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QUESTIONS AND
ANSWERS
for Buyers
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Experts would say yes, if you meet the following criteria: -- Are not counting on price appreciation in the short term. Most experts don't expect home prices to inflate much in Northern California in the next couple of years. -- Can afford the monthly payments. Remember, Northern California is one of the most expensive housing markets in the United States. Plan to stay in the house long enough for the appreciation to cover your transaction costs. The costs of buying and selling a home include real estate commissions, lender fees and closing costs that can amount to more than 10% of the sales price Need a tax break. The mortgage interest deduction can make homeownership very appealing. Prefer to be an owner rather than a renter. Can handle the maintenance expenses and headaches. Are not greatly concerned by dips in home values. How do I Figure what I can afford to buy? Roughly, it's three times your annual income. Real estate experts strongly recommend people get prequalified by a lender as a way of calculating exactly how much of a home they can afford, When qualifying people for a loan, lenders look at a borrower's full financial standing. Lenders use the relationship P1TI, or principal, interest. taxes and insurance payments, and their ,gross monthly income. Generally. lenders like to see the PITI not exceed 30% to 33% of the borrower's ,gross monthly income. They also consider the ratio of the borrower's monthly debt payments, including the PITI to income. Some lenders have flexibility in these qualifying ratios. What is considered a low down payment? Anything less than the standard 20%. However, many people borrow with less than 20% down by obtaining private mortgage insurance (PMI). And numerous programs are available to help first time buyers with little or no down payment, including Federal Housing Administration (FHA), Veterans Administration (VA) and Federal National Mortgage Assn's (Fannie Mae) Community Home Buyers Program. How much does PMI cost? "PMI costs vary from one mortgage insurance firm to another, but premiums usually run about 0.5% of the loan amount for the first year of the loan. Most PMI premiums are a bit lower for subsequent years. The first year's mortgage insurance premium is usually paid in advance at the close of escrow, and there is usually a separate PMI approval process," writes Diana Hymer, author of "Buying and Selling a Home in California. A Complete Guide," (Chronicle Books). Can I drop my PMI? California Civil Code 2954.6, a disclosure law, requires lenders to notify borrowers within 30 days after the close of escrow whether the borrower has the right to cancel private mortgage insurance. The code also requires lenders or servicers to provide borrowers with an annual notice concerning each borrower's right to terminate PMI. Civil Code 2954.7 ,grants borrowers the right to terminate PMI under certain limited circumstances. Generally, to drop PMI, the loan must be at least 2 years old and the borrower cannot have made any late payments in the last year. In addition, the loan-to-value ratio must be less than 75% How much should I set aside for maintenance expenses? According to Bob Vilas, author of "Guide to Buying Your Dream House," (Little, Brown & Co.): "For maintenance, depending on the age and condition of the house. you should allocate about 1% of the purchase price annually. " Is it better to make as large a down payment as possible? Putting down as little as possible and taking a larger mortgage allows buyers to take full advantage of the tax benefits of homeownership. Mortgage interest (and property taxes) are fully deductible from state and federal income taxes. Can I buy a house with nothing down? Although some experts advise against it. home buyers interested in buying a house with nothing down can do so. But it's not easy finding these loans and in some cases they can be risky. Occasionally, a builder will offer nothing-down loans to induce sales in an otherwise slow-moving project. Desperate sellers also may agree to finance the full purchase price to get out from under a property. The V,4 loan program allows buyers-s to qualify for a nothing-down loan, as well as a loan program offered through the California Public Employees Retirement System. What programs does the FHA offer? The U. S. Department of Housing and Urban Development (MUD) offers a variety of loan insurance programs through FHA that require about 4% to 5% cash down. The down payment must be the buyer's own money- gift money is not allowed but buyers can finance all non-recurring closing costs. FHA loan limits vary depending on the county where the property is located. Recently, the FHA loan limit was increased to $151,725, but only in high cost areas such as Los Angeles, Marin and Monterey. FHA loans are originated and serviced by private lenders. What special programs exist for veterans? VA loans are attractive because in some cases they require no down payment. With the U. S. department of Veterans Affairs, there is no restrictions on the purchase price. For more information, call the U. S. Department of Veterans Affairs at (800) 827-1000. In addition, the California Department of Veterans Affairs offers a home loan program. Gal-Vet actually buys the subject property from the seller and resells the property to the veteran on a land contract The department holds title until the veteran has repaid the amount owed, although the veteran has the right to possession of the property as his or her personal residence. For specific information about Gal-Vet programs and requirements, call (800) 952-LOAN or (510) 602-5070 Can people who served in the National Guard use the VA loan program? Yes, but the qualifying requirements may be more stringent and loan fees for National Guard veterans are generally more costly. How does the Community Home Buyers Program work? The program is sponsored by Fannie Mae, the Federal National Mortgage Assn., and administered through participating lenders. The program has an income cap of 115% of the area's median income. In addition, the borrower must attend a seminar on homeowner;hip and the home-buying process. The program allows for 95% financing. The borrower may pur down as little as 3% of his or her own money, with the remaining 2% coming in the form of a family gift or loan from a government or nonprofit t agency. For a list of participating lenders, call Fannie Mae at (800) 732-6643. What are the standard contingencies in a purchase offer? According to author Diana Hymen, "Most real estate purchase contracts include at least two contingencies A financing contingency makes the purchase conditional on the buyers' ability to obtain a loan commitment from a lender. An inspection contingency allows the buyers to have professionals Inspect the property to their satisfaction, Can I get a home loan with bad credit? A poor credit history makes it harder to qualify for a mortgage. There are numerous types of credit report problems that cause a lender to reject a loan application, says Ilyce R. Glink in "100 Questions Every First-Time Home Buyer Should Ask," (Random House): "If you've ever missed a credit card payment, or defaulted on a prior mortgage or school or car loan, it will probably show up on your credit report. If you've filed for bankruptcy within the past seven years, that will show up on your credit report. If you haven't paid your taxes, or there has been a judgment filed against you (perhaps for non-payment of spousal or child support), it will also show up. Failure to pay your landlord, doctor or hospital may turn into a black spot on your credit report," How can I find out what my credit report says about me? Anyone concerned about their credit history can order a copy of their own report by calling the three main national credit reporting agencies: Equifax (800) 685-1111; TRW (800)392-1122 or Trans Union (317) 408-1050. Can I legally buy a house with a couple of friends or investors? Yes, The investment approach - equity sharing - isn't very popular when homes aren't appreciating because investors disappear. However, the "tenants in common" (TIG) way of holding title becoming more popular, especially among first-time buyers as a way to purchase property collectively with other unrelated individuals. Generally, TIC properties are eligible for many of the same loan programs as homes owned by individuals, but the underwriting standards are more complicated because the lender must consider the financial situation of all the parties who hold an interest in the property. How do lease options help people buy a home? According to the "Realty Bluebook, 29th Edition" (Dearborn Financial Publishing), a lease with an option to purchase is a tool sellers can use to induce a sale, where the buyer lacks sufficient funds for down payment and closing costs. Option amounts vary from one deal to another. Lease options generally provide that a portion of the rent is applied toward the purchase if the option is exercised, referred to as rent credit. What is the mortgage credit certificate program? The mortgage credit certificate (MCC) program is a federal income tax credit for qualified first-time home buyers. The credit, which often totals in excess of $1,000, reduces the borrower's federal tax liability by that amount. Both the borrower's income and the purchase price of the home must fall within established guidelines. A limited number of California cities have authorized the MCC program Interested home buyers should contact their municipal housing departments. Will sellers consider only offers close to, or at, full price? "While a very low offer in a normal market might be rejected immediately, in a buyer's market the below-market offer will usually either be accepted or generate a counteroffer. When few offers are being made, an outright rejection of offers becomes unlikely," writes William H. Pivar, in "Real Estate Investing From A to Z:" (Probus Publishing). Plus, he said, "There are always some sellers who for some reason must sell quickly" and will consider a reduced price. There are other considerations : -Is the offer contingent upon anything such as the sale of the buyer's current house? -If the offer made on the house "as is," or does the buyer want the seller to make some repairs before close of escrow? -Is the offer all cash? A cash offer at less than the asking price may be more attractive to the seller than a full-price offer with a financing contingency. How do adjustable-rate loans work? Adjustable rate mortgages rise and fall with interest rates, based on several indexes that cause the cost of funds for lenders to go up or down. The most common indexes used in California are the 1 I th District Cost of Funds (an average of the cost of funds to the 1 Ith Federal Home Loan Bank District Institutions), Treasury Securities (T-Bills), Certificates of Deposit (CDs) and Libor (London inter-bank offering rate). The Times publishes current ARM index rates in the Sunday Real Estate section. The interest rate and payment adjustments may or may not be scheduled to change at the same time. For example, the interest rate on some plans changes more frequently than the monthly payments, which may result in negative amortization. Is there such a thing as a no-cost loan? The state's real estate regulatory agency, the Department of Real Estate is cracking down on mortgage brokers who claim to offer "no cost" and "no fee" loans. According to the DRE spokesman Pablo Wong, "Advertising claims by brokers of "no cost" or "no fee" loans are patently misleading and are in violation of the State of California Business and Professional Code Section." That's because borrowers are actually paying a higher interest rate on the so-called "no cost" loan in exchange for not having to pay fees or closing costs up front when the loan is secured. No matter what lenders claim. "there is no free lunch," said Wong. Zero-point loan is one where the lender does not charge points (one point is equal to 1% of the loan amount). But there are other fees involved in no-point loans, as with most loans. How can I find a good real estate agent? Here are some tips for finding an agent suggested by author Dian Hymer: "The best sources of contacts are friends or associates who have bought or sold recently and can recommend agents. Be sure to ask your colleagues if they would use the agent again. "If personal contacts don't generate enough leads, call the managers of reputable local real estate companies and ask for recommendations of agents who specialize in your neighborhood if you're selling. Find out if the agent works full time at real estate and how much experience the agent has." I'm a buyer and want my own agent, how do I go about it? In California. it's legal for an agent to represent the Buyers exclusively in the transaction and be paid a commission by the sellers. More and more buyers are going a step further, hiring and paying for their own agent, referred to as buyers brokers. What should I do if I suspect my real estate agent has done something unethical or illegal? Report the agent to the enforcement division of the Department of Real Estate. If the agent is a member of a local association of realtors, a breach of ethics can be reported to one of these trade ,groups, which are listed in the telephone book. The local associations have a disciplinary procedure that promises to root out problem agents. They also have the power to revoke the agent's membership in the trade group Consumers who suffered an economic hardship from doing business with a licensed real estate agent can appeal for relief from a special state fund. Twelve percent of every agent's license fee is deposited in this Real Estate Recovery Fund, which is used to pay damages to consumers from civil action taken against a licensee in cases where the agent has no funds to pay the judgment. Where do you find a fixerupper? So-called "diamonds in the rough" - distressed properties or fixer- uppers - can be found in most communities, even the wealthier neighborhoods. A distressed property is one that has been poorly maintained and has a lower market value than other houses in the immediate area.The basic strategy for a fixer-upper is to find the least desirable house in the most desirable neighborhood and then decide if the expenses needed to bring the value of that property up to its full potential market value are within one's budget. Most experts say buyers should avoid rundown houses that need major structural repair. Where can I find MUD-repossessed homes? MUD-owned properties can be purchased only through a licensed real estate broker. HUD acquires properties from lenders who foreclose on mortgages insured by HUD. These properties are available for sale to both homeowner occupants and investors, HUD pays the broker's commission up to 6% of the sales price. Buyers should be aware that HUD homes are sold "as is", meaning limited repairs were made but no structural or mechanical warranties implied. In San Francisco, call (315) 533-3940 or stop by 648 Mission St.. Ste. 301 for more information. How do you determine which areas are more prone to earthquakes? There are several sources to research seismic information. The U.S. Geological Survey, located in Menlo Park, can be reached by calling (415) 853-8300. State geologists have designated special studies zones along earthquake faults. These designations may not disclose all risks-San Francisco is not within a special study zone because the fault doesn't run right through the city. Check maps kept at your local city or-county planning department to find out if a property is within a special studies zone. In addition, state law requires home sellers to disclose if their property is within a Seismic Hazards Zone. Is there any state agency that governs condominium associations? No. However, condominium associations are subject to the Davis- Stirling Common Interest Development Act, a portion of the California Civil Code. The Department of Real Estate regulates units up until they are sold by the developer. Then no one does. Condominium associations are self regulated by covenants, codes and restrictions (CC&Rs) and bylaws. How are property taxes calculated in California? According to the rules of Proposition 13, property taxes are limited to 1.1% of the market value of a house. The 1978 tax measure limits increases in the taxable value of property to 2% a year but allows property to be reassessed at its market price when it is sold. One year after the passage of Proposition 13: voter!: approved Proposition 8, which permits the assessor to lower property assessments after considering reductions in value due to damage. destruction. depreciation or other factors. I want to move out of the city and buy another house to retire Can I take my property tax bill with me? Yes, as long as the new house is of equal or lesser value than the previous home. Twelve counties have ordinances allowing people over age 55 and disabled people moving from another county to carry their old property tax assessments, presuming they meet all state requirements for Proposition 60 or Proposition 90. Those counties are Alameda, Inyo. Ken, Los Angles, Marin, Modoc, Orange, Riverside, San Diego, San Mateo, Santa Clara and Ventrra. Are property taxes deductible from federal and state income taxes? a Property taxes on all real estate, including those levied by state and local governments and school districts? are fully deductible against current state and federal income taxes. The value of my house has gone down, Can I deduct the lost in value from my income taxes? No. "The IRS allows no deductions for losses on the sale of your own home. There's no way to use a loss to your advantage on your income tax return. It won't matter what type of misfortune you may have run into," writes Edith Lank and Miriam Geisman in "Your Home as a Tax Shelter" (Dearborn Financial Publishing). What will increase the value of my property? Several factors, including overall market trends, the condition of the property, specific home improvements and neighborhood stability can influence property values. The,greatest rise in home prices occurs when the economy is strong and the number of home sales is increasing. In recent times in California, that has occurred twice - in the early 1980s and the late 1980s. During those two periods, almost all property in the state appreciated. However, single- family homes appreciated much more than condominiums. While overall market conditions are out of the homeowner's control, other factors are not. For example, specific home improvements may increase the value above the cost of the improvements. According to a report by Remodeling magazine. a bathroom remodeled in the Los Angeles area returns 75% to the owner, a bathroom addition 102% and a master bedroom suite 78%. What is the best way for a married couple to hold title? Married persons in California may take title to real property as joint tenants or tenants in common. In addition, they have a choice unmarried owners don't have: to take title as community property, which is the option that many experts recommend. When one spouse dies, property held as community property goes directly to the surviving spouse without formal probate, unless the deceased left their half to someone other than their spouse. In cases of "tenancy-in-common," there is no right to survivorship. We are facing foreclosure. Would a deed in lieu of foreclosure be better? A property foreclosure is one of the most damaging events in a borrowers credit history; a deed in lieu of foreclosure is not as negative "A deed in lieu of foreclosure," according to "California Real Estate Principles. Third Edition," Charles O. Stapleton III, Martha R. Williams and Thomas J. Morgan (Dearborn Financial Publishing) "may be used to transfer property to the beneficiary of a trust deed. This may be done, with the beneficiary's consent, to prevent a forced sale. Transfer of the property to the beneficiary may be to the beneficiary's advantage if the property is worth at least the amount of the remaining debt. The trustor benefits by avoiding the publicity of a public foreclosure sale." According to John W. Reilly, author of "The Ultimate Language of Real Estate, 4th Edition " (Dearborn Financial Publishing), "A deed in lieu of foreclosure is sometimes known as a friendly foreclosure, because it is settled by agreement rather than by civil action. The major disadvantage to this type of default settlement is that the mortgagee takes the real estate subject to all junior liens, whereas foreclosure eliminates all such liens." Can you explain reverse mortgage loans? Many long-time homeowners consider a reverse annuity mortgage (RAM), which enables them to borrow against the equity in their home so they ran receive monthly payments needed to help meet living costs. Under this plan, the flow of funds is in reverse to a conventional loan. The homeowner receives periodic (not necessarily equal) payments based on accumulated equity, according to author John W. Reilly. Many homeowners who worked to pay off a mortgage have shunned the RAM program because they are hesitant to take on new debt. What expenses beyond mortgage interest are tax deductible? "Points paid by the buyer are deductible for that year." say authors Edith Lank and Miriam C Geisman. In a new ruling by the IRS, even points paid by the seller are deductible. An amended tax return must be filed to take advantage of this benefit. Non-deductible expenses include title insurance, loan-application fee, credit report, appraisal fee, service fee, settlement or closing fees, bank attorney's fee, attorney's fee, document preparation fee and recording fees. My house has been on the market for six months and it won't sell, what should I do? Even in a down market, real estate experts say price and condition are the two most important factors in selling a home. So, the first step is to lower the price. Also, Go through the house and see if there are cosmetic defects that you missed and can be repaired. Home sellers should make sure that the home is getting the exposure it deserves through open houses, broker open houses, advertising, target marketing, good signage and a listing on the Multiple Listing Service and a special marketing campaign. If the seller is using a real estate agent and the property isn't getting that exposure, find another agent. Who should pay the closing cost? Closing costs vary from one transaction to another and often total in the thousands of dollars. They may be paid up front or added to the buyer's loan balance. However, anxious sellers may offer to pay some or all of the costs to induce a sale. If one or more agents are involved, their commissions are traditionally based on the sales prince and paid by the seller at the time of closing. As for typical costs and who usually pays what, real estate writers Ralph Warner, Ira Serkes and George Devine, authors of "How to Buy a House in California," 2nd California Edition, (Nolo Press), state them as follows: Buyer pays: escrow fees, deed preparation fees; recording fees; pest control inspection; as well as roof and other inspection charges. Seller pays: title search; title insurance for buyer/owner; reconveyance deed; documentary transfer tax, and for the one-year home warranty. The price of my home has gone down. Can I sell it for less than the Ioan amount? Some home sellers in this situation can sell for less than the amount of the mortgage. It is called a "short sale" or a "short payoff," and may be accomplished by negotiating with your lender. A real estate agent or a lawyer can help in the negotiations. A short sale may be complicated if the loan has been sold into the secondary market because then the lender will have to get permission from Fannie Mae or Freddie Mac (Federal Home Loan Mortgage Corp.) to negotiate a shore sale. Fannie Mae spokesperson Bonnie O'Dell says the secondary market giant has a policy of looking at each loan individually. If the loan was a low down payment mortgage with PMI. then the lender also must involve the mortgage insurance company that insured the low down payment loan. How can I avoid capital gains taxes? In considering capital gains tax from the sale of a primary residence, the critical time frame is two years. Generally, the capital gain is the difference between the original sales price, capital improvements and some closing costs and the eventual sales price. Tax on the gain may be deferred if the sellers buys another home of equal or greater value within 24 months. People over 55 can qualify for a one-time capital gains exemption of $125,000. What is a seller obligated to disclose? Under California law, the seller and the seller's broker, if there is one, are required to disclose all "facts materially affecting the value or desirability of the property which are known or accessible only to him" and which are "not known to, or within reach of the diligent attention and observation of the buyer. " In the case of residential properties, the seller must provide the buyer with a real estate transfer disclosure statement, which specifies the existence and condition of all know physical attributes of the property. "Sellers are responsible for disclosing only information within their personal Knowledge They don't have to hire professionals to answer the questions on the disclosure form." says real estate writer George Devine, author of "for Sale by Owner" (Nolo Press). However, sellers must fill out the form in good faith. Some of the items sellers disclose include homeowners' association dues; whether or not work done on the house met local building codes and permit requirements; the presence of any neighborhood nuisances or noises that a prospective buyer might not notice, such as a dog that barks every night or poor TV reception. any death within three years on the property: and any restrictions on the use if the property such as zoning ordinances or association rules. Is it difficult to sell your house yourself to avoid paying a commission? While many real estate experts recommend that home sellers engage the services of a licensed real estate agent, as many as 16% to 19% of all home sellers sell their homes without the use of these services, according to the National Assn. of Realtors (NAR). A 1992 NAR survey showed that 30% of all sellers who sold their homes themselves would not do so again the next time. Legal issues a seller should consider include discrimination laws. disclosure laws and laws ,governing advertising. False or misleading advertising is against the law, and certain terms and disclosures must be included if you are advertising the specifics of a financial package. For sellers determined to sell the property themselves, various guide books are available explaining the process step-by-step. What should I do to prepare my house to show? Making your home look as nice as possible may seem obvious. Apparently, it's not, because many sellers don't do much beyond vacuuming the living room rug and maybe cleaning the ring off the bathtub, says author George Devine. Short of spending a lot Of money, Devine offers several steps people can take to make their home show better: --Sweep the sidewalk, mow the lawn, prune the hushes, weed the garden and clean debris from the yard. --Clean the windows (both inside and out) and make sure the paint is not chipped of flaking --Clean and make attractive all rooms, furnishings, floors, walls and ceilings. It's especially important that the bathroom and kitchen are spotless. --Organize closets. --Make sure the basic appliances and fixtures work. Get rid of leaky faucets and frayed cords. --Ensure that the house smells good: from an apple pie, cookies baking or spaghetti sauce simmering on the stove. Hide the kitty litter. --Put vases of fresh flowers throughout the house. --Pleasant background music is a nice touch. Where can I find foreclosure properties for sale? "Notice of foreclosure must be published once a week for three weeks in a newspaper of general circulation in the city where the property is located or in the city nearest the property in the county where a newspaper is published, "according to the authors of "California Peal Estate Principles," 3rd Edition. (Dearborn Financial Publishing). For a buyer serious about finding a foreclosure, subscribing to a legal publication may be a first step, recommends author William H. Pivar. "Many people don't even know of the existence of these papers. Therefore. default and foreclosure notices published in such papers are likely to mean fewer pre-foreclosure buyers as well as fewer bidders than if the notices had been published in a general newspaper, "Pivar says. |
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