Wednesday, August 14, 2013

THE HOME BUYING PROCESS-Your Results May Vary (C) 2013 by Wayne D. Lewis, Sr.



If you are buying your first home, you are to be truly commended.  It is a tremendous undertaking, and certainly nothing to be taken lightly.  Whether you are looking to buy a fixer-upper, or a move-in ready home, buying a home requires some actual homework.  Not a lot a homework, but enough to be able to maneuver through the process so that you will know what is around the next turn in the home buying process.  With that said, there is no guarantee that the process, if fully followed, will result in the successful purchase of your home, but at least, your strategy to buy a home will be more informative and reliable when you make an offer, conduct an inspection, or close on your home.  Now, let’s get into the home buying process.

Calling in?-While it may seem insignificant, stopping by a For Sale sign and calling the office or agent is just one aspect of the home buying process. Or, maybe you called from the internet, or left your name in a drop-down menu for them to capture your info where they either called you or email you for a follow up.  No matter how it started, you were already on the road to becoming a home buyer.  It may have not been a lot of fireworks when it began, but you were off to an exciting opportunity, and from there, unless you were fully aware of what you were about to get into, you were in for an experience of a life time.  Welcome aboard!

From the initial contact, the home buying process has an overall order that can’t be by-passed.  Although there are some blurred lines at the beginning, there is one part that once you get through it, there is no question about what is to follow.  Here is where the blurred line occurs, but only for a short period of time.

What comes first, the agent or the lender?-Depending on whom you ask, the answers may vary.  But no matter who you ask, the lender or the agent, starting with one will lead you to the other, and that’s for certain.  If you ask me, an agent, you should start with your lender.  Why?  If you are looking to buy a home with financing, you might as well get pre-qualified[1].  Pre-qualified is one of two terms that are confusing to buyers.  The other term is pre-approved.  Pre-qualifying occurs in the preliminary process and can be conducted by your lender or agent.  The process takes a few moments of gathering some preliminary financial information from the buyer in terms of their sources income, how much monthly, and household expenses.  From there, an estimate is determined of how much home a potential buyer can purchase.  A Pre-approval[2], is conducted by the lender.  Their process is more extensive, where it takes into account all of the previously mentioned information, but also looks into credit history, overall expenses, rental history, taxes and bank statements, all in an effort to determine a score that helps the lender, the buyer, and the agent to make sure that the house of interest is affordable to the potential buyer.

Below is an overview of the home buying process.  Again, I caution that your results may vary.  One of the key components to the home buying process, when financing, will be confirming your ability to buy your first home.  This obviously means that as a buyer, you have the financial wherewithal to obtain the money to buy a home.  The ability to buy a home, as many of you will learn, does not necessarily mean that you have to run down to your local bank or loan office to buy a house.  You may be able to finance your first home through the seller him or herself.  We will discuss that option in a different forum.  But if you do decide to do owner financing, know your rights and limitations if you decide to go for non-traditional financing.

The outline below does not tell you how to buy a house, it gives you an insight as to what should ordinarily occur in the process of a buying a home.  There is no absolute ABC’s to buying a home, but the manner in which the home buying process is laid out here is designed to a give you a close to an ABC approach as possible.


   How much home can you afford?  There is a formula for determining how much home you can afford.  It generally states that your house note should account for no than 28% of your monthly income, and that your total expenses should not exceed 36%.[3]  In theory, if you make $2,000 a month, your house note with P&I, Insurance and taxes (someone correct me if I am wrong) should be approximately $560.00.  If you are following with that formula, your total expenses should not exceed $720.00 a month.  This formula follows the government’s FHA loan requirements,[4] but differs for a conventional type loan,[5] where the amount that you can carry for total expenses maybe higher.  

      Is this a good time to buy a home? That is a great question.  When is it the worse time to buy a house for a real estate professional? Wrong answer! Never!  Is this the best time to buy a house?  Well, if you find yourself asking, then it must be a good time to buy a house.  You may run into those who will point out that interest rates are too high; that flood insurance is going up; that you probably could rent cheaper than you can buy a house; or, that to maintain a house is extremely expensive.  All of these maybe great reasons to not buy a house, and sufficient enough for anyone who was willing to hedge their bets, to not buy a house at this time.  But, if you are sincerely interested in buying your first home, interest rates maybe the least of your concerns, the cost to maintain a home will be inconsequential, and insurance can be shopped for on the best deals.  The flood insurance is in limbo, but none of these things are of any issue if, and that’s a big IF! you are ready to buy your first home.  And IF you are ready to buy your first home, then the time is right!

      Who can I trust to help me through this experience?  However you are going to decide to buy a home, unless everyone you know is in every aspect of the home buying process, you are about to meet some fantastic people.  What makes them fantastic is that each set of professionals are dedicated to helping you accomplish something magnificent in buying your home.  Whether it is a lender, Realtor®, home inspector, Insurance provider, Appraiser, or Title Attorney, you are going to meet a dedicated team of professionals who are well versed in helping you make a tremendously important and well worthwhile decision in buying your first home.  Your means of selection will need to be based on little more than a pretty smile, or a firm handshake.  Research websites, and or check with family and friends to see whom they may have worked with that they were most impressed enough to recommend an outstanding professional to help you make this important decision.

      Finding a Real Estate Agent- In the New Orleans area, you can search for an agent on the NOMAR site, at www.nomar.org, or check out the Louisiana Real Estate Commission’s website to locate agents in your area (www.lrec.state.la.us)  .  When you find a few agents that catch your interests, be prepared to interview them to see what kind of experience they may bring to the table to help you in buying a home.  Here are a few questions to consider:
v     How long have you been a Real Estate agent?
v     Have you sold homes in this area?
v     Are you a member of any professional associations?
v     How will you help me sell my home?
v     Why should I select you to be my agent?
Additional questions may be found at the following site to help you formulate in your mind whom you believe would be a great help to you in making this decision on who may represent you as an agent.  You may also want to include a trusted family member or friend to help you in the selection process.
          
              15 Questions to Ask an Agent-
            http://www.redfin.com/home-buying-guide/questions-to-ask-an-agent

     Choosing a Lender-  The best place to start for a lender is with your own bank or credit union.  If you are not comfortable with this option, consult with the Realtor® you have selected.  They often team up with great lenders who can help you in the effort to finance your new home.  But even at that point, know that you are not obligated to select a lender that is suggested by your Realtor®.  The lenders suggested are only that, suggestions.  You may want to use some of the same questions that you used to screen an agent in selecting your potential lenders.

 House Hunting- When do you start hunting for a house?  As experience real estate professionals, we know that many home buyers begin searching for a home before they even consider an agent, a lender, or….if they have the money.  It is understandable that a first time home buyer is trying to fulfill their dreams, and a little thing like money, shouldn’t be a hindrance, now should it?.  It is understandable that seeing the home of their dreams may actually motivate a first time home buyer more than the process.  But the process must be adhered to, even if it begun inadvertently, out of order.  Fortunately, there will be no penalties for starting the home buying process by first looking at the houses.  Other ways that you may go about looking for a house maybe the following:
o       Internet
o       Open houses
o       Driving around
o       Newspapers
o       Asking around

   Making An Offer-Once you have found a house that you believe is THE house, you will need the advice of your real estate professional.  Why?  Most houses that are offered for sale are featured with an asking price.  Unless otherwise stipulated, the price listed is subject to an offer.  How much you may offer is entirely up to you.  But before making an offer, ask your real estate professional to conduct a Comparative Market Analysis[6] or a CMA.  This analysis will give you, as a buyer, an indication of what other homes of similar design, and in the area, are selling for.  Of course, the sales price is still subject to an appraisal (see The Home Appraisal below).  There are three possible responses to an offer and knowing how to handle any one of them is important.  For example:
     
§         The Rejection- A seller may reject a buyer’s offer by writing rejection on an offer to purchase, without so much as a counter offer;
§         The Counter Offer-  The seller may respond with a higher sales price more closely aligned with  what they need to see in order to sell their home.  It doesn’t mean it has to be accepted, it’s just a counter to the offer made by the buyer;
§         Accepted-  Enough said!
Consult with your real estate agent for the best direction to take under above set of circumstances.

     Insurance-In Louisiana, especially here in the southeastern portion, as real estate professionals, we are encouraging buyers to immediately begin the search for quotes on insurance (Homeowners and Flood).  While both can be obtained from one source, both aren’t necessarily managed by the insurance company of record.  Your insurance provider will explain to you what your options are available as you work to obtain sufficient coverage for your proposed new home.  Additionally, if possible, and FEMA [7] hasn’t stepped in to prevent it, as a buyer, you should try to see if you can obtain a copy of the current flood policy on the home you are considering buying.  If still approved, you maybe able to do what is called “grandfathering”[8] of a policy.  In this instance, you would be allowed to assume an existing policy on a current home, providing that policy is sufficient to cover the cost of the home and your individual personal items.  Consult with your insurance professional to be sure.  In addition, you can go to the FEMA website at www.fema.gov for further information.

     The Home Inspection-A home inspection is strongly advised when purchasing a home.   No matter how good a home looks, or how new it is, a home inspection is highly recommended by real estate professionals.  Generally, a home inspection consists of a licensed home inspection company going through the home to be bought and using a set of state approved guidelines to conduct a thorough(*) inspection of the home.  The inspection is an overview of various systems components of your perspective new home.  For example, a home inspection includes but is not limited to:
§         The roof
§         The foundation
§         Plumbing
§         Electrical
§         HVAC systems
§         Termites
§         Mold
§         Lead-paint
The home inspection portion of buying a home is critical, but not necessarily a deal breaker.  A home inspection will reveal problems. Why?  Because no home is perfect.  Even brand new, a home will have problems.  Generally speaking, unless the problems revealed by a home inspection impacts your qualify of life, the problems can most likely be corrected. It does become a balancing act between the buyer and seller as to what problems from an inspection will be addressed.  Some problems revealed in an inspection may require additional professional evaluation.  For example, a plumbing system may require a video pipe inspection, or the heating and A/C unit may require a licensed technician to give their perspective.  These addition inspections maybe paid for by the buyer, but repairs maybe requested of the seller.  Your circumstances may vary.

The Home Appraisal[9]-Earlier, we spoke about your Realtor® conducting a CMA, or a Comparative Analysis when considering making an offer to purchase.  An Appraisal, when financing, often at the expense of the buyer, will provide an opinion of value of the selected home to be purchased.  The Appraiser, often selected by your lender, when financing, will conduct an assessment of the property to be purchased comparing it to other homes in the area.  The appraisal goes deeper than a CMA, and for a fee, will be determined to be at, above, or below the sales price.  Generally, if the appraisal is at or above the sales price of the home, the lender will most often finance the home, pending whether the contracts stipulates otherwise as to whether the seller will accept the fact that the buyer maybe acquiring equity at the seller’s expense.  See your agent or lender for further details, as to the seller’s response when the property appraises below the sales price.

Pre-Closing/Pre-Settlement- While we are bringing this part of the home buying process in at this time, the title work, or abstract of title, is generally in play, generally from the moment the contract is accepted between buyer and seller.   For the most part, this activity calls for the title company to conduct what is called an abstract of the title.[10]  From their research, they are looking for any clouds on the title.   This basically means that the ownership of the property that is in play, doesn’t have any liens, or questionable transfers between the current and/or previous owners.  What both the buyer and seller want in order to close on the home is what is called a “clear title”.[11]  What is also going on during this process, especially when a loan is under consideration, is the fact that the loan’s underwriter(s) are finalizing a closing packet for the buyer(s).  This may require the lender seeking some additional information, or information that has yet to be submitted from the buyer, such as check stubs, income taxes,  W-2’s, Profit and Loss Statements (if you are an Independent Contractor), or a statement regarding a past due payment.  When it is finally ready to close, the buyers and sellers will be presented with a preliminary HUD Settlement Statement [12].  This statement will break down the charges, fees and costs of the loan to the buyer(s) as well as any costs to payout any outstanding loans on the subject property for the seller(s).  There maybe references to insurance (homeowners, and flood) as well as title insurance, which is often strongly recommended.  An aside, Title Insurance generally protects the buyer against any possible legal activity that may arise later from either a former family member, or lien holder (consult with your title attorney for further information).

The Walk Thru-  The Walk-thru is a recommended portion for the buyer.  In this instance, the buyer takes advantage of the opportunity, perhaps 5 days, but no less than 2 days before closing on the home, to literally walk through the potential home.  This walk-thru may consist of an inspector or contractor, but not necessarily, to confirm that the property contracted, is in as in good if not better condition than when first contracted between seller(s) and buyer(s).  Any opportunity to point out any problems should be done at this point, giving the seller a chance to address the problem, and also to ensure that the buyer does not have any unresolved issues, that once the property has closed, the possibility of having problems corrected or relatively slim.

The Closing Process/The Settlement-The closing, where the sale of your intended home is finalized can occur in any agreeable setting.  It may occur in the home itself.  But most often, the closings are conducted in the Closing Attorney’s office.  The benefits go without saying, but many closing attorneys are flexible and sometime hold the closings at a real estate office.  The overall benefit, is that the buyer(s) and seller(s) come face-to-face, perhaps for the first time, to sign off on stacks of papers, all necessary to proclaim that one is selling and that the other is buying a property, free and clear of all encumbrances[13].  After fingers are worn to a nub from all of the signing, buyers and sellers exchange niceties and keys, and both receive their respective final papers declaring their respective positions from buyer to owner, and from owner to… non-owner?  Well, I am sure that the former owners are now going to their new homes or, are perhaps in the market to buy a new home.  At any rate, good luck to both parties and best wishes going forward.

Conclusion- We have discussed an overview of the home buying process.  Our discussion covered getting insurance quotes, finding a lender, and an agent, as well as knowing the importance of getting a home inspection.  We also discussed the difference between a CMA and an Appraisal, knowing that one costs and the other is a courtesy of your agent in making an offer on a perspective home.  Other  aspects of the home buying process  include but are not limited to working with your lender to provide needed information to get pre-approval to provide the necessary documents to ensure that you, as a buyer, meet the ratio formula for buying a home.  We covered a number of important aspects, but the home buying process is much deeper than what we covered here in this small forum.  You are strongly encouraged to access the services of the professionals who are licensed and ready to provide extraordinary service to you as a buyer to ensure that buying your first home is an experience worth repeating.  Good luck and best wishes in buying your first home.

Disclaimer:  No information provided here should be considered as legal advice, please consult with your respective attorneys or related professionals for advice concerning your finances, etc.  All information provided here is deemed to be from reliable sources, but not guaranteed. This blog is not attempt to solicit the business of any brokerage or agent.



[3] Home buying qualifying ratios- http://www.fha.com/fha_requirements_debt
[7] FEMA-Federal Emergency Management Agency- www.fema.gov       

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