We provide real estate services to buyers
and sellers in Pennsylvania (Berks County, Chester County, Delaware County,
Montgomery County, Philadelphia, Drexel Hill, Haverford Township, Havertown and Upper Darby) as well as in
New Jersey (Brigantine, Atlantic City, Ocean City, Camden County and Gloucester
County).
Regardless of your experience, we are equipped to help you with the
home buying and
financing process.
We highly recommend that you seek the assistance of a Realtor
in your home buying activity and to seek competent counsel regarding mortgage
financing.
The Process
The
following is a simple step-by-step approach to buying a house. This will
demystify the complex process of buying a home -- specially to the first-time
home buyer. This will
show you the entire home buying process--from start to settlement.
Homeownership is about the
pursuit of sense of security, pride, and comfort. The feeling of possessing
something that you control and, possibly, pass on to your children. The feeling
of accumulating value for the security of the future. All these are motivation
to own your own home. However, this is one's single most significant investment
most will ever make. Thus, it is important that the ownership process is managed
well, just like managing your own investment in stocks or bank account.
List of Benefits of Homeownership
The
benefits of homeownerhip could be summarized as follows:
Build equity:
Unlike renting where money spent is wasted, making mortgage payment contribute
to the build-up of equity to have a more financial security in the future.
Increase your take home pay:
The interest you pay (and starting January 1, 2007, the mortgage insurance
premium you pay if your adjusted gross income does not exceed $100,000) on your mortgage is usually deductible
on your tax return. This will save you taxes (more significantly during
the earlier years) and increase your take home pay. You must consult with your
tax accountant regarding the deductibility for your particular case.
Strengthen your credit score:
Paying your mortgage loan diligently and on time will increase your credit
rating -- also known as FICO score.
It is your own house!: You no longer have to worry about what
improvements to make on your home or worry about putting the home back in the
same condition as when you moved in by the time you move out. Decorate,
remodel, and renovate as you wish. It is your home.
No renewal or rent increase:You no
longer have to worry about renewals or increasing rent payment.
Drawbacks of
Homeownership
Homeownership does not come without drawbacks or responsibilities. You must
anticipate the
responsibilities involved in owning your own home. You have to be prepared to
anticipate them and make some adjustments.
Added financial
responsibility:
Whether it makes sense for you financially to own or to rent will depend on
your particular situation. When renting, some or all your utilities are paid
for by the landlord. As a homeowner, you will be responsible for ALL these
items. In addition, you will be paying for real estate taxes and insurance
that you did not have to pay for before. Danny Cachuela could help you in this
evaluation using a computer model that will use information that applies to
your particular case. You will then receive a written report for you to review
in making your decision.
Maintenance:
Homeownership requires repairs and maintenance that used to be the
responsibility of your landlord.
Less flexibility:
When you rent, you can change dwellings very easily. This could apply in
situations where there is a job relocation. You can usually break your lease
with short notice, the worse case being that you will be required to pay a
certain amount of penalty such as one or two months' rent. When you own your
home, it will not be as easy to sell your house unless you are in a seller's
market. Your responsibility to pay the mortgage does not stop until you sell
your home and payoff the loan balance.
Value loss:
Although real estate values almost always increase over time, there could be
seasonable fluctuation in this value. If you are relocated and required to
sell your home when the market is down, you could suffer a loss in value.
The personal satisfaction of owning a home is significant and in most cases
is advisable. However, you have to be prepared with the responsibilities that
comes with it, and the long-term commitment involved such as long-term loan
obligation (usually, 30 years), and the potential difficulty to sell in
the event a change is required. Selecting the right mortgage is extremely
important. Danny Cachuela can help you with this process.
There are two important preparation required -- financial and emotional -- both
of which are important.
Because all decisions are emotional decision, you must be emotionally prepared
to take the responsibility involved in home ownership (but don't forget
about the pleasures of home ownership). Many who make a decision very
quickly questions the decision after a purchase is made. This is called
buyer's remorse. This must be anticipated and avoided by thinking through
thoroughly the pros and cons of homeownerhip.
Financial preparedness is even more important. You must carefully evaluate your
spending pattern and be prepared for a change if your budget is tight.
Obviously, for those who have significant income and substantial expendable
income, this is not an issue. But for most, it could be an issue that needs to
be addressed. You must consider your monthly income, spending habits, existing
debt, current accumulated savings and savings target, and your credit score.
Working with a financial consultant, a savvy mortgage counselor, or a realtor
with good business and financial background will be extremely helpful.
Down-Payment
Many are of the false impression that you need a huge amount of savings to buy.
It certainly helps, but it is not required. You can even buy a home with zero
down payment. However, you have to have some funds to pay for the closing cost.
Even that could be minimized by asking the homeseller to pay for some of you
closing cost (also called seller assist).
Some are also concerned that they will not be able to buy because they cannot
support their income. This applies particularly to self-employed individuals.
There are programs available that would not require you to document your income
(also called no doc loan).
Danny Cachuela can review with you options that are available to you based
on your personal situation and credit score.
Your Credit
How you paid your bills in the past is one important fact lenders take into
account in processing your loan application. Your credit history is reviewed by
ordering a credit report. This will dictate the type of loan program that will
be made available to you, and the corresponding interest rate that you will have
to pay. If you rating is lower, you will be considered higher risk. You may
still be able to get a mortgage, but you may be required to pay higher interest
rate. Should your credit score improve in the future through your diligent
payment of bills, you could always refinance this higher interest rate mortgage
with a one that carries low interest rate. This, however, will depend on what
interest rate is available in the future since this changes every day.
If you had issues in
the past that could impact your ability to apply for a normal loan, other
programs may be available to you to help you get through your short-term
difficulties. Discuss this with Danny Cachuela.
Debt-to-Income Ratio
In processing your
loan, the underwriter will compare how much debt payments you're making a month
compared to the monthly income you have. This will determine the amount of loan
you can carry. Various lenders have different guidelines. Whereas one lender may
decline your application, another lender may approve it. Most lenders would
prefer that your total debt, including mortgage payments (which include real
estate taxes and homeowners insurance), not exceed 36% of your monthly gross
income (before deducting income taxes). When you apply for a loan, avoid
incurring additional debt prior to settlement. Otherwise, whereas you were
pre-approved for a loan, you may not be approved at the time of settlement
because of additional debt you incurred.
If your debt-to-income
ratio is more than 36%, you may still be eligible to borrow. However, you may be
put in a higher risk category, which translates to higher interest rate.
The loan you obtain is evidenced by a Note (also known as Promissory
Note) that you sign at the time of settlement. This gives rise to the
loan obligation where you promise to pay back the loan. Mortgage is the
document you sign that would allow the bank to foreclose on the property (take
possession of the property) in the event you fail to pay the loan. Frequently,
the term mortgage is used to mean the loan. We can simply say that the
mortgage loan is a loan you obtain to help you finance a home purchase,
which you repay over a period of time -- usually over 30 years.
Rates, Points & Loan Fees
How
much a mortgage loan cost you depends of different factors. The most common and
known to all is the interest cost. The second -- and also becoming known
to all -- is the discount points. The last -- and still not known to all
-- are the loan fees. To protect the consumer, federal law requires that
lenders disclose the APR (annual percentage rate), which gives you the
effective cost of your borrowing by taking into account all those three factors.
Interest Rate
-- the percentage applied to your outstanding loan balance and paid each month
in addition to the principal.
Discount Points
-- interest paid in advance to reduce your interest rate (also known as
interest rate buy down). As a rule -- but not precisely -- one point (1%
of the loan amount) will buy down about .25% of interest rate. Thus, your
interest rate will be lower depending on the number of points you are willing
to pay at settlement. Paying points upfront (if you have cash on hand) will
lower the interest rate and lower the monthly payment, enabling you to borrow
a larger amount. This will then enable you to buy a more expensive home.
Loan Fees
are up-front charges to cover the cost of originating, processing, and closing
your loan, among other things. An origination point is a loan fee that equals
1% of your loan amount.
When
considering loan pricing, keep in mind that all the above should be considered
in choosing which loan makes more sense. Many borrowers stop looking beyond the
interest rate, thus being misled into believing that one loan is less expensive
than another.
Monthly Mortgage Payment
There are four parts including in your monthly mortgage payments. They are principal, interest,
taxes, and insurance. These are often referred to as PITI.
Principal
-- a portion of the money you borrowed to buy a home. This part of the payment
is deducted from the original loan you borrowed in arriving at the outstanding
balance at any point in time.
Interest
-- the monthly charge for the money you borrowed. This is computed by
applying the monthly interest rate to each month's outstanding loan balance.
Taxes
-- this is the tax assessed by your local municipality. This is usually
collected by your lender and put in escrow to ensure that money will be
available to pay the taxes in your behalf at the end of each payment cycle.
Insurance --
just like taxes, this is usually collected by your lender and put in escrow
to pay for them when it comes due. This is usually made up of the homeowner's
insurance (also called hazard insurance) and, in some cases, mortgage
insurance (usually required when your down payment is less than 20%).
Taxes
and insurance are not take into account in computing the loan's APR (see
explanation above).
Check with Danny Cachuela in selecting the suitable type of mortgage program
that is available to you.
In general, there are two basic types of loans: fixed rate mortgages and
adjustable-rate mortgages (ARM).
They are explained as follows:
Fixed-rate mortgages -- as the name implies, these are
loans with rates that are fixed and does not fluctuate over time.
your
payment is fixed and know during the entire term of the loan; and
you'll are not subject to the risk of increasing rates (however, you also do
not get the benefit of decreasing rates in those times when rates come
down).
Adjustable Rate
Mortgages -- interest rates fluctuate
periodically based on defined market conditions.
The initial rate is fixed during the introductory period, which could be
one, two, three or five years. Then it fluctuates based on pre-defined
market index and subject to predetermined maximums (called caps).
The introductory rate is usually lower than the fixed rate.
The lower interest rate (compared to fixed rate mortgages) allows buyers to
qualify for larger loan amounts.
Terms of Loan
The “term” of a loan is number of years the loan will be repaid. Commonly,
this is 30 years, but other options such as 10, 15 and 20 year loans are also
available to enable earlier payoff of the loan. Recently, a 40-year loan
has been made available to allow buyers to purchase homes that are going up in
value.
You will have to evaluate your situation to determine the loan term that is
beneficial to you. The longer term loan will allow you to purchase more of a
home because of lower monthly payment for comparable priced property. However,
it will take longer to payoff the loan, and the total payment could be
significantly higher. The reverse is true for short term loans.
Other Types of Loans
There are other factors to consider such as:
Can the
loan be insured by the government such as FHA or VA. FHA loans are
guaranteed by the Federal Housing Administration to assist low-to-moderate
income buyers. It allows for low down payment and it has more liberal
qualifying guidelines. VA loans are guaranteed by the Department of Veterans
Affairs (formerly called Veterans Administration), and available only to
qualified veterans and those who are actively in the military and their spouses.
They offer sort of similar benefits as the FHA loans.
Is the amount of the loan within the conforming loan limit?
For 2007, the limit is $417,000 for single family homes. Conforming loans are
also subject to certain additional guidelines that need to be met.
Anything above this amount and not meeting the additional guidelines will be
classified as jumbo loan subject to higher interest rates.
There are additional guidelines that need to be met. Other types of
mortgages are available to accommodate those who fail to meet the additional
guideline. Examples are those with credit challenges, high debt
(debt-to-income ratio higher than guideline), etc. Other solutions are
available for those falling into this category.
Talk to Danny Cachuela
about the wide variety of products that are available.
In buying a home, the seller wants assurance that you will be able to get the
loan to go to settlement. This would require you to get a written letter from a
lender certifying that you are pre-approved to obtain a loan up to a specific
amount. This is a required document in putting an offer on a house. Any buyer
who puts an offer on a house without getting a pre-approval letter is generally
not considered to be a serious buyer.
What's the difference
between Pre-approval and Prequalification?
With prequalification, the lender simply looked at your financial situation (and
perhaps pulled your credit report) to determine if you will qualify for a loan
and to estimate the amount of loan you can afford to carry based on provided
income and existing debt information. Lender basically rely on information you
provided without verification. In a pre-approval, lender definitely need
to pull your credit report and to performs some limited verification of certain
information such as review of pay stubs and tax return. However, lender still
does not verify employment and such. Thus, a pre-approval is much stronger than
a prequalification.
Why should you be pre-approved?
Armed with a pre-approval letter, you can be assured that you can obtain the
loan ones you find the home you are looking for. This prevents shopping for a
home blindly, that in the end you may not be able to buy. When you find the home
of your choice, you can be assured that the seller will view your offer as
coming from a serious buyer. In a multiple offer situation, it may mean the
difference of winning or losing the bid for the home.
Home buyers who are salaried are easy to pre-approve because it is easy to
verify employment and income has some consistency. On the other hand,
self-employed individuals and those on straight commission are more difficult to
evaluate and document. Therefore, it is more important to obtain a pre-approval
for buyers whose income is in this category to show sellers that this matter has
already been reviewed by the lender.
How do you get a
pre-approval?
Simply contact Danny Cachuela before shopping for a home. You will fill out a
simple application form, which will be used as a basis for the pre-approval.
Your credit report will be pulled, and coupled with the information you provide
on the application form, a determination will be made regarding the amount of
loan you will be granted. This pre-approval will be subject to certain
conditions such as identification and appraisal of the property you are buying,
etc.
Now the fun begins with looking for the right home for you and your family that
you will enjoy for the many years to come. The first step is to find one that is
closest to what you want. Remember, you will be extremely lucky to find the one
that exactly meets your requirements. Thus, you must maintain some
flexibility. You must consider the following factors:
Location:
This is the most important factor. You should consider the school district
where your children are likely to go (unless they're going to a private or
parochial school). You must consider the distance to work and the
availability of transportation. This, in most cases, is more important
than the house itself.
Features of the home:
Size is the number one consideration, which will vary depending on the
size of your household and your day-to-day activities. You must consider
and distinguish the "must haves" and the "nice to have" amenities. For
example, the number of bedrooms, number of baths, central air
conditioning, fireplace, preference on heating system, etc.
Style or type
of homes:
This could be a single family (detached) home, a twin (semi-detached), or
a townhouse (attached and also called a row home). Condominium is a type
of ownership and could take the form of a garden type or high rise
condominium. There are also townhouses (also called townhomes) where
homeowners belong to an association. In the case of a condominium and
townhouse with an association, there will be some restrictions imposed by
the condominium or association management. Whether you want to own this
form of property will depend on your lifestyle and preferences.
Regardless of the house you choose, you have to make sure that it is one you
are comfortable with. Remember, unlike a car, buying a wrong house will not
be easy to correct. Get the right guidance from a competent real estate
agent and make the right choice.
Why work with a Real Estate Agent?
Working with a real estate agent does not cost the buyer anything.
Their fees are paid for by the agent of the seller in form of a commission
split. Meanwhile, his obligation will be to represent your best interest as
the buyer. Trying to do it on your own could be a very time consuming
process -- unless you enjoy that process. Here's why.
The
real estate agent has the best information available to him (or her)
regarding the inventory of available homes. The homes you see listed on the
paper and the internet are frequently outdated and incomplete. Even the
homes you spot while driving around does not provide you with comprehensive
information about the home. It is very unlikely that you will buy the
home you see on the paper, the internet, or on your drive-by. Instead, you
will wind-up calling and working with an agent; and in all likelihood, you
will wind-up buying a home other than the one you called about. Why not
start your home search process by calling an agent you're comfortable with
and working with him or her from the very start.
Realtors are real estate agents, but not all real estate agents are
Realtors. A Realtor is a real estate agent who is a member of the National Association of REALTORS®,
and subject to the strict code of ethics of the Association. Agents are
commonly referred to (although erroneously) as Realtors, when they are not
necessarily such, unless they belong to the Association.
Working with a Realtor assures you that the professional is subject to the
strict code of ethics of the Association. You will get the benefit of
working with someone who understands the market and has the necessary
network to get up to the minute information on available homes--assuring you
the advantage of being among the first to know of homes as soon as they come
up in the market.
Incidentally, it's also best for sellers to work with a Realtor, especially
when it comes to the correct pricing of their home, and in bringing in
buyers who have been pre-qualified or pre-approved. Many sellers rely on
information they obtain on the Internet, which lists homes that are
currently for sale (with asking prices). What determines market value
is not the asking price of available homes -- it is the settled
price of sold homes.
Once you’ve obtained your pre-approval or pre-qualification, find REALTOR®
you're comfortable with.
Once you find the home you want to buy, you will need to work with a Realtor
in determining the right price to offer. Your realtor will prepare a market
analysis for you (also known as CMA, or Competitive Market Analysis).
Through your Realtor, you will then negotiate the price to offer for the
home.
The Offer
In making an offer, your Realtor will prepare an Agreement of Sale (which
will become "the contract" ones accepted by the seller) indicating the
appropriate offer price based on the Competitive Market Analysis that was
discussed with you. This Agreement of sale is just an offer
at this point. This document will be accompanied by:
a mortgage pre-approval
letter from the lender, evidencing
your ability to obtain the mortgage;
a Buyer Financial
Information listing your resources
to show your ability to cover the cash required to get you to settlement;
and
a check to cover the earnest money deposit
(also called the security deposit or good faith deposit).
The Contract
If the Agreement of Sale presented by the buyer is accepted by the seller,
it becomes "the contract" that sets forth all the terms of the purchase and
sale transaction. This document will then legally bind both buyer and
seller. However, if the seller signs the Agreement of Sale but makes changes
to the terms, it then becomes a counter offer until such changes are
accepted, initialed and dated by the buyer. It is at that point that the
Agreement of Sale becomes a binding contract.
Depending on the state you are in, an attorney may or may not need to draft
(or review) the Agreement of Sale.
Bear in mind that an Agreement of Sale may include contingencies such as
inspection contingency, mortgage contingency, zoning verification
contingency, etc. The mortgage contingency clause generally gets you out of
the contract if you are unable to obtain the mortgage commitment from the
lender. The contract is usually full of deadlines and you must pay careful
attention to this deadlines to protect your interest as buyer. After all,
you do not want to accidentally own the home because you missed the
deadline. Your realtor will guide you through this and make sure that your
interest is protected.
This is the final step in the home buying process. The following steps must
be undertaken:
Make sure that you
received your mortgage commitment from your lender and that you understand
all the conditions attached to it.
Your Realtor will
schedule the closing date and time (generally handled by the Title
Company) taking into account contractually agreed upon dates on the
Agreement of Sale.
If required, ensure
that the survey of the property is completed, and that any settlement of
inspection issues are resolved and documented.
Schedule the move
and make the necessary arrangements with the mover, notify the landlord
regarding termination of leases, and arrange for connection and
disconnection of utilities.
Conduct a walk-through inspection of
the property before settlement. Although this is ideally held just prior
to settlement, it is quite common to do it the day before settlement.
Bring a cashiers check from the bank for
the remaining cash you will need to bring. You will be notified of this by
your Realtor or their conveyancing office. A personal check is generally
not acceptable. Also, the cashiers check is generally payable to the Title
Company. If unsure, make the cashier's check payable to yourself, which
you can then endorse at the settlement table.
At
the settlement table, the title to the property will be conveyed to buyer by
seller. Both buyer and seller will sign appropriate documents acknowledging
the transfer. The mortgage and loan documents will also be signed by buyer.
The settlement officer (either an attorney, or the title company
representative, depending on local custom) will then disburse the check and
distribute the documents to various parties. Both buyer and seller will
review and accept the settlement sheet (also called HUD-1) as being an
accurate accounting of the settlement.
The key will be handed to the buyer at this point.
Your home is likely to
be your single largest investment. This is where you can develop wealth over
time. It will present you with new challenges and responsibilities,
but it will also offer you new opportunities.
Build your Equity
Each month that you make your monthly payment, a portion of the payment goes
to reduce the principal balance of your loan. In addition, the value of your
home appreciates over time. The equity is the difference between the
appreciated value of your home, and the outstanding balance of your loan.
For purposes of illustration, let's assume that you bought a home for
$300,000 with $270,000 loan (financed at 6% over 30 years). You started with
an equity of $30,000 through your down payment. At the end of five years,
your loan balance will be about $251,000. Through repayment of your loan,
you accumulated additional equity of $19,000 ($270,000 - $251,000). In
addition, assuming that your home's value increased from $300,000 to
$380,000 (that's about 5% per year), you also accumulated additional equity
of $80,000 through appreciation. At the end of five years, you would have
accumulated a total of $129,000 in equity ($30,000 + $19,000 + $80,000).
This is equivalent to the difference between the home value of $380,000 and
the loan balance of $251,000.
In the beginning, more
of your monthly payments go to interest, and less on principal. As time goes
on, more of the payment goes to principal and lesser on interest. Thus, you
will be accumulating more equity through principal repayment as time goes
on. You can also increase your equity by prepaying more of your principal by
making larger payments as your loan agreement permits (without penalty).
How to cash in on your Equity
What do you do with this built-up equity over time? Instead of borrowing
money for car loan, to finance home improvement, travel and leisure, college
tuition, or other expenses, you can borrow against your home's equity. This
is called home equity loan, or equity line of credit. This is
the preferred because the interest you pay
on home equity loan may be tax-deductible, unlike the ones you pay for credit cards
debt, personal loans, car loans, etc. Consult with your tax accountant
regarding the deductibility of this interest as it applies to you.
This equity built-up on your home could be tapped through what is called a
cash-out refinance, or a home equity loan.
Cash-out refinancing:
involves applying for a new mortgage for an amount that is larger than
your current mortgage balance, thereby taking the difference in cash. The
amount of extra cash you can obtain will depend on your financial
condition, and the program available at that time.
Home equity loan(also known as "equity line of credit"):
involves applying for a second mortgage in addition to the existing
mortgage. In a home equity loan, you will receive cash in lump-sum amount;
whereas the equity line of credit will give you the ability to draw money
as you need it by writing a check up to the approved amount. The advantage
of the equity line of credit is that you only pay for the interest on cash
that you use. This is good for establishing a source of fund for emergency
needs.
