Module 7: Buying vs Renting, & Obtaining a Home Loan

What are the different contingency clauses that can be included in an offer to purchase?

1. The property is not subject to any public improvements, such as major highway construction, that will significantly reduce the property's value. 2. The property is not subject to any administrative or legal orders to correct faults, such as a building inspector ordering changes in an out-of-date plumbing system. 3. The owner is not aware that the property has mechanical or structural defects, such as a faulty air conditioning system or leaky roof. 4. The seller guarantees the property is not in a flood plain. 5. The seller agrees to repair any property damage that occurs between the date of the accepted offer and date of sale. 6. The seller guarantees that the property title is free and clear of any title defects that have not already been mentioned by providing a warranty deed. A warranty deed does not guarantee the soundness of the structure or mechanical systems.

If you purchase a house with a conventional mortgage loan, you will need to make a ______________ down payment if you want to avoid paying PMI.

20%

Describe what a Good Faith Estimate is and explain its purpose.

A Good Faith Estimate is an estimate provided by a mortgage lender that highlights the full costs of a loan. This can help borrowers compare between different lenders.

Multiple listing service:

A computer-based service, commonly referred to as MLS, that provides real estate professionals with detailed listings of most homes currently on the market. The public can now access much of this kind of information through websites like www.realtor.com

Earnest money:

A deposit made by potential home buyers during negotiations with the seller. The sum shows a seller that a buyer is serious about purchasing the property. The money usually is counted toward the down payment

Appraisal:

A determination of the value of something, such as jewelry, stock, or, in this case, the house you plan to buy

Real estate agent:

A foot soldier of the real estate business who shows houses and does most of the other nitty-gritty tasks associated with selling real estate. An agent must have a state license and be supervised, in most U.S. states by someone called a real estate "broker" (or, if the agent is already referred to as a broker in his or her state, by a "managing broker"). Most agents are completely dependent upon commissions from sellers for their income

Explain why it is important to have a house inspection performed when purchasing a house and describe when during the home-buying process the house inspection should be completed.

A house inspection is a careful assessment of the physical condition of the house and its mechanical systems. This can be a huge money and time saver, and it allows the buyer to be aware of possible repairs the house may need. It will save the buyer money for having to repair damages, and it will save the buyer from finding any surprise repairs after purchasing.

Fixed rate mortgage:

A mortgage loan that has an interest rate that remains constant throughout the life of the loan, usually 15 or 30 years

Adjustable rate mortgage (ARM):

A mortgage loan with an interest rate that fluctuates in accordance with a designated market indicator -- such as the weekly average of one-year U.S. Treasury Bills -- over the life of the loan. To avoid constant and drastic fluctuations, ARMs typically limit how often and by how much the interest rate can vary

Contingency:

A provision in a contract stating that some or all of the terms of the contract will be altered or voided by the occurrence of a specific event, usually by specific dates leading up to the closing. For example, a contingency in your home purchase contract might state that, if the buyer does not approve the inspection report of the physical condition of the property, the buyer does not have to complete the purchase

Realtor:

A real estate agent who is a member of the National Association of Realtors (www.realtor.com) is allowed to call him or herself a Realtor

Real estate broker:

A real estate professional licensed to negotiate the purchase and sale of real estate for a commission or fee. In most states, a broker is one step up from a real estate agent, having more training and the power to supervise agents. However, in some states, the term "broker" is used for all agents. In Washington State, for example, regular real estate agents are referred to as "designated brokers," and those who can supervise others are called "managing brokers"

Annual percentage rate (APR):

A yearly interest rate that includes upfront fees and costs paid to acquire the loan, calculated by taking the average compound interest rate over the term of the loan

PITI:

Abbreviation for the major expenses that make up a mortgage payment: principal (the amount borrowed), interest, (property) taxes, and (homeowners') insurance

Acceptance:

Agreeing to the terms of an offer, thereby creating a contract. As soon as the seller signs on to your purchase offer, you're in contract for the sale of the house, and neither of you can back out without facing consequences -- in your case, losing your earnest money deposit and, in the seller's case, a potential lawsuit

Closing costs:

All settlement or transaction charges (above and beyond the actual cost of the property) that home buyers (or sellers, depending on tradition in your area and what you negotiate with the seller) need to pay at the close of escrow when the property is transferred

What is the good faith estimate? How much time does a bank have to give you a good faith estimate after you applied for a loan?

An estimate provided by a mortgage lender, detailing the full costs of a loan. must be given to you within three business days of your loan application

Appreciation:

An increase in the value or worth of an asset or piece of property that's caused by external economic factors occurring over time, rather than by the owner having made improvements or additions. For example, increased market demand or inflation can cause property to appreciate. The term is commonly used in the context of real estate

What are the differences between real estate brokers, realtors, and real estate agents?

Broker: can show property for sale on behalf of a seller and has a valid license to sell real estate Realtor: licensed real estate broker or associate holding active membership in a local real estate board affiliated with NAR Real estate agent: can show property for sale on behalf of a seller, but may or may not have a license to transact the sale and collect the sales commission

When obtaining a loan to purchase a house, most lenders will want you to escrow your taxes and insurance. Explain what that means and why lenders prefer (or even require) burrowers do this.

Escrowing taxes and insurance is when you include property taxes and house insurance with monthly mortgage payments. This preferred or sometimes required because when escrows are waived, it allows a home's real estate taxes to possibly go unpaid, go delinquent, or get sold to a third party, or allows a home's insurance coverage to potentially lapse, and major damage is somehow sustained.

Which one of the following is a type of mortgage where the lender is in the private sector but the loan is still insured by the federal government?

FHA loan

What are similarities and differences between FHA loans, VA loans, USDA loans?

FHA loans: made by lenders in the private sector and is ensured through the Federal Housing Administration VA loans: reserved for military service members and their families USDA loans: (RHA loans) reserved for people who live in certain parts of the country

T or F: During the house-buying process, the appraiser is the one that tells you how much money you can borrow to purchase the home.

False

What are the similarities and differences between fixed-rate and adjustable-rate mortgage loans?

Fixed-rate mortgage: carries the same interest rate for the entire term of the loan Adjustable-rate mortgage loans: has an interest rate that changes over time

What questions can you ask that will help you determine which mortgage is the right for you?

How much do you have for a down payment?, What's your credit score?, How long will you be in the house?

Title insurance:

Insurance that protects against loss from disputes over ownership of a property. A policy may protect the mortgage lender, the home buyer, or both

Private mortgage insurance:

Insurance that reimburses a mortgage lender if the buyer defaults on the loan and the foreclosure sale price is less than the amount owed the lender (the mortgage plus the costs of the sale). A home buyer who makes less than a 20% down payment will most likely have to purchase private mortgage insurance, commonly referred to as PMI

Escrow account:

Most lenders set up this account that receives monthly payments from home buyers to pay for obligations such as insurance, taxes and assessments

What are some advantages and disadvantages of buying a newer home vs a older home?

Older homes are made with higher quality materials, have had time to settle, can be cheaper; bad wiring, old water pipes and drains more likely to clog, etc. Newer homes are not made as nicely, more likely to have structure/settling problems; systems will most likely run better (AC, water pipes, etc.)

Title:

Ownership of real estate or personal property. With real estate, title is evidenced by a deed (or other document) recorded in the county land records office

Identify and briefly describe what each of the letters in the acronym PITI stand for.

PITI stands for principal, interest, taxes, and insurance, which is what is included in a mortgage payment. Usually you have the choice of paying property taxes and house insurance separately from the principal and interest that will be paid to the lender.

What can a real estate professional do for you?

Pre-qualify you so you know what you can afford. 10 • Use your "wish list" to generate a computer printout of houses that meet your specifications. • Show you houses that meet your requirements. (Let the agent drive.) • Provide you with information about a community, including the prices and characteristics of houses in the area, the location of schools, property tax rates, unusual building code regulations, and availability of community services. • Provide you with basic data about each property including zoning, lot and house size, age, systems, equipment, and utilities. • Present your offer to the seller. • Coordinate closing details. • Advise you regarding mortgage lenders, real estate attorneys, professional home inspectors, and title companies

What does PITI stand for? How can it help determine what your total housing costs might be?

Principal, interest, taxes, insurance. It accounts for property taxes and insurance as well as principal and interest

Hazard insurance (house insurance or homeowners insurance):

Protects against physical damage to the property caused by unexpected and sudden events such as fires, storms, and vandalism. Your mortgage lender will no doubt require you to purchase hazard insurance, in order to protect its collateral from decreases in value

What are advantages and disadvantages of buying a house vs. renting?

Renting: moving is easy, fewer responsibilities, move-in costs are lower; there are no special tax deductions, less space for the money, changes are limited or can not be made to property Buying: forced form of savings, better credit rating, house may increase in value; substantial down payment is needed, maintenance and repairs may be costly, requires money for insurance

What are the roles of the appraiser and the mortgage lender in the home buying process?

The appraiser estimates a home's value in a specific housing market. The mortgage lender will help you figure out if you have the right stuff to qualify for a home loan and what you can afford

House closing:

The final transfer of the ownership of a house from the seller to the buyer, which occurs after both have met all the terms of their contract and the deed has been recorded

Depreciation:

The gradual loss of value of property that occurs through external economic conditions, the property's age, natural wear and tear, or deterioration

Disclosure:

The making known of a fact that had previously been hidden; a revelation. In many states, a home seller must disclose major physical defects in the house within his or her knowledge, such as a leaky roof or potential flooding problem; and, in all states, sellers must disclose the presence of lead-based paint hazards in buildings constructed before 1978

Describe the purpose of a contingency clause and identify two contingency clauses that are commonly included in an offer to purchase.

The purpose of the contingency clause is to help protect people from possible problems or events that may occur in the future. Two common contingency clauses are the "subject to financing" clause and the "subject to inspection" clause

Counteroffer:

The rejection of an offer to enter into a contract, where the rejecting party includes a different offer that changes the terms of the original offer in some way. For example, if you offer $350,000 for a house, and the seller replies that he wants $375,000, the seller has rejected your offer and has made a counteroffer. The legal significance of a counteroffer is that it completely voids the original offer

Equity:

The value of a homeowner's unencumbered interest in real estate. Equity is the difference between the home's fair market value and the unpaid balance of the mortgage and any outstanding liens. Equity increases as the mortgage is paid down or as the property appreciates

What does a home inspector does? What is the importance of having a home inspection before purchasing a house?

They do a careful assessment of the physical condition of a house and the mechanical systems. Can save time and money, allows you to know what needs to be fixed

T or F: Your credit score can affect the amount of interest you will have to pay when you obtain a mortgage loan.

True

Describe two advantages and two disadvantages to purchasing a house with an FHA loan.

Two advantages of purchasing a house with a FHA loan are the down payment, and being more lenient than other conventional mortgages. Two disadvantages of purchasing a house with a FHA loan are having to pay a premium for government mortgage insurance, and the premiums are usually higher than others for conventional mortgages

What are some of the typical charges that are included as part of the closing costs?

fees, charges, and taxesAn estim

What is "closing?" What usually happens?

final step in real estate purchase transaction. buyer will provide a check for the amount owed toward the purchase price of the house, seller will sign the deed over to the buyer, title company will register the new deed with the appropriate government office, seller will receive any proceeds they earned from the sale (once their mortgage balance and closing costs have been paid off

What does it mean to "escrow" your taxes and insurance?

including property taxes and house insurance with the monthly mortgage payment

What role do the ratios "28/36" and "31/43" play?

limit spending to a specific percent each month (EX: no more spending than 28% of gross income on home loan payments and 36% of gross monthly income toward all long-term debts)

What is the "offer to purchase?" When can and can't you legally withdraw your offer?

lists price you are will to pay and other conditions of the sale. you can only withdraw your offer if the seller has not already signed it

What do you want to consider when determining what you need/want in a house?

location; appearance; safety and security; convenience to work, shopping areas, schools; good roads and streets; police and fire stations; recreational facilities; special features your family needs; tax benefits; within price range; etc.

How do FHA loans work? What are advantages and disadvantages of obtaining an FHA loan?

mortgage is made by lenders in private sector and is insured through through the Federal Housing Administration. benefits include the down payment and is more lenient than other conventional mortgages. disadvantages include paying a premium for government mortgage insurance, multiple offers on the house, etc.

What various items that should be included in the sales contract?

non-fixture items, closing date, life of the offer, earnest money

How can someone determine how much house they can afford?

people can typically afford a home that is about 2.5x your yearly gross income

What are common negotiating points when purchasing a home?

purchase price, contingency clauses