agency situation. Some states require agents to disclose all possible agency relationships before they enter into a residential real estate transaction. Here is a summary of the three basic types:
- In a traditional relationship, real estate agents and brokers have a fiduciary relationship with the seller. Be aware that the seller pays the commission of both brokers, not just the one who lists and shows the property, but also to the sub-broker, who brings the ready, willing, and able buyer to the table.
- Dual agency exists if two agents working for the same broker represent the buyer and seller in a transaction. A potential conflict of interest is created if the listing agent has advanced knowledge of another buyer's offer. Therefore, the law states that a dual agent shall not disclose to the buyer that the seller will accept less than the list price or disclose to the seller that the buyer will pay more than the offer price without express written permission.
- A buyer also can hire his or her own agent who will represent the buyer's interests exclusively. A buyer's agent usually must be paid out of the buyer's own pocket, but the buyer can trust them with financial information, knowing it will not be transmitted to the other broker and ultimately to the seller.
Experts generally agree that you can plan on annually spending 1 percent of the purchase price of your house on repairing gutters, caulking windows, sealing your driveway, and the myriad other maintenance chores that come with the privilege of homeownership. Newer homes will cost less to maintain than older homes. It also depends on how well the house has been maintained over the years.
A standard ratio used by lenders limits the mortgage payment to 28 percent of the borrower's gross income and the mortgage payment, combined with all other debts, to 36 percent of the total. The fact that some loan applicants are accustomed to spending 40 percent of their monthly income on rent -- and still promptly make the payment each time -- has prompted some lenders to broaden their acceptable mortgage payment amount when considered as a percentage of the applicant's income. Other real estate experts tell borrowers facing rejection to compensate for negative factors by saving up a larger down payment. Mortgage loans requiring little or no outside documentation often can be obtained with down payments of 25 percent or more of the purchase price.
Knowing what you can afford is the first rule of home buying, and that depends on how much income and how much debt you have. In general, lenders don't want borrowers to spend more than 28 percent of their gross income per month on a mortgage payment or more than 36 percent on debts. It pays to check with several lenders before you start searching for a home. Most will be happy to roughly calculate what you can afford and prequalify you for a loan. The price you can afford to pay for a home will depend on six factors:
- gross income
- the amount of cash you have available for the down payment, closing costs, and cash reserves required by the lender
- your outstanding debts
- your credit history
- the type of mortgage you select
- current interest rates
Another number lenders use to evaluate how much you can afford is the housing expense-to-income ratio. It is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes, and hazard insurance (or PITI as it is known). If you have to pay monthly homeowners association dues and/or private mortgage insurance, this also will be added to your PITI. This ratio should fall between 28 to 33 percent, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio should be in the 34 to 38 percent range.
Here are some frequently cited reasons for buying a house:
- You need a tax break. The mortgage interest deduction can make home ownership very appealing.
- You are not counting on price appreciation in the short term.
- You can afford the monthly payments.
- You plan to stay in the house long enough for the appreciation to cover your transaction costs. The costs of buying and selling a home include real estate commissions, lender fees, and closing costs that can amount to more than 10 percent of the sales price.
- You prefer to be an owner rather than a renter.
- You can handle maintenance expenses and headaches.
- You are not greatly concerned by dips in home values.
A real estate agent is a good source for finding out the status of the local housing market. So is your statewide association of Realtors, most of which are continuously compiling such statistics from local real estate boards. For overall housing statistics, U.S. Housing Markets regularly publishes quarterly reports on home building and home buying. Your local builders' association probably gets this report. If not, the housing research firm is located in Canton, Mich.; call (800) 755-6269 for information; the firm also maintains an Internet site. Finally, check with the U.S. Bureau of the Census in Washington, D.C.; (301) 763-2422. The census bureau also maintains a site on the Internet. The Chicago Title company also has published a pamphlet, "Who's Buying Homes in America." Write Chicago Title and Trust Family of Title Insurers, 171 North Clark St., Chicago, IL 60601-3294.
Fannie Mae is expanding the availability of low-down-payment loans in an effort to help more people nationwide qualify for a mortgage. Two new programs will help potential buyers overcome two of the most common obstacles to home ownership, low savings and a modest income. To address many first-time buyers' struggles to save the down payment, Fannie Mae developed Fannie 97. The program provides 97 percent financing on a fixed-rate mortgage with either a 25- or 30-year loan term through Fannie Mae's Community Home Buyers Program. Fannie Mae's new Start-Up Mortgage will assist buyers with a 5 percent down payment who are at any income level. Yet applicants do not need as much income to qualify and less cash for closing than with traditional mortgages. Borrowers will receive a 30-year, fixed-rate mortgage with a first-year monthly payment that is lower than the standard fixed-rate loan. Freddie Mac, Fannie Mae's counterpart, also offers low-down-payment loan programs.
Bankruptcies and foreclosures can remain on a credit report for seven to 10 years. Some lenders will consider an borrower earlier if they have reestablished good credit. The circumstances surrounding the bankruptcy can also influence a lender's decision. For example, if you went through a bankruptcy because your employer had financial difficulties, a lender may be more sympathetic. If, however, you went through bankruptcy because you overextended personal credit lines and lived beyond your means, the lender probably will be less inclined to be flexible.
Buyers considering a foreclosure property should obtain as much information as possible from the lender, including the range of bids expected. It also is important to examine the property. If you are unable to get into a foreclosure property, check with surrounding neighbors about the property's condition. It also is possible to do your own cost comparison by researching comparable properties recorded at local county recorders and assessor's offices or through Internet sites specializing in property records.
Working with an agent
Yes, however, buyers should be aware of the differences inherent in working with sales agents who are employed by the developer rather than traditional real estate agents. Builders commonly require that an outside agent be present, and sign in, the first time a prospective purchaser visits a site before payment of commission even is discussed. At times when buyers use an advertisement to find the development themselves first, builders can refuse to pay any commission regardless of how helpful an agent may become later in the process. It is advisable to call the development first and inquire about their policy on compensating real estate agents if you are using one.
Getting a recommendation from a friend or work colleague is an excellent way to find a good agent. Be sure to ask if they would use the agent again. You also can call the managers of reputable real estate firms and ask them for recommendations of agents who have worked in your neighborhood. In any case, whether you are a buyer or a seller, you should interview at least three agents to give yourself a choice. A good agent typically works full-time and has several years of experience. If you are a seller, you should expect to review a comparative market analysis, which includes recent home sale prices in your area, when you talk to a prospective agent.
In many states, it's now common for an agent to represent the buyers exclusively in the transaction and be paid a commission by the sellers. More and more buyers are going a step further, hiring and paying for their own agent, referred to as buyers brokers.
Getting a recommendation from a friend or work colleague is an excellent way to find a good agent, whether you are a buyer or a seller. Be sure to ask if they would use the agent again. You also can call the managers of reputable real estate firms and ask them for recommendations from agents who have worked in your neighborhood.
A good agent typically works full-time and has several years of experience at minimum. If you are a buyer, you don't usually pay for your agent's services (in the form of a commission or percentage of the sales price of the home). All agents in a transaction usually are paid by the seller from the sales proceeds. In many states, this means that your agent is legally acting as a subagent of the seller. But in some states, it's legal for an agent to represent the buyers exclusively in the transaction and be paid a commission by the sellers. You also can hire and pay for your own agent, known as a buyer's broker, whose legal obligation is exclusive to you. If you are a seller, you should interview at least three agents, all of whom should make a sales presentation, including a comparative market analysis of local home prices in your area. The best choice isn't always the agent with the highest asking price for your home. Be sure to evaluate all aspects of the agent's marketing plan and how well you think you can work with the individual.
Real estate agents would say that the more you tell them, the better they can negotiate on your behalf. However, the degree of trust you have with an agent may depend upon their legal obligation. Agents working for buyers have three possible choices: They can represent the buyer exclusively, called single agency, or represent the seller exclusively, called sub-agency, or represent both the buyer and seller in a dual-agency situation. Some states require agents to disclose all possible agency relationships before they enter into a residential real estate transaction. Here is a summary of the three basic types:
- In a traditional relationship, real estate agents and brokers have a fiduciary relationship with the seller. Be aware that the seller pays the commission of both brokers, not just the one who lists and shows the property, but also to the sub-broker, who brings the ready, willing, and able buyer to the table.
- A dual agency exists if two agents working for the same broker represent the buyer and seller in a transaction. A potential conflict of interest is created if the listing agent has advanced knowledge of another buyer's offer. Therefore, the law states that a dual agent shall not disclose to the buyer that the seller will accept less than the list price or disclose to the seller that the buyer will pay more than the offer price without express written permission.
- A buyer also can hire his or her own agent who will represent the buyer's interests exclusively. A buyer's agent usually must be paid out of the buyer's own pocket, but the buyer can trust them with financial information, knowing it will not be transmitted to the other broker and ultimately to the seller.
For information on buyer agents, contact your area's Realtor association or National Association of Exclusive Buyers Agents: 320 West Sabal Palm Place, Suite 150, Longwood, FL 32779. Phone: 407-767-7700, Toll-Free: 800-986-2322, FAX: 407-834-4747, WEBSITE: www.naeba.org.
Work with Lori
The goal is always to exceed your expectations by ensuring a smooth process throughout every real estate transaction. Whether you are buying your first home or moving up to your dream home, I can make each step easier.
