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For most people, a home is the biggest
investment they will ever make. However,
few people do the research necessary to
make a good buying decision. The home-purchase
process is extremely confusing for most
people. With a little bit of homework though,
and some advice from family and friends
who have been through the process before,
you can make this a little easier on yourself.
There is no substitute for taking the time
to educate yourself before you buy a house,
which typically costs you 25% to 40% of
your gross income!
BUYING A HOUSE
Looking for a house without getting pre-approvedDo
not confuse pre-approval with pre-qualification.
During the pre-qualification process, a
loan officer asks you a few questions and
then hands you a pre-qualified letter. The
pre-approval process is much more complete
then this.
During pre-approval, the mortgage company
does the same work as for full approval,
except for the appraisal and title search.
Once you are pre-approved, you become like
a CASH BUYER and have more negotiating clout
with the seller. In some cases (especially
in multiple offer situations), being pre-approved
can make the difference between buying a
home and not buying a home. It is feasible
for home buyers to save thousands of dollars
as a result of being in a better negotiating
situation due to being pre-approved.
Most good Realtors will not show you homes
until you are pre-approved because they
do not want to waste your time, their time,
and the seller's time. Many mortgage companies
will pre-approve you at little or no cost.
They typically will need to check your credit
and verify your income and assets. Refer
to the Mortgage Checklist in the Library
list of documents for assistance.
Making verbal agreements!
If an agent tries to make you sign a written
document that is contrary to his/her verbal
commitments, don’t do it! For example:
if the agent says that the washer will come
with the house, but the contract says that
it will not, the written contract will override
the verbal contract. In fact, written contracts
almost always override verbal contracts.
Don’t just say it. Put it on paper.
Buying a house is a very complex process,
but it’s a lot easier when everything
is in writing.
Choosing a lender just because
she/he has the lowest rate
While rate is important, you have to look
at the overall cost of your loan. This includes
looking at the total cost of borrowing,
the loan fees if applicable, as well as
the appraisal cost, privileges, terms and
conditions. Some lenders include appraisal
fees in their commitments, while other lenders
add them in addition to all of the other
closing costs you will incur. So when one
lenders says plus appraisal be sure to find
out who pays. If you are a qualified purchaser
several institutional lenders may absorb
the appraisal cost and/or assist you with
your other closing costs via a cash back
or similar incentive program. Other special
conditions to watch for are your privileges.
Obviously, if you intend on moving up or
selling for some other reason in the short
term you want to be sure that you can get
out of your mortgage with little or no penalty.
Not getting a written total cost
estimate
The cost of the mortgage, however, cannot
be your only criteria. There is no substitute
for searching our database to locate a professional
mortgage broker or agent for interviewing.
You must feel comfortable that the mortgage
professional you are dealing with is committed
to your best interests and will deliver
what he/she promises. Often, the company
that has the absolute lowest quoted rate
may not be the best company for your mortgage
business. Beware of low rate offer’s
which are available for an initial period
and subsequently lock you into a longer
term non-negotiable rate mortgage.
Realtor recommended lenders
Your Realtor is not a financial expert.
He/she may not know what is the best loan
for you. The Realtor only gets a commission
when your house closes. As a result, the
Realtor may refer you to a lender that is
sure to close the loan, but not necessarily
the lender that has favorable rates or fees.
Also, many Realtors refer you to their friends
in the loan business — who again may
not be able to get the best loan for you.
Even if the Realtor is very professional
and looking out for your best interest,
you should still do your own homework. We
recommend using a mortgage professional
to shop for your loan. Ask your mortgage
consultant how many companies he/she spoke
with before you make a decision. There are
countless stories of consumers who wind
up paying higher rates or getting a loan
program that was not right for them because
they blindly followed their Realtor's advice.
Not getting a rate lock in writing
When a mortgage company tells you they have
locked your rate, get a written statement
which details the interest rate, the length
of the rate lock, and details about the
program.
Dual Agent (an agent who represents
the buyer and the seller on the same transaction)
Buyers and sellers have opposing interests.
In most normal situations, dual agents cannot
be fair to both the buyer and seller, and
they represent sellers more strongly than
buyers. If you are a buyer, it is much better
to have your own agent who will be on your
side. The only time you might consider a
dual agent is when you get a price break
from using a dual agent. If that is the
case, then tread carefully and do your homework!
Buying a house without a professional
inspection
Don’t just take the seller’s
word that they have or will make repairs.
Unless you are buying a new house with warranties
on most equipment, it is highly recommended
that you get a property inspection, a roof
inspection and a termite inspection.
This way, you will know what you are buying.
Inspection reports are great negotiating
tools when it comes to asking the seller
to make repairs. If a professional home
inspector states that certain repairs need
to be done, the seller is more likely to
agree to do them.If the seller agrees to
do the repairs, have your inspector verify
that they are done prior to closing and
make the repairs a further condition of
your transaction. Do not assume that everything
has been done the way it was promised.
Not shopping for home insurance
until you are ready to close
Start shopping for insurance as soon as
you have an accepted offer. Many buyers
wait until the last minute to get insurance,
but then they have no time left to shop
around. Ask your mortgage professional to
provide you with some comparable quotes
for your mortgage insurance plus a referral
to a reputable general insurance agent for
your home insurance.
Signing documents without reading
them
Do not sign documents in a hurry. Whenever
possible, try to get documents that you
will be signing ahead of time so you can
review them. It is advisable to ask for
a copy of all loan papers you are signing
a few days ahead of the closing and review
them with your lawyer. This way you can
review them and get your questions answered.
Do not expect to read all the documents
during the closing. There is rarely ever
enough time to do that.
Making your moving plans too tight
You expect to move out of your prior residence
on a Friday and into your new residence
over the weekend. So you give notice to
your landlord to end your lease on a Friday
and arrange for movers to come to your house
on Friday. Then, your loan closing gets
delayed until the next Tuesday. You now
may be homeless! New tenants could be moving
into your apartment, and the movers are
going to charge you for wasting their time.
You could be forced to live in a motel for
a couple of days!
A Better Plan:
if you are renting allow for a 5-7 day overlap
between closing and moving. In the long
run, it is not nearly as expensive and it
will sure give you peace of mind.
REFINANCING YOUR HOUSE
Refinancing and shopping around
Your current lender may not have the best
rates and programs. There is a general misconception
that it is easier to work with your current
mortgage company. In most cases, your current
mortgage company will require the same documentation
as other companies. So even if you have
been very good at making payments to your
existing lender, they will still have to
do their verifications all over again.
Not doing a break-even analysis
Find out what the total cost of the refinance
is then figure out how much you will save
every month. Divide the total cost by the
monthly savings to get the number of months
you will have to stay in the property to
break-even on your refinancing costs.
Example: if
your refinance costs $2000 and you save
$50/month your break-even is 2000/50=40
months. You should refinance if you plan
to stay in the house for at least 40 months.
Note: the break-even
analysis only works if you are refinancing
to save money. If you are refinancing to
switch from an adjustable to a fixed or
from a 25year amortized loan to a 6 month
convertible loan, it is much more difficult
to perform a break-even analysis.
Not getting a written good-faith
estimate of closing costs
Your mortgage company is required to provide
you with a mortgage statement estimating
the closing costs 3 working days prior to
you signing the lenders commitment (Ontario
– other provinces have similar policies).
Paying for an appraisal when you
think appraise too low
Have the appraisal company do a desk-review
appraisal (typically at no charge) to provide
you with a range of possible values. Your
mortgage professional’s company can
ask their appraiser to do this for you.
Do not waste your money on a full appraisal
if you are doubtful about the value of your
house.
Tax assessment as an indicator
of market value
Mortgage companies do not use the tax assessor’s
value to determine whether they will make
the loan. Instead, they use a market-value
appraisal which may be very different from
the assessed value.
Signing your loan documents without
reviewing them
Do not sign documents in a hurry. Whenever
possible, try to get documents that you
will be signing ahead of time so you can
review them. It is advisable to ask for
a copy of all loan papers you will be signing
a few days ahead of the closing to review
with your lawyer. This way, you can review
them and get your questions answered. Do
not expect to read all the documents during
the closing. There is rarely ever enough
time to do that.
Not providing documents to your
mortgage company
When your mortgage company asks you for
additional paperwork, jump on it! Do not
complain. They are trying to get you approved,
not trying to hassle you unnecessarily!
Jump through the hoops as quickly as possible.
Borrowers who do not respond to requests
for documentation quickly enough can end
up paying higher rates if their rate lock
or commitment expires .
Not getting a rate lock in writing
When a mortgage company tells you they have
locked your rate, get a written statement
which details the interest rate, the length
of the rate lock and details about the program.
Pulling cash out before you refinance
your first mortgage
Many lenders have “cash-out”
seasoning requirements. This means that
if you pull cash out of your credit line
for anything other than home improvements,
they will consider the refinance to be a
cash-out refinance. This leads to much stricter
requirements and can, in some cases, break
the deal!
Getting a second mortgage before
your first mortgage
Many mortgage companies look at the combined
loan amounts (i.e. the first loan plus the
second) even when they are refinancing the
first mortgage. If you plan on refinancing
your first, check with your mortgage company
to see if having a second will cause your
refinance to get turned down.
GETTING A HOME-EQUITY LOAN
If you are getting a home-equity loan,
chances are that it has a hefty pre-payment
penalty clause. This can be very important
if you are planning to sell your house or
refinance in the next 3-5 years. It may
pay to bonus the lender with a fee paid
today for the privilege of getting a fully
open loan.
Getting too large a credit line
When you get too large a credit line, you
can get turned down for other loans, because
some lenders calculate your payments based
on the available credit and not just the
used credit. Having a large equity line
indicates a large potential payment, which
makes it difficult to qualify for loans.
Note: this argument holds even if your equity
line has a zero balance.
Understand the difference between
an equity loan / line
An equity loan is closed — i.e. you
get all your money up front and then make
fixed payments on that loan, until you pay
it off. An equity line is open — i.e.
you can get an initial advance against the
line and then reuse the line as often as
your want during the period that the line
is open. Most equity lines are accessed
through a checkbook or a credit card. On
equity lines, you only pay interest on the
outstanding balance.
Use an equity loan when you need all the
money up fronte.g. home improvement, debt
consolidation.
Not considering the cost of higher
rates on your equity line
Be prepared to pay payments at higher interest
levels if rates move upwards.
Not getting a written disclosure
of closing costs.
Your mortgage professional is required to
provide you with a mortgage statement estimating
the closing costs 3 working days prior to
you signing the lenders commitment (Ontario
– other provinces have similar policies).Home
equity loan is always cheaper than a car
or credit loan
A credit card at 6.9% is cheaper than a
credit line at 12% plus closing costs. There
are a lot of credit card companies with
tremendous low rate promotional deals. If
you need money short term then this may
be an inexpensive alternative to a home
equity loan. Besides the interest rate,
you may also want to compare monthly payments
and other terms of the loan.
Getting a home-equity line of credit
Many mortgage companies look at the combined
loan amounts (i.e. the first loan plus the
second) even when they are refinancing the
first mortgage. If you plan on refinancing
your first mortgage, check with your mortgage
company if getting a second will cause your
refinance to get turned down.
Getting a home equity line to pay
off your credit cards
When you pay off your credit cards with
your equity line, don't put your house on
the line by going out and charging up those
credit cards again! If you can't manage
the plastic, tear it up!
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