HOMEBUYER’S GUIDE

CAN YOU AFFORD A HOME?

Purchasing a home is one of the most important and rewarding decisions a person can

make, which also means it is one of the most stressful!  With all of the steps, money and

people involved, it is easy to be overwhelmed.

Rule of thumb:  You can afford a home that costs about 2 1/2 times your yearly income.  Some other factors that will help determine how much you can afford:

How much money do you need for other bills?

Such as utilities, doctors, groceries, car payments, insurance, etc.

? How much do you have for a down payment?

The typical minimum down payment is 3.5% (FHA financing) of the total loan amount.  Some special financing programs have lower down payment requirements. Down payments can also be from funds given to you by family or friends.  If you choose to have money gifted by family or friends, please discuss this with your lender ahead of time.

? How much will you need for closing costs and other payments?

There are several costs - along with the down payment - that will arise such as earnest money, inspection and appraisal fees and insurance binders.  The typical closing costs are approximately 2.5% to 3% of loan amount.  There are certain closing costs that can be worked into your offer as a seller expense which will allow you to bring in less money at close.  If you'd like to go this route, this must be discussed ahead of time with your lender and Realtor so an established amount is verified prior to writing your purchase agreement offer. 

QUALIFYING FOR A LOAN

Do not confuse loan qualification with loan approval.  Even before you begin looking for

a home, meet with a lender to determine how much you qualify for.  Keep in mind that

pre-qualifying with a lender does not bind you to that lender.  Do not sign any paperwork

that would obligate you to a lender at this point.

Important to remember

Don’t take on any new debt once you obtain your pre-approval.  This means, don't go out and purchase a new car, apply for new credit cards, etc. if you're planning to buy a house within the next year.

Some Costs to Consider

Earnest Money:

This is money that is given to the listing brokerage firm once an offer is made on the property.  The amount can range from $1,000 to 2 % of the purchase price.  The earnest money, if the offer is accepted, goes toward the down payment.  This check is cashed and held in a Broker's Trust Account until the closing date.

Homeowner’s Insurance:

Once you find an insurer, you will need to pay the premium.  Once you pay this, you will receive a binder from your insurance agent that you will need to bring to closing.  The cost depends on the policy you purchase.  It can vary from $500 to $2,500 for a yearly premium.

Inspection Fee:

Once you’ve made an offer on a home, you will need to have a property inspection.  Depending on how in-depth of an inspection you need, you could pay from $300 to $500.

Underwriting Fee:

Most lenders charge an underwriting fee to process your loan application.  This typically is around $250 and is paid at closing.

Origination Fee or Commitment:

This is a fee lenders charge for a loan above and beyond the interest they charge.  If you are considered a credit risk, you may be charged more.  The cost is usually 1% of the loan value and is paid at closing.

Appraisal Fee:

This typically costs between $350 and $450.

Plat Drawing/Survey:

Some lenders may require a drawing of the home’s location, the lot lines, as well as any easements and rights-of-way.  Plat drawings are less expensive, and less accurate.  Expect to pay $50 to $60 for a plat drawing.  For a more accurate description, you should have the property surveyed.  This could cost $300 to $1000.

Mortgage Insurance, Private Mortgage Insurance (PMI):

This is the insurance required on some conventional loans if your down payment is less than 20% of the home's value.  For a $100,000 loan, the amount can range from $500 to $1000 annually.  The larger the loan, the larger the insurance premium. This amount can vary depending on the loan product - consult with your lender on this fee.  

Mortgage Registration Tax:

This tax is from the state, county and city.  All Minnesota mortgage borrowers must pay $2.20 per $1000 of the mortgage.

Settlement or Closing Fee:

This fee is paid to the person conducting the closing and is typically around $250 to $300.

Credit Report:

Lenders will order a credit report for all persons applying for the mortgage loan.  This report is around $60.

Recording Fees:

These fees are from the county where the property is located and cover document recording costs.  They typically range from $35 to $60.

The People You’ll be Working With

Several people will be helping you with your journey in finding and purchasing a home and they all need to be compensated.  Here’s a quick rundown:

        1.  The Real Estate Broker/Agent:

The agent’s reimbursement is riding on you purchasing a home.  Real estate brokers/agents are typically compensated as a percentage of the purchase price.  This is done through a commission split agreement between the company representing the seller and the agent representing/assisting you. 

There are different types of agents and these different agents have different interests.  A seller’s agent is loyal to the seller.  That means the agent, and the company that agent is affiliated with, is representing the seller’s interests in the transaction.

A buyer’s broker/agent is bound to you and must keep your best interests in mind.  This means that the agent/company is representing your interests in the transaction.

In some situations you may be working with a dual-agent.  This means that the agent or agents are representing both the buyer and seller in the real estate transaction.  This situation can only occur if you and the seller agree to allow the real estate agents to act as dual-agents.  When acting as a dual-agent, Minnesota law limits the information an agent may share with you.  This law states “the agents/broker shall take no action that is detrimental to either side”.

In finding a real estate agent, some questions you may want to ask are:

• How long have you been in the real estate business?
• What training and/or designations do you have?
• Do you have a list of references or past clients?
• How many homes have you sold in the last 12 months?
• How familiar are you with the area I’m interested in?

        2.  The Loan Officer:

You will be meeting with the loan officer early on in the game.  The loan officer will help you determine how much you can afford based upon the lender’s criteria.  Loan officers will also be checking your employment and credit history.  Remember, unlike a real estate agent/ broker who may be representing you, a loan officer is looking out for the interests of the lender.  Ask the loan officer upfront for a list of fees they charge and when they begin charging you.  Lender credibility is also important to securing a mortgage.  Using an established and local lender increases the probability of a successful closing.  Your Realtor is very familiar with mortgage lenders and the services they can provide.

        3.  The Loan Processor:

Part of your closing costs will go to the loan processor.  They double-check the work that the loan officer gathers.  It is the loan processor’s duty to determine if you’re a good credit risk for the lender.

        4.  The Underwriter:

The underwriter gives final approval for your loan.

        5.  The Appraiser:

The lender will need an independent opinion on the value of the property you are obtaining a loan for.  The appraiser will compare the property to similar properties in the area to determine its market value.  An appraisal is conducted so that the lender can feel comfortable that the property is worth what you will pay.  Remember, if for some reason you default on the loan, the lender wants to make sure the property has enough value to cover your loan balance.

        6.  The Home Inspector:

It is up to you whether or not to hire a home inspector.  Having a home inspected will determine if there are any major problems with the property.  If major problems do arise, you can use them as part of your negotiation in the purchase, or cancel the entire purchase agreement all together.

        7.  The Closer:

The closer’s duty is to ensure that all parties sign and date all documents at the closing.  They are also responsible to disperse the closing funds and record all required closing documents.

Discrimination and Fair Lending

It is against federal and Minnesota law for real estate agents, sellers and lenders to discriminate against buyers because of their race, color, creed, sex, religion, national origin, marital status, status with regard to public assistance, disability, sexual orientation or familial status.

Discrimination may not be as blatant as you’d think.  Real estate agents should not refuse to list or show properties in certain areas.  Lenders should not refuse loans in certain areas.

Finding a Home

One of the most important things to consider when finding a home is the location.  Here are some considerations:

        1.  Traffic:

Visit the property at different times.  If you visit at 11 o’clock in the morning, the street will probably be quiet.  Go back around 5 o’clock in the evening.  Is the property next to a highway or main thoroughfare?  If so, how noisy is it?  Is the property next to railroad tracks or in a flight pattern?  Be sure that you can handle the noise of these factors.

        2.  Commuting:

You may discover that the further out of the city you go, the more you can afford in a home.  If this is the case, and you work in the city, consider the commute.  Is this something you can endure every day?  It’s a good idea to try out the commute during your normal commute times.  The longer your commute, the more you will be paying for fuel and auto maintenance.

        3.  Community:

Check out the city’s Chamber of Commerce and ask for a Resident’s or Visitor’s Guide.  This will give you some insight as to area attractions, restaurants, events and other interests happening in the community.  Locate a copy of the city's or community’s newspaper and read about other community members’ concerns.  Talk with the city planning department to find out about future developments and other issues.  If crime is an issue, ask the local police department for statistics.

        4.  Schools:

If you have children, this is probably going to be the biggest deciding factor in choosing a home.  Visit the schools and talk with the principals and teachers, ask for performance statistics and teacher to student ratios etc....

        5.  Cultural and Religious Organizations:

Again, check the local newspaper for various organizations.  Another good resource to utilize is the city phone book or go online to the neighborhood Chamber of Commerce website.

        6.  Single-Family Homes vs. Condos and Townhouses:

Deciding on the type of home you want to live in will help to narrow down your search.  Do you like the worry-free benefits of association maintained property where you don’t have to do any yard or exterior maintenance?  Then you may want to consider living in a townhouse or condo.  Is having your own yard something you desire?  Then single family homes might be what you should be looking at.

One thing to remember about townhouses, should this be the type of housing you choose, is that they are part of an association.  Townhouses and condos will have an association that takes care of the exteriors of the units.  They do the snow removal, yard work and maintain the outside structure of each unit, such as siding, the roof and foundation.  Because they are completing these activities for you, the association requires you to pay them dues.  If you are considering a townhouse, be sure to inquire on these four points:

1. How much are the association dues and what do they cover?  Are they paid monthly or annually?

2. Is there a reserve fund in escrow for major repairs?  i.e. if the roof is severely damaged or if the driveway needs to be resurfaced how will it be paid for?  (Your realtor will ask for a document called a “Resale Disclosure Certificate” during your sale negotiations so you can review the Association Reserve Fund.  The purchase agreement will be subject to your satisfactory review of this information.)

3. Is the association run by a management company, or is it run by the owners?

4. Ask for a copy of the association rules.  Some associations have pet restrictions.  Some have strict parking rules.  Some may also have restrictions on exterior decorations and planters.

The Search Is On

Now that you have a better idea of what you desire in a home, it’s time to start searching.

Your Realtor will show you a number of properties based on your criteria.  Realtors have access to the Multiple Listing Service, or MLS.  This is the most up-to-date database of homes for sale.  Your Realtor will send you listings that match your criteria.  If you think that the listing is worth taking a closer look at, your Realtor will set up a showing, which allows your Realtor to gain access to the homes for private showings.

You may also want to do some searching on your own.  Look through the local newspaper and other publications to find homes for sale.  Drive through the area you are considering.  If you happen to find a home that your Realtor hasn't brought to your attenstion, let them know you are interested in the property and they will set up a showing.

Another fun way to view properties is by attending an open house.  If you have signed a “Buyer’s Representation Agreement” with your Realtor, it is a good idea to discuss open houses and the viewing of other properties before going out on your own.  Depending upon your compensation agreement with the agent, you may jeopardize the commission split if you view the home without your representative.  And, if you are working with an agent, be sure you disclose this information to the agent hosting the open house by either signing in as “represented” on the open house registry or handing the hosting agent at the property your Realtor’s business card.

You’ve Found “The One”

After searching and looking, you, with the assistance of your Realtor, finally found a house that you really like.  Be careful to not let your emotions get too carried away.  It may be easy to fall in love with a home the second you walk through the door.  If you are truly interested in the house, visit it a few times.  Once you are certain that this is the house you want, it’s time to make an offer.

Making an offer on a home is why it is so important to work with a Realtor.  They have experienced negotiation skills and know the best way to manage the transaction.  Keep in mind that when a Realtor is representing you, it’s their duty to keep your best interests in mind.  Consult with your Realtor about how you would like to proceed.  You want to be able to pay the lowest possible price for the home, but you also don’t want to waste any time.  Have your Realtor check on the activity of the listing.  Have a lot of people already looked at the property?  How long has it been listed?  If it is a new listing and has already received heavy traffic, you may want to act quickly.  If the property has been on the market for many months, you will probably have some negotiation room.  Your Realtor will also be able to conduct a neighborhood comparison, which identifies the prices of other similar homes in the area.  This will help you in determining how much to offer for the property.

Your Offer Must:

• Be in writing
• Include how you will finance the purchase
• Include the time period for the seller to accept
• Include the closing and possession date on the property

Your offer will be prepared on a purchase agreement.  This is a legally binding contract, so be sure that you can back up what you are offering.  Once the seller signs the purchase agreement, it will be expensive to back out.  READ THE PURCHASE AGREEMENT CAREFULLY AND THOROUGHLY!  Don’t feel obligated to be rushed into signing a purchase agreement.  If you have questions, ask your Realtor.  They are trained to understand the language contained in the purchase agreement.

The Inspection

When you do sign a purchase agreement, it is a very good idea to include an inspection contingency.  This will allow you to hire an inspector to view the property and point out any major defects.  It is important to remember that an existing home will need maintenance.  However, an inspector can help you identify and avoid major problems.  Your Realtor will utilize a contingency that will give you more negotiating options should a major problem arise.

Homes can have many problems the average person may not see.  A trained inspector will look at the plumbing, electrical, heating and cooling systems.  They will climb on the roof and crawl in small dark spaces.  They will be able to see if a house has mold or significant roof or foundation problems.  They can also conduct tests for environmental hazards such as radon, lead paint and asbestos.  Should a major problem be discovered, you can ask the seller to either repair it or reduce the price, or cancel the purchase agreement and ask for your earnest money back if the home is unacceptable or no agreement for repair can be made between seller and buyer.

Some municipalities require a Truth-In Housing Inspection Report to be completed prior to a property being listed for sale in their city.  This inspection is done to ensure that the home meets the city’s building codes.  Most cities that require this report do not necessitate that the seller fixes any problems, they just need to be listed out during the showing of the property.  Even if a Truth-In Housing Report is done on a property, it is still a good idea to have an inspection of your own done.

Mortgage Insurance

Depending on your loan type and the amount of your down payment, you may be required to purchase mortgage insurance.

If you made less than a 20% down payment on a conventional loan, you will need to purchase Private Mortgage Insurance (PMI), which is paid monthly.  Once you gain 20% equity, you may be released from this insurance by contacting your mortgage company for instructions on the removal of this insurance.

If you have an FHA or other loan product you may need to pay a mortgage insurance premium (MIP) for the entire loan term (see your lender for details).  In this instance you cannot cancel your MIP insurance.

Property Appraisal

To approve your loan, your lender will require a property appraisal to ensure that the amount of the loan is appropriate for the condition of the property.  An appraisal is an estimate of the property value in relation to other recently sold similar type properties in the area.

Homeowner’s Insurance

Another requirement of the lender will be that you have the property insured.  This also insures their investment in the property.  Be sure to shop around to avoid overpaying.  Keep in mind that an insurance company will not only look at the current condition of the home, but they will also look at any past claims on the property, along with any past claims that you have made on any other properties.  Depending on the location of the property, meaning county, city and zip, you may pay a higher premium.  The insurer will also look at your age, if you have children and if you have any pets.

Title Insurance

This will protect the lender in the event the legal title of the property isn’t clear.  Some events that could result in an unclear or cloud on the title would be if a spouse wasn’t living in the property at the time of sale, then later decides they want to claim it, or if the property was left to another party in a will and title was not transferred, or if by human error a property was recorded incorrectly, or any other numerous, miscellaneous situations.

Escrow

Your lender may require you to escrow monthly payments for things such as insurance and property taxes.  The amount of these expenses will be included in your monthly mortgage payments.

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