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Buyers Questions and Answers:
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Is this a good time to buy a house?
Experts would say yes, if you meet the following criteria:
-- Are not counting on price appreciation in the short term. Most
experts don't expect home prices to inflate much in Northern California in the
next couple of years.
-- Can afford the monthly payments. Remember, Northern California is
one of the most expensive housing markets in the United States.
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% of the sales price Need a tax break. The mortgage interest deduction can make
home ownership very appealing. Prefer to be an owner rather than a renter.
Can handle the maintenance expenses and headaches.
Are not greatly concerned by dips in home values.
How do I Figure what I can afford to buy?
Roughly, it's three times your annual income. Real estate experts
strongly recommend people get prequalified by a lender as a way of
calculating exactly how much of a home they can afford,
When qualifying people for a loan, lenders look at a borrower's
full financial standing. Lenders use the relationship P1TI, or principal,
interest. taxes and insurance payments, and their ,gross monthly income.
Generally. lenders like to see the PITI not exceed 30% to 33% of the borrower's
,gross monthly income. They also consider the ratio of the borrower's monthly
debt payments, including the PITI to income. Some lenders have
flexibility in these qualifying ratios.
What is considered a low down payment?
Anything less than the standard 20%. However, many people borrow
with less than 20% down by obtaining private mortgage insurance (PMI).
And numerous programs are available to help first time buyers with
little or no down payment, including Federal Housing Administration (FHA),
Veterans Administration (VA) and Federal National Mortgage Assn's
(Fannie Mae) Community Home Buyers Program.
How much does PMI cost?
"PMI costs vary from one mortgage insurance firm to another, but
premiums usually run about 0.5% of the loan amount for the first year of
the loan. Most PMI premiums are a bit lower for subsequent years. The first
year's mortgage insurance premium is usually paid in advance at the
close of escrow, and there is usually a separate PMI approval process," writes
Diana Hymer, author of "Buying and Selling a Home in California. A Complete
Guide," (Chronicle Books).
Can I drop my PMI?
California Civil Code 2954.6, a disclosure law, requires lenders to
notify borrowers within 30 days after the close of escrow whether the
borrower has the right to cancel private mortgage insurance. The code
also requires lenders or servicers to provide borrowers with an annual notice
concerning each borrower's right to terminate PMI.
Civil Code 2954.7 ,grants borrowers the right to terminate PMI under
certain limited circumstances. Generally, to drop PMI, the loan must be
at least 2 years old and the borrower cannot have made any late payments in
the last year. In addition, the loan-to-value ratio must be less than
75%
How much should I set aside for maintenance expenses?
According to Bob Vilas, author of "Guide to Buying Your Dream
House," (Little, Brown & Co.): "For maintenance, depending on the age
and condition of the house. you should allocate about 1% of the purchase
price annually. "
Is it better to make as large a down payment as possible?
Putting down as little as possible and taking a larger mortgage
allows buyers to take full advantage of the tax benefits of home ownership.
Mortgage interest (and property taxes) are fully deductible from state
and federal income taxes.
Can I buy a house with nothing down?
Although some experts advise against it. home buyers interested in
buying a house with nothing down can do so. But it's not easy finding
these loans and in some cases they can be risky. Occasionally, a builder will
offer nothing-down loans to induce sales in an otherwise slow-moving project.
Desperate sellers also may agree to finance the full purchase price to
get out from under a property. The V,4 loan program allows buyers-s to qualify
for a nothing-down loan, as well as a loan program offered through the
California Public Employees Retirement System.
What programs does the FHA offer?
The U. S. Department of Housing and Urban Development (MUD)
offers a variety of loan insurance programs through FHA that require
about 4% to 5% cash down. The down payment must be the buyer's own money-
gift money is not allowed but buyers can finance all non-recurring
closing costs.
FHA loan limits vary depending on the county where the property is
located. Recently, the FHA loan limit was increased to $151,725, but
only in high cost areas such as Los Angeles, Marin and Monterey. FHA loans
are originated and serviced by private lenders.
What special programs exist for veterans?
VA loans are attractive because in some cases they require no down
payment. With the U. S. department of Veterans Affairs, there is no
restrictions on the purchase price.
For more information, call the U. S. Department of Veterans Affairs
at (800) 827-1000.
In addition, the California Department of Veterans Affairs offers a
home loan program. Gal-Vet actually buys the subject property from the
seller and resells the property to the veteran on a land contract The
department holds title until the veteran has repaid the amount owed,
although the veteran has the right to possession of the property as his
or her personal residence.
For specific information about Gal-Vet programs and requirements,
call (800) 952-LOAN or (510) 602-5070
Can people who served in the National Guard use the VA loan program?
Yes, but the qualifying requirements may be more stringent and loan
fees for National Guard veterans are generally more costly.
How does the Community Home Buyers Program work?
The program is sponsored by Fannie Mae, the Federal National
Mortgage Assn., and administered through participating lenders. The
program has an income cap of 115% of the area's median income. In
addition, the borrower must attend a seminar on homeowner;hip and the
home-buying process.
The program allows for 95% financing. The borrower may pur down
as little as 3% of his or her own money, with the remaining 2% coming
in the form of a family gift or loan from a government or nonprofit t
agency. For a list of participating lenders, call Fannie Mae at (800)
732-6643.
What are the standard contingencies in a purchase offer?
According to author Diana Hymen, "Most real estate purchase
contracts include at least two contingencies A financing contingency makes the
purchase conditional on the buyers' ability to obtain a loan
commitment from a lender. An inspection contingency allows the buyers to have
professionals Inspect the property to their satisfaction,
Can I get a home loan with bad credit?
A poor credit history makes it harder to qualify for a mortgage.
There are numerous types of credit report problems that cause a lender to
reject a loan application, says Ilyce R. Glink in "100 Questions Every
First-Time Home Buyer Should Ask," (Random House):
"If you've ever missed a credit card payment, or defaulted on a
prior mortgage or school or car loan, it will probably show up on your credit
report. If you've filed for bankruptcy within the past seven years,
that will show up on your credit report. If you haven't paid your taxes, or there
has been a judgment filed against you (perhaps for non-payment of spousal
or child support), it will also show up. Failure to pay your landlord,
doctor or hospital may turn into a black spot on your credit report,"
How can I find out what my credit report says about me?
Anyone concerned about their credit history can order a copy of
their own report by calling the three main national credit reporting
agencies:
Equifax (800) 685-1111; TRW (800)392-1122 or Trans Union (317) 408-1050.
Can I legally buy a house with a couple of friends or investors?
Yes, The investment approach - equity sharing - isn't very popular
when homes aren't appreciating because investors disappear. However, the
"tenants in common" (TIG) way of holding title becoming more popular,
especially among first-time buyers as a way to purchase property
collectively with other unrelated individuals. Generally, TIC properties
are eligible for many of the same loan programs as homes owned by
individuals, but the underwriting standards are more complicated because the lender
must consider the financial situation of all the parties who hold an
interest in the property.
How do lease options help people buy a home?
According to the "Realty Bluebook, 29th Edition" (Dearborn
Financial Publishing), a lease with an option to purchase is a tool
sellers can use to induce a sale, where the buyer lacks sufficient funds for down
payment and closing costs. Option amounts vary from one deal to another.
Lease options generally provide that a portion of the rent is applied
toward the purchase if the option is exercised, referred to as rent credit.
What is the mortgage credit certificate program?
The mortgage credit certificate (MCC) program is a federal income
tax credit for qualified first-time home buyers. The credit, which often
totals in excess of $1,000, reduces the borrower's federal tax liability by
that amount. Both the borrower's income and the purchase price of the home
must fall within established guidelines. A limited number of California
cities have authorized the MCC program Interested home buyers should
contact their municipal housing departments.
Will sellers consider only offers close to, or at, full price?
"While a very low offer in a normal market might be rejected
immediately, in a buyer's market the below-market offer will usually
either be accepted or generate a counter offer. When few offers are being made,
an outright rejection of offers becomes unlikely," writes William H. Pivar,
in "Real Estate Investing From A to Z:" (Probus Publishing).
Plus, he said, "There are always some sellers who for some reason
must sell quickly" and will consider a reduced price. There are other
considerations :
-Is the offer contingent upon anything such as the sale of the buyer's current house?
-If the offer made on the house "as is," or does the buyer want the seller to make some repairs
before close of escrow?
-Is the offer all cash? A cash offer at less than the asking price may be more attractive to the
seller than a full-price offer with a financing contingency.
How do adjustable-rate loans work?
Adjustable rate mortgages rise and fall with interest rates, based
on several indexes that cause the cost of funds for lenders to go up or
down. The most common indexes used in California are the 1 I th District
Cost of Funds (an average of the cost of funds to the 1 Ith Federal Home
Loan Bank District Institutions), Treasury Securities (T-Bills),
Certificates of Deposit (CDs) and Libor (London inter-bank offering rate). The Times
publishes current ARM index rates in the Sunday Real Estate section.
The interest rate and payment adjustments may or may not be
scheduled to change at the same time. For example, the interest rate on
some plans changes more frequently than the monthly payments, which may
result in negative amortization.
Is there such a thing as a no-cost loan?
The state's real estate regulatory agency, the Department of Real
Estate is cracking down on mortgage brokers who claim to offer "no cost"
and "no fee" loans. According to the DRE spokesman Pablo Wong, "Advertising claims
by brokers of "no cost" or "no fee" loans are patently misleading and
are in violation of the State of California Business and Professional Code
Section."
That's because borrowers are actually paying a higher interest rate
on the so-called "no cost" loan in exchange for not having to pay fees or
closing costs up front when the loan is secured. No matter what lenders claim.
"there is no free lunch," said Wong.
Zero-point loan is one where the lender does not charge points (one
point is equal to 1% of the loan amount). But there are other fees
involved in no-point loans, as with most loans.
How can I find a good real estate agent?
Here are some tips for finding an agent suggested by author Dian
Hymer: "The best sources of contacts are friends or associates who have
bought or sold recently and can recommend agents. Be sure to ask your
colleagues if they would use the agent again.
"If personal contacts don't generate enough leads, call the
managers of reputable local real estate companies and ask for recommendations of
agents who specialize in your neighborhood if you're selling. Find out if the
agent works full time at real estate and how much experience the agent has."
I'm a buyer and want my own agent, how do I go about it?
In California. it's legal 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.
What should I do if I suspect my real estate agent has done something unethical or illegal?
Report the agent to the enforcement division of the Department of
Real Estate. If the agent is a member of a local association of
realtors, a breach of ethics can be reported to one of these trade ,groups, which
are listed in the telephone book. The local associations have a disciplinary
procedure that promises to root out problem agents. They also have the
power to revoke the agent's membership in the trade group
Consumers who suffered an economic hardship from doing business
with a licensed real estate agent can appeal for relief from a special
state fund. Twelve percent of every agent's license fee is deposited in this
Real Estate Recovery Fund, which is used to pay damages to consumers from
civil action taken against a licensee in cases where the agent has no
funds to pay the judgment.
Where do you find a fixer upper?
So-called "diamonds in the rough" - distressed properties or fixer-
uppers - can be found in most communities, even the wealthier
neighborhoods. A distressed property is one that has been poorly maintained and
has a lower market value than other houses in the immediate area.The basic
strategy for a fixer-upper is to find the least desirable house in the
most desirable neighborhood and then decide if the expenses needed to bring
the value of that property up to its full potential market value are within
one's budget. Most experts say buyers should avoid rundown houses that need
major structural repair.
Where can I find MUD-repossessed homes?
MUD-owned properties can be purchased only through a licensed real
estate broker. HUD acquires properties from lenders who foreclose on
mortgages insured by HUD. These properties are available for sale to
both homeowner occupants and investors, HUD pays the broker's commission up
to 6% of the sales price. Buyers should be aware that HUD homes are sold "as is", meaning
limited repairs were made but no structural or mechanical warranties
implied. In San Francisco, call (315) 533-3940 or stop by 648 Mission St..
Ste. 301 for more information.
How do you determine which areas are more prone to earthquakes?
There are several sources to research seismic information. The U.S.
Geological Survey, located in Menlo Park, can be reached by calling
(415) 853-8300. State geologists have designated special studies zones along
earthquake faults. These designations may not disclose all risks-San
Francisco is not within a special study zone because the fault doesn't
run right through the city. Check maps kept at your local city or-county planning department
to find out if a property is within a special studies zone.
In addition, state law requires home sellers to disclose if their
property is within a Seismic Hazards Zone.
Is there any state agency that governs condominium associations?
No. However, condominium associations are subject to the Davis-
Stirling Common Interest Development Act, a portion of the California
Civil Code. The Department of Real Estate regulates units up until they are
sold by the developer. Then no one does. Condominium associations are self
regulated by covenants, codes and restrictions (CC&Rs) and bylaws.
How are property taxes calculated in California?
According to the rules of Proposition 13, property taxes are
limited to 1.1% of the market value of a house. The 1978 tax measure limits
increases in the taxable value of property to 2% a year but allows property to be
reassessed at its market price when it is sold.
One year after the passage of Proposition 13: voter!: approved
Proposition 8, which permits the assessor to lower property assessments
after considering reductions in value due to damage. destruction.
depreciation or other factors.
I want to move out of the city and buy another house to retire Can I take my property tax bill with me?
Yes, as long as the new house is of equal or lesser value than the
previous home. Twelve counties have ordinances allowing people over age
55 and disabled people moving from another county to carry their old
property tax assessments, presuming they meet all state requirements for
Proposition 60 or Proposition 90. Those counties are Alameda, Inyo. Ken,
Los Angles, Marin, Modoc, Orange, Riverside, San Diego, San Mateo, Santa
Clara and Ventrra.
Are property taxes deductible from federal and state income taxes?
a Property taxes on all real estate, including those levied by state
and local governments and school districts? are fully deductible against
current state and federal income taxes.
The value of my house has gone down, Can I deduct the lost in value from my income taxes?
No. "The IRS allows no deductions for losses on the sale of your
own home. There's no way to use a loss to your advantage on your income tax
return. It won't matter what type of misfortune you may have run into,"
writes Edith Lank and Miriam Geisman in "Your Home as a Tax Shelter"
(Dearborn Financial Publishing).
What will increase the value of my property?
Several factors, including overall market trends, the condition of
the property, specific home improvements and neighborhood stability can
influence property values. The,greatest rise in home prices occurs when the economy is strong
and the number of home sales is increasing. In recent times in
California, that has occurred twice - in the early 1980s and the late 1980s. During
those two periods, almost all property in the state appreciated. However,
single- family homes appreciated much more than condominiums.
While overall market conditions are out of the homeowner's
control, other factors are not. For example, specific home improvements may
increase the value above the cost of the improvements.
According to a report by Remodeling magazine. a bathroom
remodeled in the Los Angeles area returns 75% to the owner, a bathroom
addition 102% and a master bedroom suite 78%.
What is the best way for a married couple to hold title?
Married persons in California may take title to real property as
joint tenants or tenants in common. In addition, they have a choice unmarried
owners don't have: to take title as community property, which is the
option that many experts recommend. When one spouse dies, property held as
community property goes directly to the surviving spouse without formal
probate, unless the deceased left their half to someone other than their
spouse. In cases of "tenancy-in-common," there is no right to
survivorship.
We are facing foreclosure. Would a deed in lieu of foreclosure be better?
A property foreclosure is one of the most damaging events in a
borrowers credit history; a deed in lieu of foreclosure is not as
negative "A deed in lieu of foreclosure," according to "California Real
Estate Principles. Third Edition," Charles O. Stapleton III, Martha R. Williams
and Thomas J. Morgan (Dearborn Financial Publishing) "may be used to
transfer property to the beneficiary of a trust deed. This may be done,
with the beneficiary's consent, to prevent a forced sale. Transfer of the
property to the beneficiary may be to the beneficiary's advantage if the property
is worth at least the amount of the remaining debt. The trustor benefits by
avoiding the publicity of a public foreclosure sale."
According to John W. Reilly, author of "The Ultimate Language of
Real Estate, 4th Edition " (Dearborn Financial Publishing), "A deed in
lieu of foreclosure is sometimes known as a friendly foreclosure, because it
is settled by agreement rather than by civil action. The major disadvantage
to this type of default settlement is that the mortgagee takes the real
estate subject to all junior liens, whereas foreclosure eliminates all such
liens."
Can you explain reverse mortgage loans?
Many long-time homeowners consider a reverse annuity mortgage
(RAM), which enables them to borrow against the equity in their home so
they ran receive monthly payments needed to help meet living costs.
Under this plan, the flow of funds is in reverse to a conventional loan.
The homeowner receives periodic (not necessarily equal) payments
based on accumulated equity, according to author John W. Reilly. Many
homeowners who worked to pay off a mortgage have shunned the RAM
program because they are hesitant to take on new debt.
What expenses beyond mortgage interest are tax deductible?
"Points paid by the buyer are deductible for that year." say
authors Edith Lank and Miriam C Geisman. In a new ruling by the IRS, even points
paid by the seller are deductible. An amended tax return must be filed
to take advantage of this benefit. Non-deductible expenses include title
insurance, loan-application fee, credit report, appraisal fee, service
fee, settlement or closing fees, bank attorney's fee, attorney's fee,
document preparation fee and recording fees.
My house has been on the market for six months and it won't sell, what should I do?
Even in a down market, real estate experts say price and
condition are the two most important factors in selling a home. So, the first step is
to lower the price. Also, Go through the house and see if there are cosmetic
defects that you missed and can be repaired. Home sellers should make sure that the home is getting the
exposure it deserves through open houses, broker open houses, advertising, target
marketing, good signage and a listing on the Multiple Listing Service and a
special marketing campaign. If the seller is using a real estate agent and the property
isn't getting that exposure, find another agent.
Who should pay the closing cost?
Closing costs vary from one transaction to another and often
total in the thousands of dollars. They may be paid up front or added to the
buyer's loan balance. However, anxious sellers may offer to pay some or all of the costs to
induce a sale. If one or more agents are involved, their commissions are traditionally
based on the sales prince and paid by the seller at the time of closing. As for typical costs and who usually pays what, real estate
writers Ralph Warner, Ira Serkes and George Devine, authors of "How to Buy a
House in California," 2nd California Edition, (Nolo Press), state them
as follows: Buyer pays: escrow fees, deed preparation fees; recording fees; pest
control inspection; as well as roof and other inspection charges.
Seller pays: title search; title insurance for buyer/owner;
reconveyance deed; documentary transfer tax, and for the one-year home warranty.
The price of my home has gone down. Can I sell it for less than the Ioan amount?
Some home sellers in this situation can sell for less than the
amount of the mortgage. It is called a "short sale" or a "short payoff," and may
be accomplished by negotiating with your lender. A real estate agent or a
lawyer can help in the negotiations. A short sale may be complicated if the loan has been sold into
the secondary market because then the lender will have to get permission
from Fannie Mae or Freddie Mac (Federal Home Loan Mortgage Corp.) to
negotiate a shore sale. Fannie Mae spokesperson Bonnie O'Dell says the
secondary market giant has a policy of looking at each loan
individually. If the loan was a low down payment mortgage with PMI. then the lender also
must involve the mortgage insurance company that insured the low down
payment loan.
How can I avoid capital gains taxes?
In considering capital gains tax from the sale of a primary
residence, the critical time frame is two years. Generally, the capital gain is the
difference between the original sales price, capital improvements and
some closing costs and the eventual sales price. Tax on the gain may be
deferred if the sellers buys another home of equal or greater value within 24
months. People over 55 can qualify for a one-time capital gains exemption
of $125,000.
What is a seller obligated to disclose?
Under California law, the seller and the seller's broker, if there
is one, are required to disclose all "facts materially affecting the value or
desirability of the property which are known or accessible only to him"
and which are "not known to, or within reach of the diligent attention and
observation of the buyer. " In the case of residential properties, the seller must provide the
buyer with a real estate transfer disclosure statement, which specifies the
existence and condition of all know physical attributes of the property.
"Sellers are responsible for disclosing only information within
their personal Knowledge They don't have to hire professionals to answer the
questions on the disclosure form." says real estate writer George Devine,
author of "for Sale by Owner" (Nolo Press). However, sellers must fill out the form in good faith.
Some of the items sellers disclose include homeowners' association
dues; whether or not work done on the house met local building codes and
permit requirements; the presence of any neighborhood nuisances or
noises that a prospective buyer might not notice, 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 if the property such as zoning
ordinances or association rules.
Is it difficult to sell your house yourself to avoid paying a commission?
While many real estate experts recommend that home sellers engage
the services of a licensed real estate agent, as many as 16% to 19% of
all home sellers sell their homes without the use of these services,
according to the National Assn. of Realtors (NAR).
A 1992 NAR survey showed that 30% of all sellers who sold their
homes themselves would not do so again the next time.
Legal issues a seller should consider include discrimination laws.
disclosure laws and laws ,governing advertising. False or misleading
advertising is against the law, and certain terms and disclosures must
be included if you are advertising the specifics of a financial package.
For sellers determined to sell the property themselves, various
guide books are available explaining the process step-by-step.
What should I do to prepare my house to show?
Making your home look as nice as possible may seem obvious.
Apparently, it's not, because many sellers don't do much beyond
vacuuming the living room rug and maybe cleaning the ring off the bathtub, says author
George Devine. Short of spending a lot Of money, Devine offers several steps
people can take to make their home show better:
--Sweep the sidewalk, mow the lawn, prune the hushes, weed the garden and clean debris from the yard.
--Clean the windows (both inside and out) and make sure the paint
is not chipped of flaking
--Clean and make attractive all rooms, furnishings, floors, walls and
ceilings. It's especially important that the bathroom and kitchen are spotless.
--Organize closets.
--Make sure the basic appliances and fixtures work. Get rid of
leaky faucets and frayed cords.
--Ensure that the house smells good: from an apple pie, cookies
baking or spaghetti sauce simmering on the stove. Hide the kitty litter.
--Put vases of fresh flowers throughout the house.
--Pleasant background music is a nice touch.
Where can I find foreclosure properties for sale?
"Notice of foreclosure must be published once a week for three
weeks in a newspaper of general circulation in the city where the property is
located or in the city nearest the property in the county where a
newspaper is published, "according to the authors of "California Peal Estate
Principles," 3rd Edition. (Dearborn Financial Publishing).
For a buyer serious about finding a foreclosure, subscribing to a
legal publication may be a first step, recommends author William H. Pivar.
"Many people don't even know of the existence of these papers.
Therefore. default and foreclosure notices published in such papers are
likely to mean fewer pre-foreclosure buyers as well as fewer bidders than if
the notices had been published in a general newspaper, "Pivar says.
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