The Real Estate Agent

In today's fast-moving market, trying to find the right home without an agent is like trying to sell 100 shares of Ford stock without the New York Stock Exchange. You might get lucky but professional real estate agents are in the midst of the market place each day and have information on properties not even on the market yet.

Unless there is a formal written agreement between a buyer and the agent, the agent could still have the seller's best interest at heart. If the two do not enter into a buyer's agency agreement, the agent has no obligation to aggressively negotiate for that buyer.

A Buyer's Agent is an advocate who can provide a market analysis, counsel the buyer in terms of price range, and negotiate on the buyer's behalf when the offer is presented. A Buyer's Agent can offer advice to the buyer which they cannot offer when they are agents working for the seller. For example, when the agent is working for the seller he/she must let the buyers choose what price they want to offer and can not offer an opinion on that price. Not only will a buyer's agent determine a reasonable price for a property, he/she will determine what the seller paid for the house and how long ago it was purchased. The buyer can expect a full market analysis on the area. An agent representing the seller will not offer that information to a potential buyer and most buyers don't have the expertise to do this themselves.

Buyer's agents can save their clients from unnecessarily spending money. So with the benefits to buyers, what should they expect to pay for the services of a buyer's agent. Generally, the fee comes from the seller in the form of a commission and the buyer pays nothing.

Interview several agents and find someone you are comfortable with, someone who understands what you want and who is willing to work with your style. Get references and check them. Talk about how the broker will be paid. I strongly recommend you have a signed agency agreement that specifies that the broker is representing your interests, not those of the seller.

Being pre-approved by a lender may induce the seller to accept a lower price or give you a leg up on a rival bidder who has to begin the mortgage process from scratch. Often having a pre-approval letter can make or break a deal.

Getting pre-approval requires that you provide your lender with documents to include pay stubs, W-2's, and bank statements. The lender will run a credit check on you and will issue a letter or certificate saying you are pre-approved for a loan of a certain size.

In general, a pre-approval does not guarantee that you will get a specified interest rate. If you fear rates will rise before you buy, seek a lender who will let you lock in your rate for at least 60 days. For about a quarter-point ($250 on a $100,000 loan) you probably could lock in your rate for 45 to 60 days.

Interview the loan officer and ask for references. Determine how long he/she has been in the industry and what positions have they held. What education and/or training do they have. Does the lender carry a wide range of mortgage and lock options. Does the lender have a customer service department to assist you after the loan is closed?

People become jittery when borrowing money, especially a hundred thousand or more -- and a tiny hike in the rate often makes borrowers nervous. In reality, a half-point change in the rate of a 30 year fixed-rate mortgage only adds up to about $35 a month for a $100,000 loan.

You may want to consider an ARM. With a one-year ARM at 6 percent (rather than a fixed loan at 7.75 percent) you could save more than $100 per month on a $100,000 loan.

The process of applying for a loan means carefully analyzing your financial situation, the kind of risks you are willing to take, and how long you expect to be in your new home.

When you apply for a loan, the mortgage rate offered by the lender is good for a specific amount of time, usually 30, 45 or 60 days. You will need to decide how long a rate lock you want to pay for -- the longer the lock, the more you will pay. For about a quarter-point ($250 on a $100,000 loan) you probably could lock in your rate for 45 to 60 days. To protect themselves, lenders will rarely offer to hold a lock for longer than 60 days.

Whenever government regulation, state usury laws and/or competitive practices prohibit the lender from charging a rate of interest which would make the real estate loan competitive with other fields of investments, the lender must seek some method of increasing the yield for the investors. By charging "points," the lender can make the real estate loan competitive with other investments. Most first-time borrowers do not realize there is an inverse relationship between the number of points you pay and the interest rate. If you pay no points up front, you will have a slightly higher interest rate and pay more over the life of the loan.

Points paid by the buyer of a new house are generally deductible, in full, for the tax year in which the points were paid. Even if points were paid by the seller, the buyer generally can deduct them. Check with your tax preparer or accountant before filing your tax return with such a deduction.

Credit scoring is a statistical method of assessing the credit risk of a loan applicant. The score is a number that rates the likelihood that an individual will pay back a loan. Credit scoring has been used for more than 30 years by auto lenders, credit card issuers, and other extenders of consumer credit; now it is being used to determine whether homebuyers will quality for mortgages.

Fannie Mae and Freddie Mac, which, in an average year, purchase about 58 percent of all residential conforming mortgages, began in mid-1995 to encourage lenders to use credit scores.

Credit scoring grades consumers by using reports from any of the three major credit repositories: Equifax, Experian, and Trans Union. The scores are calculated by the credit bureaus, not by lenders. The credit score isn't a permanent part of any credit history but rather a snapshot of a mortgage applicant's credit history.

Mortgage lenders frequently use these scores as an important factor in deciding whether or not to offer credit. The widespread use of credit scoring allows for speedy, objective analysis; borrowers who score well can get loan approval almost instantly – something unheard of in years past.

Before shopping for a loan, experts recommend that home buyers check their credit report. Maryland residents can get one free copy of their report every year from each credit repository:

• Equifax, P. O. Box 740256, Atlanta, GA 30374; 800-685-1111; www.equifax.com

• Experian, P. O. Box 2104, Allen, TX 75013; 800-682-7654; www.experian.com

• Trans Union Corp, P. O. Box 403, Springfield, PA, 19064; 800-916-8800; www.transunion.com

Under the Fair Credit Reporting Act, you have the right to dispute the completeness and accuracy of information in your credit file. When a credit reporting agency receives notice of a dispute, it must investigate and record the current status of the disputed items within a "reasonable period of time," unless it believes the dispute is "frivolous or irrelevant." If the credit reporting agency cannot verify a disputed item, it must delete it. If the credit report contains erroneous information, the credit reporting agency must correct it; if an item is incomplete, the credit reporting agency must complete it. For example, if your file showed that you were late in making payments on accounts, but failed to show that you were no longer delinquent, the credit reporting agency must show that your payments are now current. Also, at your request, the credit reporting agency must send a notice of correction to any report recipient who has checked your file in the past six months.

To insure the best possible credit score, avoid any behavior that will negatively impact your credit scores before loan closing:

• Pay all credit card bills consistently and on time;

• Don't get new credit cards, even when stores offer a discount in return for applying for a card;
• Refuse increases in your credit limit if the increase is more than you need or is high in relation to your income;
• Pay off and close any existing accounts with finance companies, since they are viewed negatively in the scoring;
• Close out unused credit card accounts as having ready access to thousands of dollars of debt makes you a poorer credit risk;
• Maintain at least one of your oldest cards to show a lengthy credit history;
• Don't order any furniture or appliances for a new home even if no payment is immediately due (such as the no-payment-until-Spring deals);
• Avoid too many inquiries; don't let stores run a credit check for a new credit card.

If you have had credit problems, be prepared to discuss them honestly with your mortgage lender -- and come to your application meeting with a written explanation. Responsible mortgage lenders know there can be legitimate reasons for credit problems, such as unemployment, illness or other financial difficulties. If you had a problem that's been corrected, and your payments have been on time for a year or more, your credit probably will be considered satisfactory.

A loan insured by the Federal Housing Administration (FHA) and made by an approved lender in accordance with the FHA's regulations. The purpose of the FHA-insured loan program is to make affordable housing available to all U.S. residents. If you are of legal age, can meet the FHA credit requirements, and the property you choose meets FHA requirements, you may obtain an FHA loan to buy your own home.

FHA does not "make" loans; instead, it insures loans originated by different lending institutions against default. The features of the various FHA programs are regulated by the Secretary of Housing and Urban Development (HUD).

Any U.S. resident of legal age can apply for an FHA loan. All applicants must be given equal consideration without discrimination. The borrower or co-borrowers must show they are willing and able to repay the loan. All income from the borrower and co-borrowers that is likely to continue and can be verified will be considered. The borrower, or at least one of the co-borrowers, must move into the property with the intention of making it his or her principal residence.

The various FHA loan programs may be used for single-family homes; two-unit, three-unit and four-unit family dwellings; and condominiums and townhouses in FHA-approved complexes.

An appraisal made by an FHA staff appraiser or an FHA-approved fee appraiser is required for all properties. Sometimes the appraisal will require that certain repairs be made prior to loan approval. If repairs are required, the property must be re-inspected by the appraiser or an approved loan officer before the loan can be made.

For more information call 800-440-8647 x 87 or go to their website at www.hud.gov

A mortgage loan on approved property made to a qualified veteran by an authorized lender and guaranteed by the Department of Veterans Affairs. Department of Veterans Affairs (VA) loans, or GI loans if you prefer, have the best terms and conditions of any loans available today. If you are a veteran, you can probably buy your home with a VA loan, even if it has been many years since you were in the service. At one time, veterans were told they could obtain only one VA loan in their lifetime but that is no longer true.

The VA works for veterans by helping them and their families obtain homes with reasonable financing. VA loans are originated by many lenders and guaranteed against default by the federal government according to each veteran's entitlement (eligibility).

With the current maximum guaranty, a veteran who hasn't previously used the benefit may be able to obtain a VA loan up to $203,000 depending on the borrower's income level and the appraised value of the property.

The applicant must be an eligible veteran who has available entitlement:

Veterans with active duty service, that was not dishonorable, during World War II and later periods are eligible for VA loan benefits. World War II, Korean conflict and Vietnam era veterans must have at least 90 days' service. Veterans with service only during peacetime periods and active duty military personnel must have had more than 180 days' active service. Veterans of enlisted service which began after September 7, 1980, or officers with service beginning after October 16, 1981 must in most cases have served at least two years.

Aside from the veteran's certificate of eligibility and the VA-assigned appraisal, the application process is not much different than any other type of mortgage loan.

A basic funding fee of 2.0 percent must be paid to VA by all but certain exempt veterans. A down payment of 5 percent or more will reduce the fee to 1.5 percent and a 10 percent down payment will reduce it to 1.25 percent. For all VA home loans, the funding fee may be paid in cash or it may be included in the loan.

Reasonable closing costs may be charged by the lender. These costs may not be included in the loan. The following items may be paid by the veteran purchaser, the seller, or shared:

• VA appraisal;
• Credit report;
• Loan origination fee (usually 1 percent of the loan);
• Discount points;
• Title search and title insurance;
• Recording fees;
• State and/or local transfer taxes, if applicable;
• Survey.

The types of properties eligible for VA loans are single-family detached homes, condominiums, townhouses and patio homes in VA-approved complexes or areas, and two-unit, three-unit and four unit family dwellings.

If you once owned a home financed with a VA loan, and that loan has been paid in full and you no longer own the home, your entitlement may be reinstated. Even if you don't know for sure, but have reason to believe the loan may have been paid off, contact your VA office and ask a representative to check for you. The VA will need your name, service identification number and the property address of the home that was financed with the VA loan.

For additional information call your local VA regional office (Baltimore's phone number: 800-827-1000) or go to their website: www.vba.gov

Mortgage lenders usually require you to pay for private mortgage insurance if you make a down payment of less than 20 percent of the sale price. It makes it possible for you to buy a house with as little as a 3-to-5 percent down payment.

Lenders have learned that borrowers with less than 20 percent equity in their house are more likely to walk away from the property. This insurance protects the lender against financial loss in the event of default and the house has to be sold at a foreclosure sale. If, for example, your house has a loan of $200,000 but at a foreclosure sale sells for only $190,000, PMI will pay the lender the difference so that the lender will not be out of pocket. While it protects the lender's investment; the premiums are paid by the homeowner and they are not cheap. The premiums vary according to size, type and perceived risk of the loan. If you put 10 percent down on a $200,000 house bought with a 30 year fixed-rate mortgage, you will pay about $75 per month for PMI. If you put only 5 percent down, the PMI premium jumps to about $120 month.

Lenders have come up with a creative alternative called the 8-10-10 loan. Under this arrangement, the borrower puts down a minimum of 10 percent cash. The lender then makes two loans: one for 80 percent of the full loan amount and the other (a home equity loan or second trust) for the remaining 10 percent. Because the first mortgage is for 80 percent of the purchase price, it is considered a conventional loan and no PMI is required. The second trust for the remaining 10 percent carries a higher rate of interest but, in most cases, it is preferable to paying PMI and is tax deductible.

Private MI has always been the easiest and least expensive way to buy a home with a low down payment. A new federal law makes it even better. It assures consumers that they can enjoy the benefits of private MI knowing that lenders will cancel it when it is no longer needed. Under the Homeowners Insurance Protection Act, effective July 29, 1999 all PMI-insured borrowers must receive detailed disclosures and cancellation instructions from their lenders or mortgage servicers. All new home loans closed on or after July 29, 1999 are eligible for automatic cancellation by the lender when you have paid down enough of the loan to have 22% equity in your house. Lenders are required to advise their borrowers at closing exactly when the mortgage will reach that 78 percent mark.

For years thousands of borrowers have been allowed to continue to pay PMI premiums indefinitely because no one told them that the lender's economic risk was low and that they could ask the lender to terminate the insurance policy.

The price you offer will depend in large part on whether you are the only bidder or whether you are in a multiple-contract situation. When you are the only bidder, you can maneuver a bit more on price. As long as your initial offer is not so low that it insults the seller, you will likely receive a counter-offer. If you are working with a buyer's agent, listen to him/her. Your agent will help determine a reasonable price for the property, what the seller paid for the house and how long ago it was purchased. Your agent is obligated not to give your strategy away to the seller. Decide what is the highest amount you would be willing to pay and stick to it. Try to think of buying a house as a business transaction and not get too emotionally involved.

The purpose of a pre-purchase home inspection is to determine if the home you are purchasing is structurally sound, identify items that need to be repaired or replaced, and estimate the remaining useful life of the major systems and equipment. Your inspector will identify structural defects that are not readily visible to the typical home buyer.

Retaining the services of a qualified home inspector can translate into big savings at settlement. Make sure your contract states that the sale of the home depends on the inspection.

The inspector will look at such items as the plumbing, heating and air conditioning systems; irregularities in the roof framing; cracks in the foundation; evidence of water intrusion into the attic or lower levels of the home; effectiveness of the insulation, etc.

At the conclusion of the inspection you should know (1) the condition of the home you are purchasing, including all positive and negative aspects; (2) what repairs are needed, the urgency of the needed repairs, and the magnitude of the repair costs; and (3) if there are any unsafe conditions and whether there are any risks of hidden deterioration.

It is important to accompany the inspector during the home inspection so that you can learn as much as possible about your new home.

There is hardly a perfect home – a good home inspector will always find some defects but you need to weigh the positives against the negatives. There is nothing more important than knowing that the home you are purchasing is structurally sound.

Radon is a radioactive gas that comes from the natural breakdown of uranium in soil, rock and water and gets into the air you breathe. You can not see, smell or taste radon, but when you breathe air containing radon, you increase your risk of getting lung cancer.

Radon typically moves up through the ground into your home through cracks and other holes in the foundation. The amount of radon that enters the house depends on the weather, soil porosity, soil moisture, and the suction within the house. Radon has been found in homes all over America.

Consider making your contract contingent upon a radon test. The test should be done in the lowest level you are going to use as living space such as a basement.

If high radon level is found, have the sellers fix the home. EPA recommends that action be taken to reduce your home's indoor radon levels if the radon test result is 4pCi/L or higher. Be certain that mitigation is performed by a radon reduction contractor who is recognized by EPA's Radon Contractor Proficiency (RCP) Program. This Program tests the technical knowledge of contractors to ensure they can correct radon problems. For more information on how to reduce your radon health risk, call EPA's Radon Office at 1 800 438-2474 x 2090.

Insurance purchased for a one-time payment (at settlement of a mortgage) that protects the buyer and lender from past mistakes, made in the search and recording of the title. A policy of title insurance guarantees that the title is as reported and, if not, the title insurance company will indemnify the insured against his loss up to the face amount of the policy. The insured homeowner is protected for the length of time he and any subsequent heirs have an interest in the property.

Owner's title insurance policy protects the homeowner's equity -- an amount that increases over time as the mortgage is paid down. Generally, it is issued in the amount of the real estate purchase and lasts as long as the homeowner and any subsequent heirs have an interest in the property. The insurer will defend the title against any claims while the owner holds the property.

Lender's title insurance is usually required by the bank or mortgage company to protect the lender for the length of time he has an interest in the property. The amount of lender's title insurance decreases and eventually disappears as the loan is paid off.

A detailed search of the public land records is performed to determine if any person or entity other than the seller has any right, lien, claim or encumbrance on the property. Certain "hidden defects" cannot be uncovered simply by an examination of public records. Coverage against such "hidden defects" is provided to the insured by the title insurance company. Typical hidden risks include:

• Undisclosed or missing heirs with claims against the property.

• Deeds, mortgages, wills, or other papers in the chain of title executed by one of unsound mind, a minor, or by fraud.

• A Deed or Mortgage executed under a fabricated or an expired power of attorney.

• Old unreleased mortgages.

• Errors in copying or falsification of Court records.

If there is a lender involved, owner's title insurance on a $150,000 home in Maryland would cost about $200. (The lender's policy would cost about $375.) Homebuyers should obtain several quotes before deciding on a title insurance company. Although the policies are usually the same, the fees that title insurance companies charge can vary.