Preparing for Homeownership - Step Six

Buying Your Home

Now that you have completed your research and qualified for a loan, there are still a number of steps in the home buying process that you must follow before you can reach your goal of homeownership.

NEGOTIATING A PURCHASE AGREEMENT

Buying a home requires solid negotiation. Most homebuyers and home sellers want to arrive at a win-win agreement, but that’s not to say either side would regret getting a bigger “win” than the other. Successful negotiation is more than luck or natural talent. It requires the learned ability to use certain skills and techniques to bring about those coveted win-win results. Here are suggestions for turning negotiation into agreement:

1. Start with a fair price and a fair offer.
   When sellers significantly overprice their homes, it turns off potential buyers. Likewise, making an offer that is far lower than the asking price is practically guaranteed to alienate the sellers. Asking and offering prices should be based on recent sales prices of comparable homes. The condition of the home is also a point that can be used in negotiations. If the buyer will be forced to replace old, worn carpeting, for example, the seller should take that into consideration when considering an offer that is below the asking price.
   
2. Respect the other side’s priorities.
   Knowing what is most important to the person on the other side of the negotiating table can help you avoid pushing too hard on hot or sensitive issues. For example, a seller who won’t budge on the sales price might be willing to pay more of the transaction costs, or to make more repairs to the home. On the other hand, a buyer with an urgent move-in date might be willing to pay a higher portion of the transaction costs or forego some major repairs.
   
3. Be prepared to compromise.
   “Win-win” doesn’t mean both the buyer and the seller will get everything they want. It means both sides will win some and compromise a little. Rather than approach negotiations from an adversarial winner-take-all perspective, focus on your top priorities and don’t let your emotions get in the way of your better judgment.
   
4. Meet in the middle.
   Having trouble deciding who will pay the recording fee? Do you disagree on a close-of-escrow date? Are you arguing over cosmetic repairs? Split the difference. Splitting the difference is a timehonored and often successful negotiation strategy. Pay half the fee. Count off half the days. Fix half the blemishes. Both sides will come out ahead.
   
5. Leave it aside.
   Politicians and corporate executives are famous for their “for future discussion” agreements. If you have a major sticking point that isn’t a major factor in the overall contract (e.g. the purchase of furniture or fixtures), finish the main agreement, and then resolve the other difficulties in a side agreement or amendment. This technique allows both sides to recognize and solidify basic areas of agreement. They can then come up with a fair compromise on other terms and conditions. Summarizing the points of agreement in writing is another helpful strategy.
   
6. Ask for advice.
   Successful real estate professionals tend to be experienced negotiators. In countless real estate transactions, they have seen what does and doesn’t work. They have also established a track record of bringing buyers and sellers together. Consult your agent about negotiating strategies, win-win compromises, and creative alternatives.

UNDERSTANDING HOME INSPECTIONS

It is recommended that you pay for a home inspection before you buy the home. You should make the purchase contingent on a satisfactory inspection. Home inspectors will evaluate the structural aspects and certain mechanical systems of the home. They primarily inspect the foundation, roof, plumbing, electrical, and heating and cooling systems, but services vary widely, so be sure to communicate just how thorough an inspection you want. The more detailed the inspection, the more costly the service. Always seek out a qualified and licensed home inspector with a solid reputation for standing behind his or her work. Any warranties offered should be given to you in writing. Also ask about having the home inspected for termites, radon, or other potential environmental hazards.

Keep in mind that if you do make the purchase of the home contingent on a satisfactory inspection, you need to specify a dollar amount of liability. For example, the seller may agree to a contingency clause with a liability limit of $500, meaning that the seller will make repairs or replacements only up to that dollar amount. The inspection report will recommend certain repairs, if needed, with an estimated cost for these repairs. If the estimated cost of repairs is beyond the agreed upon cap of liability, the seller is not obligated to meet those repairs and the purchase agreement izs void. The buyer usually pays the cost of inspections.

CLOSING ON YOUR LOAN AND GOOD FAITH ESTIMATE

Within three days of receiving your completed mortgage loan application, your mortgage lender is required by federal law to provide you with a good faith estimate of the fees and other costs due at the closing. These mortgage fees, also known as settlement costs, cover every expense associated with your transaction. Items such as inspections, title insurance, taxes, credit report, etc., will all be disclosed to you in writing. Closing costs can vary, but usually range anywhere from 3% to 5% of the sales price. Make sure you understand and agree to any costs disclosed to you. Always ask questions if a fee seems unnecessary or excessive.

SAMPLE GOOD FAITH ESTIMATE (Click to view sample)

In addition to your down payment, which is your investment in the house, you will be required to pay certain closing costs on the transaction. Following is a list of these costs:

Loan Origination Fee – This is a fee charged by the lender to originate the loan, or reserve funds for your loan in the pool of mortgage money. It is usually one “point,” or 1% of your base loan amount.

Points – (Also called Discount Points) refer to the cost of “buying down” your interest rate. One point is equal to 1% of your loan amount. For example, if a loan is for $100,000, one point is $1,000.

Credit Report – At the time you make your loan application, your mortgage lender will order a Residential Mortgage Credit Report. This report is a detailed history combining information from two or three credit bureaus, and covers the last several years of your credit history. (As discussed previously in this workbook, the length of time an item remains on your credit report depends on the nature of the item.) The cost of a credit report can vary, but usually ranges from $50 to $65.

Appraisal Fee – This is what you will pay a professional appraiser for an estimate on the value of a house. As discussed earlier in this workbook, the appraised value of the home is one part of the equation used to figure your “loan-to-value” ratio (LTV). Currently, the cost of a residential appraisal ranges from $350 to $450.

First Year’s Mortgage Insurance Premium – When your down payment is less than 20% of the home’s value, you will be required to buy mortgage insurance that protects the lender against loss due to foreclosure. This insurance premium is usually added into your monthly mortgage payment.

Hazard Insurance Premium – You will need to prepay the hazard insurance premium for specified number of months.

Commitment Fee – This is the cost of reserving your loan with a lender at a certain rate and amount, provided that the loan is closed within a specified period of time.

Lender’s Title Insurance Policy – This is insurance against any defects in the title that may jeopardize ownership (e.g. forged documents, undisclosed heirs, etc.) The liability is limited to the outstanding loan balance at the time of any claim. Rather than a monthly premium, title insurance is paid for in advance as a one-time fee. It becomes void when the loan reaches a zero balance.

Owner’s Title Insurance Policy – This is the owner’s insurance against any defects in title that may jeopardize ownership (e.g. forged documents, undisclosed heirs, etc.)

Property Taxes – Property taxes are customarily paid in arrears. Therefore, they are prorated at the time of closing in order to make sure both the seller and buyer each pay only their fair share

Recording Fee for Deed – This is the fee charged by the county clerk to record your deed in the official records.

Survey Fee – This pays for a professional surveyor to determine boundaries and land area of the property you wish to purchase. Lenders generally require a survey of the property before they approve your loan.

Inspection Fee – This is the cost of hiring a professional inspector to inspect the structural and major mechanical systems of the home. In most cases, the buyer pays for the inspection. Although an inspection is usually not required, it is strongly encouraged as it helps the buyer make a more informed purchasing decision.

PREPARING FOR POST-CLOSING COSTS

As this workbook has emphasized, it is important to formulate a budget prior to purchasing your home. Once you become a homeowner, you will most likely incur additional costs. If you have savings and maintain a balanced budget, you will be ready to handle most of the unforeseen expenses that can occur after you buy your home. Following are just some of the costs you’ll encounter as you transition to your new home:

Moving Expenses – These include renting a van or truck, plus packing material, etc. Renting local transportation can range from $150 for a trailer that you hitch to the back of your own truck, to between $300 and $1,000 for a rental truck. Rates are based on the distance you’ll travel and how many days you’ll use the vehicle. You can negotiate the best price of a rental by calling different companies. You should retain all receipts related to your moving expenses, as they may be tax deductible. Be sure to check with a qualified tax advisor for details.

Utility Connections – Gas, electric, water, and telephone services all require hook-up fees in addition to any actual deposits required. You may have to pay a deposit if you have never had a utility account in your name, or if you’re moving here from another city or state. If you are currently paying utilities, but the account is in someone else’s name, (e.g. landlord, parents, etc.) you should inquire as to whether your name can be added to the account. This may allow you to avoid additional deposits by establishing yourself with the utility provider prior to moving. For example, if you are living with your parents, and everything is under their name, you can request that your name be added to the utility bill. Both names should then show up on the bill. Each utility company has its own requirements, and in some cases, there’s no way around a deposit requirement.

Appliances – Your purchase agreement will clearly spell out which, if any, of the major appliances will be transferred with the home. Make sure that you’re prepared to buy whatever you’ll need to establish your new household. You wouldn’t want to wait until moving day to find out you don’t have a refrigerator!

Furnishings – Typically, homes do not come furnished. You may be able to negotiate curtains, blinds, etc. as part of the sale, but any such agreement must be made a part of the purchase agreement. It’s a good idea to wait until after the closing to purchase any furnishings for your new home.

Landscaping – Depending on whether you buy a new or existing home, landscaping can be another costly item. Make certain that you have a clear understanding of how much, if any, landscaping is included with your new home. Because landscaping is not usually considered an immediate necessity, you can wait until after closing to address the issue. However, you should keep in mind that part of being a good neighbor is keeping your front landscaping attractive and neat. Also, check to see if your area has covenants regarding landscaping requirements.

Maintenance and Repairs – Your pre-purchase inspection report should have given you an idea of what, if any, repairs might be needed once you move in. It is a good idea to keep a separate household account to be used for maintenance costs and repairs. Even if your home doesn’t require any immediate repairs, it will at some point. At the very least, you should always set aside enough money to cover the deductible on your hazard insurance in the event of robbery or fire.

UNDERSTANDING HOMEOWNER’S INSURANCE

It is important to purchase a homeowner’s insurance policy that fits your particular needs. For example, consider the area in which you live. Is it prone to flooding? If it is, the lender will require the homeowner to purchase flood insurance. The following are additional items to consider as you shop for insurance:

REPLACEMENT COST COVERAGE INSURANCE

Insure your home’s replacement cost, not its market value. The market value may be higher or lower than the cost to rebuild your home. With replacement cost coverage, you can rebuild your home on the same lot at current local construction costs if it is destroyed.

Companies use various methods to determine the estimated replacement cost of your home. Be prepared to answer questions about your home’s square footage, number of bedrooms, and number of bathrooms. Inform your insurance agent of any custom features that are part of the dwelling.

When considering replacement cost coverage, be sure to deduct the value of the land, foundations that are below the surface of the ground, and other items such as landscaping and lawn sprinkler systems. If a loss does occur, the insurance will cover the cost to replace the actual structures on your property.

Be sure to review your policy on an annual basis. If you make major improvements or additions to your home, you’ll want to contact your insurance carrier to arrange additional coverage.

Household contents are only covered for their actual cash value. Actual cash value is the replacement cost minus depreciation. You can buy replacement cost coverage for your possessions as a policy add-on, or endorsement. A homeowner’s policy also offers very limited coverage for valuables like jewelry, furs, cash, and stamp or coin collections. You can buy separate endorsements to cover these items, but doing so will significantly increase your premium. You may also be required to have such items professionally appraised, at your expense.

LOWERING YOUR PREMIUM BY INCREASING YOUR DEDUCTIBLE

You can lower your premium by raising your deductible. The deductible is the maximum amount the homeowner is required to pay for each covered loss. A deductible can range from $100 to $1,000 or more. Most homeowners find it reasonable to carry a $500 to $1,000 deductible.

ASK ABOUT DISCOUNTS

You may be eligible for discounts on your homeowner’s insurance. Some discounts are mandatory. Others are optional. Ask your agent if you’re eligible for any of the following discounts:

* The amounts listed are maximum discounts.