Homebuyer's Guide 2014
Move Up Don’t sit on the fence – it’s time to find your dream home
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MAY 2014 | THE HERALD | Homebuyer’s Guide
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ESSENTIAL MORTGAGE LINGO:
Pre-qualified: Often received via mail or phone call, prequalifications are based on the most basic financial information about a potential borrower and do not commit a lender to any loan details. Pre-approved: After providing a banker with thorough documentation of finances, a preapproval will state how much the bank is willing to lend and at what interest rate. This is an essential step before going to a real estate agent.
New Year, New Rules The much-discussed, often-misunderstood ‘qualified mortgage’ rules primarily impact banks, not buyers. B Y M A G G I E F LY N N C T W F E AT U R E S
o make lenders more accountable, the mortgage application process is getting more stringent. According to regulations stemming from the Dodd-Frank Wall Street and Consumer Protection Act of 2010, mortgage lenders must be more thorough in their documentation of loans and limit risky lending behavior. As of Jan. 10, 2014, lenders must follow the qualified residential mortgage rules, otherwise they cannot make a loan and sell off their stake in the secondary loan market, which is their preferred practice. The QRM rules align closely with the “qualified mortgage” rules released earlier last year by the Consumer Financial Protection Bureau. Because of this precedent, many banks already adhere to the requirements. CFPB Director Richard Cordray estimated 95 percent of loans in
the current market qualify. The rules are as follows: n Fees and points – additional charges that increase the cost of the loan – can equal at most 3 percent of the loan, except loans less than $100,000. n The CFPB will not qualify loans with risky features such as negative amortization, interest-only and balloon payments. n The loan term can be no more than 30 years. n Lenders must obtain extensive paperwork to verify borrowers have the ability to repay loans by the Ability to Repay Rule. A borrower’s total debt-to-income ratio can be no more than 43 percent. This last point is the most impactful,
MAY 2014 | THE HERALD | Homebuyer’s Guide
Loan committal: This occurs after a buyer has been pre-approved and chosen a home. The loan committal is dependent on several factors including an appraisal or review of homeowner association, if one exists, to ensure the loan is a smart choice for both borrower and lender.
and it puts more burden upon banks to ensure a borrower is in sufficient financial health to repay the mortgage. For homebuyers, those at extreme ends of the income scale are likely to feel the pinch. Low-income borrowers and those with debt or credit problems may be denied mortgages they could have obtained in the free-wheeling financial years preceding the housing crisis. High net-worth individuals seeking large mortgages for luxury properties may also find it difficult to meet the debtto-income requirement. However, the new mortgage rules are not more stringent than the majority of current mortgage loans, so the average homebuyer is less likely to feel immediate differences in the housing market. And, the qualified residential mortgage rules don’t apply to loans from federal programs such as the Federal Housing Administration and the Veterans Administration. n 3
Match COMPARATIVE MARKET ANALYSIS:
Agents may conduct a CMA to help a seller determine listing price or a buyer determine the value of an offer. It shows the prices at which similar properties in that area have sold recently.
ou’ve heard it before: Buying a home is one of the biggest financial transactions you’ll ever make. Talk about pressure. Before you proceed to make that weighty decision, if you’re like most buyers, you’ll first want to decide on a real estate agent who will help you through the process. WHY USE AN AGENT? A 2013 survey from the National Association of Realtors reveals that 88 percent of buyers in the previous year purchased their home through a real estate agent or broker. Especially for firsttimers, a trusted, knowledgeable ally can reduce stress and leave buyers feeling confident. “With the Internet, it’s easy to find properties that match your needs today,” said Bob Larson, real estate agent with First Weber Group in Milwaukee. “The value of a real estate agent or broker is to get through all the paperwork and negotiations, working with lenders, inspectors, title companies… Finding a house is not the biggest part. It’s crossing all the ‘t’s and dotting all the ‘i’s.”
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A real estate agent is a lifeline, a sounding board and an expert who guides you through the difficult process of selling or buying a home. Here’s what you need to know about finding the perfect (real estate) partner. B Y R A C H E L S TA R K C T W F E AT U R E S
It’s important to shop around before settling on a real estate agent. Referrals from family and friends are a good starting point, Larson said. Prospective buyers should also consider interviewing a few different agents and asking if they can contact some of the agents’ past clients. GETTING CHOOSEY “Look for an agent who is making the client’s priorities their priorities, not one who is just looking for commission,” Larson said. “One who actually gets satisfaction from helping people accomplish their dreams.” The top real estate agent might not always be the best fit. Like any business relationship, a good synergy between the two parties is key. Conversely, a buyer should be wary of picking a professional simply because they are friends or family, said Kelly Marsh, a real estate professional with Atlanta-based Keller Williams Realty. There needs to be a balance of personal connection and professional experience, as well as room for honesty. STAYING LOCAL The general consensus is buyers should also go local when it comes to real estate agents. “Oftentimes in San Francisco, we’ll have an agent come in who is not familiar with San Francisco homes and values,” said Patrick Barber, president of Pacific Union International’s San Francisco region. “I’ve heard of so many people overpaying for properties.” Instead, the most valuable real estate agent is one who is familiar with the specific market in which the buyer is looking, he said, and can negotiate for the best price. “There’s so many pieces to this puzzle of purchasing the largest investment these people are making,” Barber said. “It’s crucial you have an advocate.” n Homebuyer’s Guide | THE HERALD | MAY 2014
Why are you a real estate agent? “I would find out what that person’s value system is,” said Kelly Marsh, with Atlanta-based Keller Williams Realty. “You don’t want to work with someone who’s just doing it because they think they can make a lot of money; you want to hire someone who loves what they do.”
Will you be representing me, the buyer, exclusively? For agents representing both the buyer and the seller, it can be difficult to get the optimal price for both parties. “Always understand who the agent is representing,” recommended Bob Larson, with First Weber Group, Milwaukee.
How many houses did you sell last year? “The answer you’re looking for is not necessarily how many houses they sold, but what they say about how many houses they sold,” Marsh said. If their numbers are lower because they’re not a full-time agent, that could mean the buyer won’t get the time and attention he or she wants.
Questions for Those houses you sold, what parts of town were they in? Especially in bigger cities, buyers will want an agent who is not just 4 a Potential local, but hyperlocal. They will benefit the most from a professional who worked and sold homes in the specific area of the city in which the Real Estate Agent has buyer is looking, Marsh said.
How do you know if a real estate agent is the right fit? Real estate professionals recommend you start by asking these questions.
How will you keep me updated throughout this process? Does the buyer want to be contacted once or twice a week? By phone or text message? Setting these expectations will keep both parties happy. “The number-one thing we know to be important in any service industry is communication,” said Elizabeth Mendenhall, RE/MAX Boone Realty, Columbia, Mo., and regional vice president of the National Association of Realtors. “It’s critical in a complex real estate transaction.”
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MAY 2014 | THE HERALD | Homebuyer’s Guide
Mortgage Matters Be prepared: Getting a home loan will be different your second time around. BY E R I K J . M A R T I N C T W F E AT U R E S
ecided to sell your current home to upgrade to a new one? Shopping around for the right residence is only one part of the process. You’ll also need to shop around for the right mortgage deal to finance that bigger, better house you’ve been dreaming about. If it’s been a few years since you’ve applied for a mortgage loan, be prepared for changes. That’s because banks and lenders today have to abide by tighter financial restrictions and are much pickier about whom they approve. “If you purchased your current home before 2008, there’s a good
chance that you really didn’t have to provide much documentation when applying for a mortgage,” said Dan Gjeldum, senior vice president of mortgage lending at Guaranteed Rate in Chicago. “The current mortgage environment is heavy on documentation, and mortgage professionals review every buyers’ ability to repay the loan carefully before granting a mortgage now, so be prepared for that.” That means doing some extra homework. To be ready, gather at least three years of tax returns plus several months of bank statements and pay stubs. Also, check your credit report
and make sure your FICO credit score is better than it was the last time you applied for a loan, Portland, Ore.-based broker Rob Levy said. While you can always try financing your new mortgage with your current mortgage lender, it pays to compare loan offers from several different lenders and to compare total loan costs — including rates, points, fees and closing cost carefully. “Using the same mortgage representative or broker makes sense if you had a positive experience,” said Marietta, Ga.-based
broker/attorney Bruce Ailion. “When comparing the rates you are quoted, they should not vary more than an eighth of a percent.” For a referral to a reputable mortgage broker or lender, ask your real estate agent, family, friends and other people you trust. “Make sure you are preapproved for a mortgage before you list [your current home for sale], which is different than getting pre-qualified,” said Ken Maes, northwest divisional vice president for Skyline Home Loans in Clackamas, Ore. n
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The difference between a property’s current value and the amount owed on any mortgage. Properties where the value is less than the amount of debt owed are known as “underwater.”
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he good news is that residential real estate values increased impressively in 2013. The even better news is that, if you’re eager to trade up to a bigger, better home but have been waiting for market conditions to improve, 2014 is shaping up to be a great year to make that move. Just consider the numbers: Property prices in 20 key cities rose 13.6 percent from October 2012 through September 2013, according to the S&P/Case-Shiller home price index – the biggest 12-month jump since February 2006. What’s more, recent data released by the Federal Reserve indicates that net equity in house-
CONTINUED PG 8 MAY 2014 | THE HERALD | Homebuyer’s Guide
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CONTINUED FROM 7 » hold real estate increased $2.2 tril lion from the third quarter of 2012 to third quarter 2013. Rob Levy, principal broker with Keller Williams Realty Professionals in Portland, Ore., says now is an ideal time for a moveup purchase for several reasons. “In most cases, more expensive move-up homes have dropped more in value than more modest or average homes,” Levy says. “Also, many larger homes are owned by Baby Boomers who are now downsizing, so there are more of them available or becoming available on the market.” At the same time, the starter homes that many move-up buyers come from are in high demand from first-time buyers and investors looking for rental properties.” Moreover, would-be move-up buyers sitting on the fence may
never again get such opportune timing. “This may be the last time [a move-up purchase] is this affordable for many. As mortgage interest rates and prices increase, it
becomes increasingly less affordable,” says Bruce Ailion, broker and attorney with RE/MAX Greater Atlanta in Marietta, Ga. “Consider that the approximately 4.5 percent interest rates of
today remain historically very low,” he says. “Almost universally, economists and analysts expect rates to rise to 5 percent by the end of 2015, and prices to continue to increase.” n
Real Estate 2014: By The Numbers
Get a sense of the housing market by looking at the hard numbers. THE HOMEBUYERS…
31 10 42 65.3% 3%
Average age of a first-time homebuyer. Number of homes the typical homebuyer views in a 12-week period. Percentage of buyers who find an agent through friends or family.
Homeownership rate in the U.S. Projection of how much U.S. home values are expected to increase in 2014.
Sources: National Association of Realtors, 2013 Profile of Homebuyers and Sellers, November 2013. U.S. Census Bureau report, Nov. 5, 2013. Zillow.com, Real Estate Predictions 2014, Dec. 2013. HOA-USA.com, About section. Consumer Financial Protection Bureau, guidelines for Qualified Residential Mortgage. Mortgage Bankers Association, Forecast Commentary, Dec. 2013.
Homebuyer’s Guide | THE HERALD | MAY 2014
W Home Inspector: Your Private Detective Before you finalize the contract, get a professional home inspection to protect you from a faulty purchase. BY E R I K J . M A R T I N C T W F E AT U R E S
hat you don’t know could hurt you – at least in the case of a real estate transaction. That’s why every homebuyer should ensure a contract is contingent upon a satisfactory home inspection. Especially for older construction, building standards and construction materials have drastically changed. Plus, many properties on the market now have been vacant or in disrepair due to the foreclosure crisis and economic downturn. With those uncertain variables in play, it’s critical to hire a professional home inspector. “A home inspector in the early 1970s didn’t have to concern themselves with lead-based paint or asbestos – those materials had yet to be deemed unsafe,” said Reggie Marston, president of Residential Equity Management Home Inspections in Springfield, Va. “In the early 1980s, no one was concerned with radon gas or antitip brackets on stoves. In the early 1990s, mold was not on everyone’s
high priority list, and composite building materials were just starting to be installed.” Those are just a handful of the problems today’s home inspectors can detect. It’s also essential to check staples like the HVAC system, wiring, roof and foundation. In addition, home inspectors are uniquely qualified to catch hard-to-see problems like code violations. Hidden hazards can include improperly spaced balusters on railings, defective garage-door safety features and inoperable windows that reduce the number of fire exits in a residence, said Kurt Salomon, past president of the American Society of Home Inspectors. Once, he said, an inspector found residual chemicals in a house that had been used as a secret meth lab. And, the rash of repossessed homes has only made their jobs harder. Since many foreclosed properties have sat vacant for months – even years – damage
CONTINUED PG 10
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MAY 2014 | THE HERALD | Homebuyer’s Guide
Home CONTINUED FROM 9
from water, mold, deterioration and vandalism are prime concerns. According to a 2012 poll conducted by ASHI, nearly 90 percent of all American homeowners surveyed said home inspections boost their confidence in a home purchase. Eighty-four percent said they would be more likely to purchase a foreclosed or shortsale property if it passed a home inspection. “The purpose of a home inspection is not to assemble a list of normal wear-and-tear or cosmetic items but to identify the home’s most pressing problems to be addressed in an effort to save the buyer money in the long run,” Salomon said. After the inspection, the buyer and seller negotiate to see if any of the problems will be fixed or if there will be price allowances for necessary repairs. Even if the
contract doesn’t change, Salomon said, “The buyer will still benefit from having the knowledge of defective or unsafe components and systems.” Some sellers will have a home inspection completed prior to listing a home, said Susan Aviles, broker with Aviles Real Estate Brokerage in Mount Pleasant, S.C.
In other cases, a real estate agent may insist a home inspector of the buyer’s choice conducts the inspection. Either way, Aviles said, she would never recommend a client forgo a home inspection. Regardless of the age of the structure or appearance, an inspection is necessary. Even brand-new homes could have
issues with builders cutting corners or recent DIY home improvement projects gone awry. When shopping for a home inspector, choose one who meets state licensing/certification regulations (visit www.ashi.org for more details). He or she should have several years of experience and come highly referred by someone you know. n
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