Buying a Home

After you find that perfect home you’ve been searching for, there are still some important decisions ahead, including arranging the financing through a mortgage lender, bank or other source of funding. There are a variety of choices available to you and the option you choose should be the one that best fits your needs.

If you have never borrowed to buy a house before, then a good place to start is wherever you do your personal or business banking. Most banks offer home mortgages and as an existing customer you may enjoy the benefit of lower interest rates and fees not available to non‐bank customers. For those who have owned homes with mortgages in the past, contacting your previous lender could also produce similar advantages.

In recent months the mortgage industry has become more cautious in the types of loans they make and the qualifications of borrowers. As a result, it is wise to shop around and not limit yourself to a single source. Competition among lenders is good for you as a borrower.

A wide variety of institutions offer home mortgage loans, including savings and loan associations, credit unions, commercial banks, mutual savings banks and mortgage companies. There are also mortgage brokers who represent a variety of lenders offering you one‐stop shopping to get multiple choices. Your REALTOR® will be able to recommend some lenders you should consider.

When you meet with lenders be prepared to ask the following questions.

• What types of loans do you have available?
• For what types of loans do I qualify?
• Can I get a federally insured or guaranteed loan from you? (These loans usually require smaller down payments.)
• What about special loan programs like those offered by the Federal Housing Administration (FHA loans) or the Department of Veterans Affairs (VA loans)? (These loans are attractive to first time buyers and to military veterans.)

Other factors to consider are the length of the loan, the interest rate and whether that rate will be fixed or adjusted from time to time. In addition, you should consider options on the amount of the down payment and any fees or closing costs associated with the loan type and interest rate.

Your financial status and your plans for how long you might stay in the house will also affect which loan might be best for you. If you are in for the long haul and want the financial piece of mind in knowing your payment won’t change, then a 30‐year fixed rate loan may be your ticket.

If you would prefer to keep payments low for the first few years of a loan, consider an Adjustable Rate Mortgage. There are ARM loans that adjust after the first year, the fifth year or at other pre‐determined intervals. If you make this choice understand that your payments will go up at some future date unless you refinance the loan.

Your REALTOR® can help you get a better understanding of your financing options and the lenders that may offer the best products for your individual needs.

The FICO score is the best-known and most widely used credit score model in the United States. First introduced in 1989 by Fair, Isaac and Company, the system was designed to create consumer credit scores using information provided by one of the three major credit reporting agencies – Equifax, Experian or TransUnion, with scores ranging between 300 on the low end to 850 on the high end. FICO itself is not a credit reporting agency. Your FICO score is a primary factor in determining whether you pay a higher interest rate, how much a lending institution is willing to lend you to purchase a home or getting denied all together.

Any time you need to borrow money to purchase a home, car or other large items, lender examine your credit score to see if you are “credit worthy.” The concern for the lender is whether you will be able to repay the loan on a schedule you agree to follow. Today’s lenders are even more cautious about taking on unnecessary risk and have the relatively new government mandated “ability to pay” rule to contend with as well before they approve you for a home loan.

As a result, your FICO score becomes even more important in determining if you will be able to borrow the money you need.

In addition, your REALTOR® will want to know your credit worthiness in order to effectively guide you in finding a home that is within your financial reach and to assist you through the loan process. Sellers who are evaluating multiple offers for their home will seriously consider your offer if you can prove you are credit worthy for a home loan as well. One of the first steps in that process may be to ask a lender to review your credit score and provide you with a letter showing that you have the resources to obtain and pay off an appropriate loan.

A single mistake, intentional or not, on your credit history may cause you problems when requesting approval for a home loan. It is recommended that you check your credit history annually. Credit reports can often be obtained free of charge on an annual basis through the major credit reporting agencies. You can purchase your FICO score online. You can also request a disclosure that includes this information if you are ever turned down for credit or charged more by a lender. Some banks and credit unions even offer these reports for free as a part of your account.

According to myFICO.com some of the main factors that determine your score and how they are weighted are:

• Payment History (35%)
• Debt/Amounts Owed (30%)
• Age of credit history (15%)
• New credit/inquiries (10%)
• Mix of accounts/types of credit (10%)

All of these factors are considered in other credit score models, so it’s safe to say that if you have a strong FICO score you likely have a good score with other models as well. When you check your credit score, don’t get too hung up on the specific number. Instead, focus on what areas of your credit are strong and which ones you might want to work on to improve your credibility.
Once you check this off your home shopping list you are one step closer to owning a place you can call home.

Finding that perfect home can be an exhausting but very gratifying process. Having a signed contract in hand may seem like the end of the journey but there are a number of important steps still to come. Sellers and buyers have a combined 12 or more steps to complete before the transaction is complete. Paying careful attention to each of these steps will ensure a smooth conclusion.

Earnest Money

Contracts are typically presented to sellers by buyers and are accompanied by a deposit, known as earnest money. Once the contract is accepted those funds need to be deposited with a third party, called an escrow agent, for safekeeping until the closing of the sale. The escrow agent can be chosen by either the seller or the buyer and is responsible for collecting all the necessary documentation from both parties.

In Colorado, buyers and sellers have the option of depositing the earnest money in special funds that helps support affordable housing programs. For instance CARHOF (Colorado Association of REALTORS® Housing Opportunity Foundation), the interest earned on earnest money deposited to these accounts is used to help people with emergency housing, special needs housing and to create affordable housing opportunities throughout Colorado.

Loan, Appraisal and Inspection

Most buyers begin the search for financing early by securing a letter from a lender supporting their eligibility for a mortgage. After the contract is signed, the buyer must secure the funding within a defined period of time which involves completing a full loan application and having the house appraised to assure its value is comparable to the agreed upon sale price.

It is important that buyers be certain that they will have complete legal title to the property they are purchasing and that no other person could claim they have an interest in that property. The seller will initiate the title search process which should result in a document at closing showing clear title to the property. Buyers almost always purchase Title Insurance which helps protect their interest in the property.

An inspection is essential to determining if any defects exist in the home that will need to be corrected before closing. The buyer is responsible for arranging and paying for the inspection.

Insurance

Before acquiring the new home, it is a good idea for the buyer to have homeowner’s insurance in place. Utility accounts will need to be transferred and a final walk-through to be sure any requested repairs have been made should be scheduled.

Delays in Closing

In most cases all of this goes smoothly. However, there can be delays in closing that are avoidable. Some common causes of delays are:

• Submitting incorrect information on a loan application
• Missing documents from either the seller or buyer
• Unknown defects are found in the property
• Clear title is not available or delayed
• Dates change to the contract due to vacations and travel
• The appraisal comes in too low
• The lender changes interest rates or withdraws funding

There are a surprising number of documents involved in buying or selling a home. It is advisable to have a professional REALTOR® involved from the outset of your search to guide and assist you with what is a complicated and important transaction. Many buyers and sellers engage the services of a qualified attorney to review all of the contracts and closing documents involved, as well.

The purchase of a home is often the largest single investment a person typically makes. It would be reassuring to know that the price you are planning to pay for your next house is a fair price. Typically the selling price is set by the person(s) selling the house, often with the help of experts who understand the value of real estate in that particular market. The price may or not be based on good information.

Appraisers are skilled professionals who provide an unbiased estimate of what a buyer should expect to pay for a property. In Colorado there are four levels of licensure for appraisers. It is important that the person who will appraise the property you want to buy is qualified to do so.

Registered, Licensed and Certified Appraisers

A Registered Appraiser is a trainee learning under the supervision of a higher- level appraiser and is limited in what they can appraise. Licensed Appraisers can appraise many residential properties and some non-residential properties without supervision. A Certified Residential Appraiser may appraise all residential and some non-residential properties. The highest level of certification in Colorado is Certified General Appraiser. This person is qualified to appraise any property.

Determining the Value of a Property

Appraisers use a variety of tools and resources to determine the value of a property. A site visit to the property is an essential first step in understanding the true condition of the property. On the site visit the appraiser will look at the house thoroughly to determine overall size and location as well as the key features, such as number of bedrooms and baths. The appraiser typically makes a drawing of the house and notes any problems or defects that could affect pricing.

With the site visit information in hand and a thorough knowledge of the local housing market, the appraiser then seeks to estimate a fair price for the house using one or more of the following approaches.

1. The Cost Approach involves calculating what it would cost to construct a similar house based on local building costs, labor, taxes and the like. This approach sets an upper limit on the value as you would not be likely to pay more for an existing home than it would cost to build you a new one just like it.
2. The Sales Comparison approach involves collecting information on recent sales of comparable properties in the same neighborhood. With this information in hand the appraiser then makes adjustments to the value of the home being appraised to take into account features the comparable properties have that the home being assessed does not have (or vice versa). For example, extra bedrooms or baths would increase the value over the comparable homes while no basement or garage might reduce the appraisal.
3. In the case of income producing properties (rentals) the appraiser may use the Income Approach, taking into account future earnings on the property to help set its market value.

The appraiser will take all of the information available and set an appraised value that he believes is reasonably accurate. A buyer may end up paying more or less than the appraised value depending upon the urgency to complete the sale, the motivations of both buyer and seller and the possibility of a “bidding war” for a very desirable property.

Buying a home may not be the only time that you will want to engage the services of an appraiser. You may need to establish the value of your existing home in order to buy insurance, settle an insurance claim, refinance a loan or to use the home as collateral on additional loans. Appraisals are also helpful if you want to challenge a property tax assessment, avoid having to pay mortgage insurance, or to settle an estate.

In all instances, be certain the appraiser is qualified at the appropriate level to deliver a reliable estimate of value.

Fortunately, long gone are the days when open discrimination was not only tolerated but written into our laws and the covenants governing some local neighborhoods. Real estate agents were often prevented from showing properties to clients based solely on race, ethnicity or country of origin.

Today such overtly discriminatory behavior is certainly not permitted under the federal and state law. However housing discrimination, unfortunately, still exists. The National Fair Housing Coalition estimates that there are 3-4 million instances of housing discrimination in this country every year.

As a home buyer or renter you cannot be refused to be shown a property or prohibited from renting, buying, selling or transferring a property based on race, color, national origin, religion, sex, familial status or disability.

For example, a landlord cannot say that he won’t rent to Asian Americans or require that a Latino renter provide a larger security deposit than he would need from a person of a different ethnicity. Mortgage lenders cannot charge higher interest rates for same-sex couples and a real estate agent cannot legally steer you to neighborhoods where “people like you” would be most comfortable. Advertisements for housing must also be non-discriminatory.

Discrimination in housing has been against the law in this country since the official end of slavery and passage of the Civil Rights Act of 1866. The act declared that all persons born in the United States were citizens, without regard to race, color, or previous condition (i.e. slavery).

Title VIII of the Civil Rights Act of 1968 (known as the Fair Housing Act), updated earlier laws by prohibiting discrimination in the sale, rental, and financing of dwellings based on race, color, national origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women, and people securing custody of children under the age of 18), and handicap (disability).

Further protections against discrimination in housing are found in the Americans with Disabilities Act, the Equal Credit Opportunity Act and various state and local laws which often cover categories not mentioned in the Federal statutes.

One of the characteristics which sets REALTORS® apart from others who may be offering real estate services is the Code of Ethics. Every REALTOR® must sign this code It includes specific language prohibiting any form of discrimination. Working with a REALTOR® provides you with an additional layer of protection against any discrimination.

If you have been trying to buy or rent a house or apartment and you believe your rights have been violated you should contact:

Colorado Civil Rights Division
303-894-2997
www.dora.colorado.gov/crd

The Denver Regional office of the U.S. Department of Housing and Urban Development
303-672-5440
http://portal.hud.gov/hudportal/HUD?src=/states/colorado/offices

The National Fair Housing Alliance
202-898-1661
www.nationalfairhousing.org/

If you are planning to buy a home, you will want to protect what is probably your largest single investment. When we think about insuring our home we usually mean the structure and the contents. Fire, theft and natural disasters immediately come to mind as reasons to insure your home. How would you replace whatever was damaged, destroyed or stolen?

Homeowner’s Insurance

For these concerns many people will buy Homeowners’ Insurance (also called Hazard Insurance). Most such policies will cover damage to your property and its contents up to whatever limits are set in the policy and will also protect you against liability that you and others living in the house have for any injury or damage caused to another person or their property. For example, if your dog ruins the neighbor’s custom patio furniture, your liability coverage would come into play. Again, the amount and kind of liability coverage you have is dependent on the limits you choose when you purchase a policy.

Homeowners’ policies cover some forms of disaster, such as fire, but often do not include coverage for floods or earthquakes. If you live in areas where these events happen regularly, then separate coverage may be needed – or even required. The Federal Government, through a program managed by FEMA (Federal Emergency Management Agency), offers flood insurance in more than 20,000 communities across the country. This form of coverage can be quite expensive.

You are not required by law to have homeowners’ insurance. If, however, you have financed the purchase of your home with a mortgage, your lender is likely to require you get homeowners insurance. This is to protect their investment in you and your property. Lenders may also require a particular type of insurance if the home is in a high risk area for disaster.

Title Insurance

Buying a home involves other kinds of insurance, as well. Title Insurance is purchased at the time that you “close” on your new property. The home you are buying may have previous owners and the land on which it sits certainly had other owners in the past.

You need Title Insurance in the event someone in the chain of ownership of either the land or the house did anything that calls into question who has “clear title” to the property.

There are two forms of this insurance – one that protects your lender up to the value of your mortgage and another that protects you as the owner up to the total purchase price of the home (including your down payment). If you plan to have a mortgage on your home you will need to make the one-time purchase of Title Insurance and you will need to decide which level of coverage you want to buy.

Mortgage Insurance

Some lenders may also require that you purchase Mortgage Insurance. This insurance provides no benefit to the buyer but protects the lender against a default on the loan.

The advantage to purchasing Mortgage Insurance is that your lender will likely allow a smaller down payment, making it easier for you to buy the house.

Home Warranty Insurance

Another type of insurance to consider is a Home Warranty. These are essentially service agreements purchased either by the builder if it is a new home or the seller if the home has been previously occupied. Each policy offers different coverage but will likely include mechanical problems (like plumbing and heating), workmanship defects and structural problems (if a new home). If there is a covered “defect,” then the warranty company would step in to take care of the repair or its cost.

With so many choices in the insurance marketplace, it is a good idea to contact your REALTOR® and a reputable insurance broker to help you sort through your options.

Buying a home without a professional inspection is a major mistake. Doing so can have costly consequences. Although sellers and real estate brokers are required to disclose known defects, no one can provide the defect disclosure of a professional, full-time faultfinder. It is also in homeowners best interest to periodically (every few years), especially after major renovations, to have their home inspected.

The main reason, a home inspection will save money by helping the buyer and homeowner to understand specific maintenance needs of a particular house. Preventive maintenance will generally prove more cost-effective than repairs done after a breakdown or failure occurs.

A home inspector will check things such as the heating, plumbing, electrical and structural aspects of the home. The inspector will also check problems such as roof leakage and deterioration and then let the customer know how to prevent these problems.

The majority of home inspections are conducted as a part of the real estate purchasing process. It is important that the homeowner obtain a home inspection from a qualified professional.

Take the following quiz to determine whether a home inspection is needed:

• Was the home inspected when purchased? If not, an inspection is warranted regardless of how long you’ve been in the home, even if it was new construction.
• Have you been in the home three to five years? If the answer is “yes,” a home inspection is a good idea since homes and home systems age and deteriorate, even with proper ongoing maintenance.
• Are you planning on doing major remodeling or renovation work? Whether it’s a do-it-yourself project or a contractor will be involved, now is a good time to determine whether there are any problem areas requiring attention that may have been overlooked.
• Have you recently undergone a major remodel or renovation? It never hurts to have an objective opinion about the work that has been done to ensure there are no remaining issues or needed repairs.
• Are you an older homeowner planning to remain in your home as you age? Elderly homeowners may have more difficulty addressing ongoing maintenance concerns or inspecting hard to reach areas. American Society of Home Inspectors suggests that a professional home inspector be brought in to point out maintenance or safety issues and recommend when to hire outside help for specific problems.
• Are you a first-time homeowner that doesn’t know the first thing about maintaining your home? Especially if a home inspection was not performed during the purchasing process, or the buyer was not present, a professional home inspection can be a valuable educational experience for the new homeowner.
• Do you have small children or a baby on the way? New parents have special concerns about safety in the home and a home inspector can help point out problem areas that could cause harm to a growing family.

Most home buyers must borrow money to purchase a home. Having housing-related tax provisions like the Mortgage Interest Deduction (MID) can help home buyers begin building their future through home ownership. While this has been a long-standing federal government tax incentive to encourage home ownership, not all homeowners qualify.

In most cases, all mortgage interest can be deducted from U.S. federal taxes provided the homeowner meets IRS requirements including: a homeowner files a Form 1040 and itemizes deductions on Schedule A; they are legally liable for the loan (you cannot deduct interest if you make a payment on someone else’s loan); and they made the payment on a qualified home.
The IRS defines a home as a house, condominium, cooperative, mobile home, boat, recreational vehicle or similar property that has sleeping, cooking and toilet facilities.

Of course, because the MID is regulated by the government, the rules are never quite as simple as they seem at first glance. There are two types of debt that generate tax-deductible interest. The first is debt that was taken out in order to buy, build or improve your home. This type of debt is known as “acquisition debt.” The second type is debt that was taken out for other purposes and is known as “equity debt” because it draws on the equity of your property.

You should also know that the MID can only be taken on itemized tax returns and that the interest paid on first and second mortgages is limited to a total of $1 million of mortgage debt. If you’re married and file separately, you can only deduct a total of $500,000. Interest on a home equity loan can also be deducted. That’s limited, however, to the amount of equity in your home up to a maximum loan amount of $100,000.

Your mortgage interest deduction generally declines slightly with each year you pay on your home loan. That’s because you’re paying less in interest and more in principal, with each passing year. Eventually, the total amount of your itemized deductions might not exceed the IRS-authorized standard deduction for your filing status. When that occurs, there may be little or no benefit to taking the mortgage interest deduction because the standard deduction would then be worth more to you.

While the deduction was created and exists to benefit homeowners remember that IRS rules for such deductions can be tricky. Make sure you consult with a tax attorney or certified tax preparer and read the IRS rules thoroughly before attempting to take the deduction.

To get a quick idea of what you can afford to spend, multiply your annual gross income (before taxes) by 2.5. For example, if your annual household income is $50,000, you might be able to qualify for a $125,000 home. This is just a rough estimate – the actual number will vary based on factors such as your debt and credit history.

Mortgage lenders typically use the housing expense and debt-to-income ratios to more accurately determine how much you can afford to spend on your mortgage.

Housing Expense Ratio
Mortgage lenders as a general guideline recommend that your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your gross monthly income. This percentage can change based on the type of mortgage you choose and sometimes the area in which you’re looking to buy.

Debt-to-Income Ratio
You should also factor in your other debts when determining an affordable monthly mortgage payment. Mortgage lenders look at whether your total debt is larger than 30-40% of your monthly gross income. Remember, debt is not just credit cards and student loans. It can also include alimony, child support, car loans, and housing expenses.

A mortgage lender, a housing counselor, or consumer credit counselor can help you better understand these guidelines. Before you talk to a financial professional, you can organize your financial picture by creating a budget. Don’t forget that you also have to save for the down payment, closing costs, inspections costs, moving, and other related expenses.

Use the Realtor.com Mortgage Calculator below to estimate how much home you can afford.