HO ME a home buyer’s handbook
What’s Inside? FINANCING | 4
How Much Home Can I Afford? Take a Close Look at Your Credit Report Talk to a Professional Pre-approval vs. Pre-qualification Lender Interview Cheat Sheet 2
HOUSE WISH LIST | 12 SHOWINGS | 14 MAKING AN OFFER | 15
THE FINAL STEPS | 16
Home Inspection Appraisal Clearing the Title Closing
CONGRATULATIONS! BUYING A HOME is a big decision and often one of the largest financial investments you ever make. While it’s a major commitment and responsibility, it’s also a very exciting time in your life, and I’m proud to play a part in it. With that said, it’s important to keep in mind that the home buying process is a complicated one. I will be working to make everything as seamless as possible and to remind you of all of the deadlines we need to meet along the way. This guide is designed to inform you of all the steps in the home buying process so you can feel confident, make informed decisions, and act as an educated buyer. It will also help me understand the things you’re looking for in a home so that our search can be as easy as possible. Please take some time to review all of the information enclosed carefully. Every real estate transaction is unique, so you will most likely have questions or concerns that are not covered here. That’s what I’m for – to assist you at each step, to answer your questions, and to help you find the right home! Sincerely,
Rachel Bettis
Proprietor | Affiliate Broker
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"Rachel was absolutely awesome. She was easy to work with and enjoyable to be around. She was honest throughout the process, and I always felt like she had my best interest at heart. I will highly recommend her to any friend who needs a realtor.” —-Alice Revenig "Rachel Bettis is an awesome realtor! She helped us every step of the way with the purchase of our home. Since we were buying a home six hours away from our current home, Rachel did much of the “on the ground” things for us to make things go smoothly. She never made us feel pressured, she recommended a great lender, and they worked together to get the closing accomplished in record time. Thank you, Rachel!” —Henry & Sue Brown “Really enjoyed working with Rachel! She’s patient, understanding, and works with you to find the perfect home! She helped us buy our first home, and I plan to use her in the future!” —Jake & Hannah Martin 3
FINANCING 1. HOW MUCH HOME CAN I AFFORD? To determine how much home you can afford, you will need to make a list of all of your monthly debts as well as your monthly income. The list of debts should include items such as student loans, car payments, credit cards, medical bills, etc. This list will help you determine your debt to income ratio. Financial experts recommend that your monthly debts should be no more than 36 percent of your monthly gross income. From there an online mortgage calculator can help you determine how much home you can afford based off of the estimated monthly payments. Keep in mind that these are only guidelines and there are several other factors that determine how much a lender will approve you to borrow. However, it is important that you only borrow the amount that you are comfortable with based off of the monthly payments when looking at your current obligations and income.
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ANNUAL SALARY $50,000 $60,000 $70,000 $80,000 $90,000 $100,000 $110,000 $120,000 $130,000 $140,000
MONTHLY TAKE HOME INCOME $4,167 $5,000 $5,833 $6,667 $7,500 $8,333 $9,167 $10,000 $10,833 $11,667
MONTHLY DEBT PAYMENT $1,500 $1,800 $2,100 $2,400 $2,700 $3,000 $3,300 $3,600 $3,900 $4,200
2. TAKE A CLOSE LOOK AT YOUR CREDIT REPORT Your credit history is one of the principal measures used by a lender to determine your interest rate. The better your credit, the better lending terms your bank or lending institution will offer you. A higher interest rate translates into a higher monthly mortgage payment and vice versa. You can find your credit score by obtaining and reviewing copies of your credit report from the three main credit report agencies.
WHAT NOT TO DO Avoid making any major purchases or changing jobs if you are seriously considering buying a home in the next few months, as this may negatively affect your credit score.
Equifax www.equifax.com 1.888.766.0008 TransUnion www.transunion.com 1.800.888.4213 Experian www.experian.com 1.888.397.3742
HOW DOES YOUR CREDIT SCORE RANK? LOW BELOW 620
FAIR 620- 690
GOOD 690- 740
GREAT 740- 780
EXCEPTIONAL ABOVE 780
The average credit score in the United States is 666 (Experian 2014) The average credit score in Chattanooga is 652 (Experian 2014)
REMEMBER THAT THERE ARE SEVERAL FACTORS THAT AFFECT YOUR CREDIT REPORT:
ONE
TWO
THREE
YOUR PAYMENT HISTORY
YOUR CURRENT RATIO OF DEBT TO INCOME
SIGNS OF RESPONSIBILITY AND STABILITY
Not all creditors report to all three agencies, so it’s best to order a report from all three institutions to make sure all of the information stated on each report is accurate and correct. If there are any discrepancies on your credit report, it’s important that you contact the rating agencies and have those records corrected. This will help you avoid hassles later on. 5
In addition to your credit report, the documents below will help your lender establish your debt to income ratio and your ability to pay a mortgage: • Social Security number • W2 Forms from the previous two years • Most recent Pay Stubs • Employment History Summary • 3 months of Bank Statements • Creditor Information which includes debts like: Student Loans Auto Loans Credit Cards Child Support Payments • 2 Years of Federal Tax Returns • Record of Assets Stocks, bonds, & investment accounts IRA / Retirement plan Life insurance policies Automobiles owned Construction loan Gift letters Documentation of other income
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3. TALK TO A PROFESSIONAL After looking at this information for yourself, it’s time to speak to a qualified lender. A professional advisor will not only be able to give you information on the best rates and terms available in the current market, but they will also walk you through your options given your unique financial situation. There are a considerable number of choices available to consumers, so learn as much as you can about the different lending options that are available. Talking to a lender at this time will help you get a more accurate idea of what you can afford and allow you to make an educated decision when you go to make an offer. There are many things to consider when looking at your financing options. Here are a few tips on home loan features and things you should consider while you shop around: TYPES OF LENDERS Home loans are available to consumers from several entities, such as commercial banks, mortgage companies, credit unions and mortgage brokers. A mortgage broker is unlike the other lenders in that the broker does not lend money to you directly. A broker will help find you a lender and secure the terms of your arrangement. A broker may have access to several lenders and therefore can offer you a wider selection of loan products and terms. Keep in mind, a broker is not obligated to find you the best deal possible, so be sure to ask questions. They are also paid a fee in addition to the lender’s origination fees and set their own compensation, so you’ll need to ask anyone you speak to how their fees are determined.
TYPES OF LOANS Not all home mortgages are structured alike. There are several borrowing options for home-buyers to choose from. Fixed Rate (Traditional) These loans are typically structured with repayment terms of 15, 20 or 30 years. The lender charges a fixed interest rate over the life of the loan, and your monthly mortgage payments will remain the same for the life of the loan. Adjustable-Rate (ARM) Also known as a variable-rate loan, these loans often offer a teaser rate for the initial period of the loan. This introductory interest rate is usually lower than rates offered for fixed-rate mortgages and will fluctuate over the life of the loan based on market conditions. Changes in rate happen at certain time periods, and the lender can set both a maximum and minimum on the rate of fluctuation. Federal Housing Administration (FHA) FHA loans are federally insured loans made by private lending institutions. A borrower must apply and qualify with a certified FHA lender to secure an FHA loan. Eligible borrowers are typically required to pay a minimum of 3.5 percent of a home’s purchase price as a down payment. If the loan is approved, the FHA will ensure a portion of the loan’s value to the lender. Veterans Administration (VA) VA Home Loans are available to qualified veterans and their spouses through private lending institutions. The VA does not require any down payment on these loans and allows the borrower to receive a fixed interest rate.
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The best type of loan for you will likely be based on the down payment you can afford and the length of time you plan to spend in the home. If you’re considering a variable-rate mortgage, you’ll want to be sure to understand what a rate increase could do to your monthly payment. INTEREST RATE & MORTGAGE TERMS When you start shopping for a loan, you’ll start looking at interest rates. The interest rate, terms, and fees for a mortgage will be based on your qualifications as a borrower and on the current lending market. Keep in mind though that finding the right loan is not just about finding the lowest interest rate possible. Mortgage institutions offer loans of varying terms – typically 30, 20, or 15 years. Shorter-term loans can save you thousands of dollars over the life of your loan if you can afford a higher monthly payment. You’ll want to get a complete picture and break down of what a given offer means to you on a monthly basis as well as how much money you’ll be spending over the life of the loan. At a minimum, you should request quotes with a few different scenarios from different lending institutions to compare the financial impact of each situation before you determine your best course of action. Shopping around is worth your time! When you receive quotes, ask your lender whether you’re being quoted the lowest rate for the day or week. Next, ask what the loan’s Annual Percentage Rate (APR) is. This will express as a yearly rate all of the fees associated with a loan. 8
If you are satisfied with a proposed interest rate, you can ask your lender if he or she can lockin the quoted rate. There may be a fee associated with locking in a rate, and the agreement will generally only last 60 to 90 days. FEES Most loans have fees in addition to the total amount you are borrowing. You can sometimes borrow the money needed to cover these fees; however, that will increase the overall amount of debt you undertake. Some fees are paid up front and others are not due until closing. POINTS A lender or broker can charge you points on your mortgage. One point equals one percent of the loan amount. These are fees paid to the lender that are often linked to the interest rate and are usually paid in cash at closing. A lender may offer you a lower interest rate but charge more points, so it’s important to compare offers.
If you are working with a broker, be sure to ask about their fee. CLOSING COSTS This fee lumps together several charges: application fees, title examination, abstract of title, title insurance, property survey fees, deed preparing fees, other mortgage fees and settlement documents, attorney fees, recording fees, notary fees, appraisal fees and credit report fees. The Real Estate Settlement Procedures Act requires that a lending institution provide a borrower with a Good Faith Estimate of closing costs at the time of application. This estimate must list each expected cost as a range or as an exact amount where applicable.
Never hesitate to question a fee that you don’t understand. Your lender should give you a thorough explanation and make sure that you know what you’re paying for. For a better understanding, ask your broker or lender to quote LOAN ORIGINATION FEES you a dollar amount rather than a number on any points you are The institution that actually loans you the money will generally charge being charged on the loan. on origination fee for processing Sometimes lenders lump fees the loan. They are often calculated together; however, you can ask as a percentage of the amount of for a more detailed break down. the loan. Certain fees like the broker’s fee or the amount of points assessed on a UNDERWRITING FEES loan are negotiable. It never hurts Certain lenders will charge a fee to to ask your lender if they can get investigate your creditworthiness you a better deal. and determine if you are likely to DOWN PAYMENT & PRIVATE repay your loan. MORTGAGE INSURANCE (PMI) BROKER FEES The largest upfront cost in Typically paid at closing, this fee purchasing a home is the down charged by the mortgage broker is payment. Most traditional lenders in addition to the origination fee. expect borrowers to put at least
DID YOU KNOW? THE AVERAGE 30 YEAR FIXED RATE MORTGAGE INTEREST RATE IN 1990 WAS 10.13%, IN 2000 IT HAD DROPPED TO 8.05% AND BY 2010 WAS AT 4.69%. THE RATES TODAY ARE STILL CHANGING, BUT IF YOU LOOK THROUGHOUT HISTORY, NOW IS A GREAT TIME TO BUY A HOME! 20% of the loan’s total amount down. Borrowers who are unable to do so are required to purchase PMI. This insurance protects the lender in case of default by the borrower. If PMI is required, ask your lender what the total cost of the insurance will be, how much it will increase your monthly payment, and how long you will be required to carry the insurance.
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PRE-APPROVAL VS. PRE-QUALIFICATION Before you begin your home search, you will need to work with a lender to get pre approved for a loan. Many homebuyers will talk to a lender quickly and get pre qualified, but this is not the same thing. Prequalification is only a loan agent’s opinion that you’ll be able to obtain financing. No verifications are made, so formal approval is not issued.
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Preapproved buyers are ahead of the game. This means your loan application has been taken through a rigorous procedure, including a review of your credit report. If you make an offer on a home and then apply for a loan instead of the other way around, you are at the mercy of the lender who now knows that you don’t have time to shop around. A preapproval letter from a lender will also give you an edge when multiple offers have been made on a house. Preapproved buyers generally close escrow more quickly since most of the paperwork is already finished. Preapproval also saves you the time of looking at houses you can’t afford.
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LENDER INTERVIEW CHEAT SHEET What kind of loan would you recommend for me?
What are the discount points and origination fees?
What are the closing costs?
What are the advantages and disadvantages of this loan structure?
What are the costs associated with opening this kind of mortgage?
Do you offer a loan rate lock? Is there a fee for that?
What is the current interest rate?
If the rate is adjustable, how will rate and loan payment vary?
Is there a prepayment penalty?
What is the Annual Percentage Rate (APR) of an offered loan?
What is the required down payment for this loan?
Are you able to approve loans in house?
Is the loan rate adjustable or fixed?
What documents do I need to provide?
Will mortgage insurance be required?
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WISH LIST YOUR DREAM HOME Now that we’ve talked about all the serious logistics, let’s talk about the fun things. When thinking about your dream home, what comes to mind? I’m committed to finding the house that best suits your wants and needs, so let’s get going! Take a few minutes to look over the following features and benefits you’re looking for in your next home:
PRICE
LOCATION/ COMMUNITY
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What price range do you feel comfortable with? Keep in mind your monthly mortgage payment with taxes and insurance as well as utilities on the home to find a home price that you feel good about.
Is there a specific location or part of town that interests you? Are there any factors that limit where you can move within the area?
CONDITION
Are you looking for something move-in ready, or are you willing to do a little work to the home? If you are thinking about working on the home, how much time and money are you willing to put into it?
SCHOOL ZONES
School zones can be a big deal for a lot of buyers. If this is not something that is important to you, a lot of times we can save money by going down the road to a home that is not in the most desirable school zone. If this is a big factor for you and your family, you will want to double check the schools a home is zoned for on the Hamilton County website before making an offer.
HOME STYLES
There are may different types and styles of homes. Are there any that you naturally gravitate toward, or better yet, any that you know you do not like?
SIZE
How many bedrooms & bathrooms you need is always one of the first things people will ask you when looking for a home. Another thing to keep in mind is square footage...how many square feet do you live in now? Is that too small, too big or just about right?
INTERIOR FEATURES
Is there a certain floor plan that is more conducive to your lifestyle? For instance, do you need a home with minimal stairs or maybe a finished basement? When thinking about interiors, we want to be sure to keep your "must have" list separate from your list of things that "would be nice."
EXTERIOR FEATURES
Is a big yard important to you? Do you prefer a neighborhood feel or something with more acreage? Is a garage important? If so, does it have to be an attached garage?
Next, put your priorities in order. What is the most important thing for you? What areas can you compromise on? Chances are the perfect home for you won’t be exactly what you put down on paper. You may want to circle your top three priorities or items that are “must haves.” 13
SHOWINGS DRIVE BY Once you find a home online that piques your interest, take a little time to drive by later that day. Location can make or break a house, so be sure you have seen where the home is located and what is around it. SHOWINGS Shopping for a home can be both exciting and exhausting, but a little preparation before we hit the streets to look at homes will help tremendously. Once you have driven by and found a few homes that interest you, it is time to contact me to get a few showings scheduled. We will compile a list of the properties you’ve found, as well as any additional options that I’ve found for you to see. Then it’s time for us to visit some of the houses together. Here are some great tips to keep in mind when you’re viewing properties. We don’t want to view too many houses in one day; in fact, the typical buyer begins forgetting the homes’ features if they see more than five in one day. Don’t be put off by interior decor; the look of the home will change with your furniture inside. Bring a notebook and pen to take notes, and use your phone to take photos. When you find a property you like, plan on driving by at different times of the day. Most importantly, don’t hesitate to ask questions.
THAT’S THE AVERAGE NUMBER OF HOUSES A HOMEBUYER WILL LOOK AT BEFORE CHOOSING ONE.
QUESTIONS ABOUT THE PROPERTY
EXTERIOR
When you find a home you really like, there are some more probing questions you might want to ask. Remember, a professional home inspection will be necessary to answer some of these questions.
1. What level of lawn maintenance is required? 2. Are there any structural issues with the property?
GENERAL QUESTIONS
1. Is there adequate insulation? 2. What improvements/additions has the current homeowner made to the property since they purchased the home? 3. What appliances is the seller offering in the sale?
1. When was the home built? 2. How many owners has it had? 3. How does the asking price compare to other houses in the neighborhood? 4. What did the property sell for when the current owner purchased it? 5. In what year was it last purchased? 6. What are the annual property taxes? 7. Is there a builder’s warranty on the property? 8. Will there be additional structures built around the property that could distort the view? 14
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INTERIOR
MAJOR SYSTEMS 1. What is the age and condition of each major system in the home (plumbing, electrical, heating & cooling)? 2. How is the home heated? 3. What is the average monthly utility costs?
MAKING AN OFFER Once you’ve found a home that you’re interested in, it’s time to make an offer. To do this, I will draw up a formal contract with your offer amount and necessary contingencies. Make sure to review this document carefully so that it states your terms exactly. If the offer is accepted by a seller, this contract will become a legally binding agreement.
In addition to the offer paperwork, you will need to provide earnest money as well as a letter from your lender indicating your qualification to purchase. Earnest money typically equals roughly one to five percent of the purchase price. You will not be at risk of losing your earnest money as long as you do not default on your contract. The amount will be credited
toward the purchase price of the house at closing. After you’ve made your offer, the seller will either accept, counter or reject your offer.
In most cases, a seller will not accept your initial offer outright. Typically a counter offer can include modifications to the purchase price, closing date, possession date and inclusions. Be prepared for the negotiations to go back and forth several times before both parties agree to the terms. Additionally, in certain market conditions, you might also have to compete with other interested buyers. When an agreement is reached on all issues and you and the seller have signed the offer, you are both under a legally binding contract.
AS A BUYER, YOU WILL BE IN A BETTER NEGOTIATING POSITION IF:
ONE
TWO
THREE
YOU ARE NOT SELLING A HOUSE AT THE SAME TIME
YOU HAVE NOT LOADED YOUR OFFER WITH OTHER CONTINGENCIES
YOU HAVE BEEN PREAPPROVED FOR A MORTGAGE
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THE FINAL STEPS Your offer is accepted. Now it’s time to get to work. Before we can close on the purchase of your new home, we need to take a few more steps to make sure the purchase is a sound decision.
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HOME INSPECTION
As the buyer, you have the opportunity to hire a professional inspector to evaluate the condition of the home. The goal of a home inspection is to give you an objective, independent and comprehensive analysis of the physical condition of your potential new home and to check for any safety issues. A professional inspection typically checks the following items: • Siding: dents or buckling • Foundations: cracks or water seepage • Exterior Brick: cracked bricks or mortar pulling away from bricks • Insulation: condition and adequate rating for climate • Doors and Windows: loose or tight fits, condition of locks, and condition of weather-stripping • Roof: age, condition of flashing, pooling water, buckled shingles, or loose gutters and downspouts • Ceilings, walls, and moldings: loose pieces and drywall that is pulling away • Porch/Deck: Loose railings or steps and rot • Electrical: condition of fuse box/circuit breakers and number of outlets in each room • Plumbing: poor water pressure, banging pipes, and rust spots or corrosion that indicates leaks or insufficient insulation • Water Heater: age, adequate size, speed of recovery and energy rating • Furnace/Air Conditioning: age and energy rating. Furnaces are rated by annual fuel utilization efficiency – the higher the rating, the lower your fuel costs. • Garage: exterior in good repair and condition of floor—cracks, stains, etc.; condition of door mechanism • Basement: water leakage and musty smell • Attic: adequate ventilation and water leaks from roof • Septic Tanks (if applicable): adequate absorption field capacity for the percolation rate in your area and the size of your family • Driveways/Sidewalks: cracks, heaving pavement, crumbling near edges, and stains
Afterward, you will receive a written report with the findings from the inspection. If you choose to be present during the inspection, you can ask your inspector about unique features of the property and get his or her opinion on the necessary maintenance on different areas of the home. Depending on the results of the inspection, you will have the opportunity to: • Get out of the written offer if major problems are discovered • Renegotiate the purchase price to account for necessary repairs • Negotiate that repairs are made by the seller before you purchase the home In some cases your lender may also require that a legal land survey be completed of any property on which they issue a mortgage so that they can obtain a clear lender’s title insurance policy. This surveyor will determine: • Whether the house is within the property borders • Whether there are any encroachments on the properties by neighbors • The extent to which any easements on the property may affect legal title
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APPRAISAL
An appraisal is an estimate of the value of a property made by a qualified professional. Although its primary goal is to justify the lender’s investment, this appraisal also protects you from overpaying. Your lender will typically hire the appraiser and will charge you a fee for the service at closing. If the appraisal falls short of the amount you wish to borrow, you may be denied a mortgage or offered a lesser loan amount. Your offer will be contingent on the appraisal coming in at or above the purchase price you and the seller have agreed upon. In the case that your appraisal does not come in at or above the offer price, you will have the opportunity to walk away or re-negotiate. Your lender will send you a copy of your appraisal report; be sure to save a copy of this for your records.
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CLEARING THE TITLE
Simply explained, “title” is the right to own, possess, use, control and dispose of property. When you buy a home, you are actually buying the seller’s title to the home. A deed is the written legal evidence that the seller has conveyed his or her ownership rights to you. Before the closing, when the actual transfer of ownership occurs, an attorney or title specialist will conduct a title examination to search for any problems that might prevent you from getting clear title to the home. Generally, title issues can be cleared up before settlement, but in some cases severe title problems can delay settlement or even cause you to consider voiding your contract with the seller. Some “clouds on title” can be corrected relatively easily while others can become quite complicated to remove. You should insist on being kept informed of every step in the title examination process. If title problems are uncovered, it is important for you to understand your legal rights. What is Title Insurance? Title insurance is the best way to protect yourself against title defects that have occurred in the past which may not appear until after you have taken ownership of the property. Before a title insurance policy is issued, a title report is prepared based on a search of the public records. This report gives a description of the property, along with any title defects, liens, or encumbrances discovered in the course of the title search. It is different than casualty insurance in that you pay a one-time fee and it protects against past events. Title insurance will also protect you against title defects that were not discovered in the course of the title search. If such a defect were discovered later, your title insurance would cover you. If title problems are severe enough and not covered by insurance, you could actually lose your house. A title insurance policy protects you and your heirs against title defects for as long as you own your home.
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4
CLOSING
Once all of the contingencies are cleared, it’s time for closing! Closing is the legal transfer of ownership of the home from seller to buyer. It is a formal meeting usually held at the title company or lawyer’s office that all of parties involved will attend. Your closing officer will coordinate the signing of documents and the collection of and disbursement of funds. In order to ensure a smooth closing, you will need to: • Obtain a homeowners insurance policy and provide this information to your lender and/or closing agent. • Review the Settlement Statement that your lender or closing agent will provide you one to two days before closing. These documents will contain a detailed description of all costs associated with the transaction, including the exact dollar amount you will need to bring to closing. • Verify with your lender and/or closing agent any other items that you need to bring with you, such as a valid driver’s license or other form of identification • Conduct a walkthrough of the property prior to closing. This will give you an opportunity to see that the condition of the house is the same as it was at the time of contract. Additionally, you will be able to ensure that any repairs agreed to by the seller based on the inspection have been completed. COMMON CLOSING COSTS FOR BUYERS The lender must disclose a Good Faith Estimate of all settlement costs. A check to cover your closing costs will likely have to be either a cashier’s check or a money wire. The title company or other entity conducting the closing will tell you the required amount for: • Down payment • Loan origination fees • Points or loan discount fees you pay to receive a lower interest rate
• • • • • • • • • • •
Appraisal fee Credit report Private Mortgage Insurance premium (if applicable) Insurance escrow for homeowners insurance, if being paid as part of the mortgage Property tax escrow, if being paid as part of the mortgage. Lenders keep funds for taxes and insurance in escrow accounts as they are paid with the mortgage, then pay the insurance or taxes for you. Deed recording fees Title insurance policy premiums Survey Inspection fees—building inspection, termites, etc. Notary fees Prorations for your share of costs, such as utility bills and property taxes
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35 SOUTH REAL ESTATE & DESIGN is a boutique Real Estate agency created by a group of likeminded professionals to serve the Greater Chattanooga Area. At 35 SOUTH, we strive to serve our customers’ needs over our own. Bringing together over 80 years of combined experience in the real estate industry, a passion for homes, and love for our city, we pride ourselves on what we do. As the first real estate agency of its kind in Chattanooga, 35 SOUTH aims to marry the great real estate services you would expect from seasoned agents with the keen eye for design that makes a house a home.
HOME SWEET CHATT IS A LIST OF HOMES CURATED BY 35 SOUTH’S OWN RACHEL BETTIS TO INCLUDE ONLY THE CUTEST NEW LISTINGS ON THE CHATTANOOGA MARKET. FOLLOW ALONG ON FACEBOOK, INSTAGRAM, PINTEREST & TWITTER
FOR REGULAR UPDATES & TO KEEP UP WITH NEW HOMES ON THE MARKET.