"Homes that underwent a price revision sold for less, and the greater the revision, the lower the selling price. Also, the longer the home remains on the market, the lower its ultimate selling price."
Owning a home is supposed to be part of the American Dream, but the buying process can seem more like a nightmare at times. As my husband and I prepared to buy our first home last year, I was shocked by how little I knew about it and how few definitive answers I could find online. As I bumbled through the process, learning on the fly, I developed a new understanding of the saying, “You don’t know what you don’t know.”
Setting Up for Success Before You BeginBefore I started the process, I researched meticulously — or I tried to, at least. I looked into traditional and Federal Housing Authority (FHA)–backed mortgages, finding out the down payment amount and minimum credit score we’d need for each program.
My husband and I made sure our credit scores were above 580, the minimum for the FHA program that we hoped to use. We paid down credit cards in order to make our debt-to-income ratio more appealing to lenders. As soon as we met the minimum requirements, we made an appointment with the bank — and we were sorely disappointed.
First, we learned that many individual banks have their own requirements on top of the regulations that the FHA put in place. In our case, the federal program required a score of 580, but the bank and mortgage agency that we spoke with required minimum scores of 600 and 620, which can be a significant difference when you’re working hard to repair credit.
We also learned that underwriters want to see that your deposit and closing costs have been in your account for at least two months, to track where the funds have come from and to confirm your ongoing financial stability. This was a hindrance to an impatient buyer like me.
The Home or the Mortgage: Which Came First?When we began meeting with real estate agents, they always asked if we had approached a lender. When we met with lenders, their first question was always whether we had a property in mind. This left us totally confused.
So what’s the right plan? “Potential homebuyers should always meet with a lender before they start their home search,” says Peter Jennings, a lender with Merrimack Mortgage in New Hampshire who has worked in the industry for more than 30 years. This helps you decide which mortgage program is best for you. Mortgages are originated either by mortgage brokers or traditional banks. Because the industry is so heavily regulated, it doesn’t really matter who you choose for your mortgage — the qualifications will be largely the same, Jennings says. However, small banks are likely to offer fewer mortgage options, while larger lenders usually offer more.
When you’re ready to buy a home, you can strengthen your offer with either a pre-qualification or a pre-approval letter from your lender. A pre-qualification, where a loan officer reviews the applicant to make sure that they meet the minimum requirements, is the most common, Jennings says. If your income and credit qualifications are well above the minimum range and your employment history is steady, many lenders will feel comfortable providing a pre-qualification letter. “In the industry it’s known as a slam-dunk borrower,” Jennings says.
However, if your application is on the cusp of qualifying because of credit or income issues, you may choose pre-approval. “The file is actually formally approved subject to the borrower finding a home,” Jennings says. “I do these on occasion when I don’t feel comfortable signing off on a pre-qualification letter.” Although a pre-approval takes longer up front, it can actually cut time between your offer being accepted and closing, because much of the review is already done.
Read More: How to Save for a House and Tackle Your Debt
Finding an AgentOnce you know that you qualify for a mortgage, it’s time to start shopping. At first my husband and I searched on our own, reaching out to listing agents on properties we were interested in. But once we realized that a buyer’s agent is actually paid for by the seller when a home is sold, without any out-of-pocket expenses to the buyer, we got an agent immediately.
Not realizing that there is no out-of-pocket expense for a buyer’s agent is common, says Liz Murphy, an agent with Berkshire, Hathaway, Fox and Roach Realtors in Jenkintown, Pennsylvania. “Usually the conversation goes faster once the buyer realizes they don’t pay the buyer’s agent,” she says. “The home-buying process is so daunting, and then you’re thinking, ‘I have to pay this person too.’”
Real estate agents streamline the process by finding properties that may not be listed online and helping buyers navigate regulations and laws. When our buying process was interrupted by unexpected hiccups, including an issue with the home’s title, our agent explained to us exactly what was happening and advised us on what to do.
Emotional support is no small part of a buyer’s agent’s job, Murphy says. “You want someone who can work with you through the ups and downs, and carry you emotionally through the process.”
Read More: How Much Should I Spend on a House?
Making an OfferOnce you find a home you like, your agent should help you to put together an offer that will be formalized in the purchase and sales agreement, a binding contract between you and the seller.
Consider how aggressive you want to be in negotiations and how competitive the market is (after all, until your offer has been accepted, the seller can take other offers). If you’re hoping to conserve cash, then consider making a stipulation that the seller contribute to closing costs — the amount varies depending on the type of mortgage and down payment amount, but can range from 3 to 9 percent of the sale price.
Also decide whether you want your offer to be subject to the home passing inspection, and what type of inspection. A traditional home inspection covers any flaws in the property so that you know exactly what you’re getting into. You can also include a pest inspection, radon testing, and a bunch of other options.
I was prepared for an endless back-and-forth with the seller (maybe I watch too much TV), but our negotiation was short. We made an offer, the seller countered, and our agent advised us to come back with our “best and final” offer to let the seller know that we were done negotiating. They accepted.
Read More: A Glossary of Basic Mortgage Terms: From Escrow to Title
Meanwhile, at the Mortgage OfficeNext comes the waiting. Typically it takes about 35 days from when your offer is accepted to when you can close on the house, although it could be longer, according to Neena Vlamis, president and co-founder of A&N Mortgage Services in Chicago. The wait can seem arbitrary and feel frustrating, but things are happening the whole time behind the scenes.
After your offer is accepted, the application enters the Attorney Review Period, Vlamis says. This is when the buyer does due diligence by getting an inspection and making any requests for repairs or closing cost credits. “This is the time to make sure this is the property you thought it was,” Vlamis adds.
After that, it’s time for the buyer to take a back seat and let the mortgage agent do their job. “Validation is the No. 1 process that’s happening during that time period,” says Vlamis. “It’s very important.” During the time that your application is in review, the lender is making sure that all the documentation you’ve provided, from tax returns to pay stubs, is truthful and accurate.
Because the mortgage industry is so heavily regulated, the bank takes many steps to make sure that the information it has received from the buyer is correct. The bank sends the tax transcripts to the IRS to make sure that they match what the IRS has on file. It also confirms employment information and pay before sending the application to underwriting, where everything is confirmed again, in greater detail.
This is also when the lender will appraise the house to make sure that the value of the property matches or exceeds the sales price. If you go with a federally backed FHA mortgage, the appraisal must be done by an FHA-certified appraiser.
During this time, you probably have more money in your account than you’ve ever had, but it’s extremely important not to make any financial changes during the time that your application is in review. Credit and employment are confirmed again at the end of the application process just before the financial commitment is made, and it’s crucial that there are no major changes, which could delay the process or jeopardize your chances of being approved. “Don’t switch banks, make big purchases, or change jobs,” Vlamis says. If you do, you could compromise your debt-to-income ratio, which lenders use to determine the likelihood that you’ll be able to make on-time payments. (During this time, my husband and I mostly stuck to the necessities — paying bills and shopping for groceries.)
Preparing to CloseOnce everything has been approved by the bank, buyers will receive a financial commitment letter. “That is saying that you have the ‘all clear’ for your financing,” Vlamis says. “Everyone, start packing.”
However, the waiting often continues — with about a week between the financial commitment dates and your closing. “That time allows the preparation of your closing package, you to do final walk-through, cashier’s checks to to be ordered, or a wire organized for closing costs, the deed to be prepared, etc,” says Vlamis.
When it finally is time to close, you’ll likely be able to breathe easy. You will sign a massive stack of papers, exchange checks and keys, and be on your way as a new homeowner.
"Looking ahead, the key for sustained momentum and more sales than last spring is a continuous stream of new listings quickly replacing what's being scooped up by a growing pool of buyers. Without adequate supply, sales will likely plateau."
"Low inventories and tight credit will limit the gains we will see in 2016. However, given the level of pent-up demand evident in web activity and stated buyer intentions for 2016, we should see this spring materialize as the busiest season of sales since 2006."
"Inventory is too low to support much higher sales. There's virtually no inventory available at the entry level, and single family housing starts and permits continue to languish at levels far below where they should be at this point of the recovery."
"Many sellers may not have an absolute decision as to whether to buy an existing home or a new home. So the low inventory of existing homes is locking them in place."
"Challenges remain, with low housing supply and declining affordability being a key concern in many markets."
A few weeks ago, Jonathan Smoke, the Chief Economist at realtor.com, exclaimed: “All indicators point to this spring being the busiest since 2006.”
Now, Freddie Mac has doubled down on that claim and is saying that 2016 will be the best year that the real estate industry has seen in a decade. In their March Housing Outlook Report, Freddie Mac explained:
“Despite the challenges facing the housing market, we expect this to be the best year for housing in a decade. Home sales, housing starts, and house prices will reach their highest level since 2006 according to our latest forecast…Challenges remain, with low housing supply and declining affordability being a key concern in many markets, but on balance, the housing markets in the U.S. are poised for the best year since 2006.”
The key indicators that have given Freddie Mac such a positive outlook are:
2016 looks to be shaping up as a great year for residential real estate. Whether you are thinking of buying or selling, now may be the time to sit down with a real estate professional to discuss the new opportunities that are arising
Are you a first time military homebuyer filing your taxes? Congratulations! You will spend much more time on your taxes by itemizing rather than taking a standardized deduction, but on the plus side tax time just became far more lucrative for you!
Except in a select number of states, renters don’t have the opportunity to claim tax deductions on their rate; homeowners, meanwhile, have lots of opportunities for deductions.
The mortgage interest deduction is the most well-known and popular benefit of homeownership. You can read more about that in our post on 9 Important Tax Deductions for Homeowners and Landlords, but let’s cover what else you need to know for taxes if you bought or sold a home in 2015.
Did your lender outline discount or mortgage points when you agreed to and signed for your loan? Your settlement statement will clarify that for you, but you’ll also find this on your Form 1098. A discount point helps you bring down the interest rate for your mortgage, which can save you on your monthly payment. These points can also bring down your owed taxes, but as every situation with mortgage points is different, it’s best to check with a tax professional first before making the claim.
Other Closing Costs
All the nitpicky little fees, such as lender fees, credit report fees, appraisals, and inspections are not tax write-offs. That's just the cost of doing business in home buying. Ideally, you'll find a lender who will waive lender fees to help defray some of the heavy costs associated with closing a loan.
Private Mortgage Insurance (PMI)
Military families using their VA loan benefit don’t have to pay for Private Mortgage Insurance, which saves an average of $100 per month. Families who use FHA loan products or conventional loan products with a lower than 20% down payment do have to pay PMI. Currently, PMI counts as a tax write-off, but this deduction is set to expire.
Did you add a Home Equity Line of Credit to your home purchase? Many choose to add a HELOC to help with home improvements. You can deduct interest on up to $100,000 on a HELOC; however, you can only deduct on the amount up to the loan to value ratio of the property. So, if you bought a house for $300,000, but your house is worth $350,000, and you added a HELOC of $100,000, you have a total of $400,000 invested in the property, so you are $50,000 invested over value. This means that you could only deduct interest on $50,000 of the HELOC.
The IRS is quite finicky about which repairs are tax deductible and which ones are not. A good rule of thumb, though, is that if you make the repair simply to beautify the home, then it is not tax deductible. If you make the repair to help accommodate a disabled family member, then it is tax deductible.
Energy Efficiency Upgrades
In years past, installing energy efficiency upgrades found homeowners financial reward come tax time. Now, energy efficiency upgrades are disappearing, and they are set to expire at the end of this year. Now, the reward is purely in knowing that you have helped the environment (and saved on your utility bills!). Some items that currently count as part of the Residential Renewable Energy Tax Credit include solar panels and solar water heaters.
Home Sale Tax-Free Profit!
If you sold a home at your last duty station and rolled the profits into your home purchase at your next duty station, then you’ve got more good news coming. You don’t owe taxes on the profits gained from that home sale unless your home sale profit exceeded $250,000 for an individual or $500,000 for a married couple. If your profit exceeds those amounts then a) Go you!, and b) Check out our post on how to defer capital gains taxes using something called a 1031 Exchange. Send this link to your wealthy friends and let them know you accept thanks in the form of steak dinners when they save bucket loads of cash.
Some final thoughts...
If you’re considering buying a home and are weighing tax deductions into your home budget, you may want to reconsider this budgeting option. Tax deductions and credits aren’t permanent, and we can never count on any of them to stick around past the end of the calendar year. Taxes are eternal, and tax deductions are political. So, if you're considering making the leap from renter to homeowner, count on no deductions, and anything you get will be a great bonus that you can apply to paying off that mortgage more quickly!
The National Association of Realtors (NAR) just announced that the February Pending Home Sales Index reached its highest reading since July 2015.
NAR’s PHSI is “a forward-looking indicator based on contract signings”. The higher the Pending Home Sales Index number, the more contracts have been signed by buyers that will soon translate to sales. February’s Index rose 3.5% month-over-month to 109.1.
Lawrence Yun, NAR’s Chief Economist explained:
"After some volatility this winter, the latest data is encouraging in that a decent number of buyers signed contracts last month, lured by mortgage rates dipping to their lowest levels in nearly a year and a modest, seasonal uptick in inventory.""Looking ahead, the key for sustained momentum and more sales than last spring is a continuous stream of new listings quickly replacing what's being scooped up by a growing pool of buyers. Without adequate supply, sales will likely plateau."
"After some volatility this winter, the latest data is encouraging in that a decent number of buyers signed contracts last month, lured by mortgage rates dipping to their lowest levels in nearly a year and a modest, seasonal uptick in inventory."
There is a lot of competition out there right now for your dream home. Prices are going to continue to climb, act now before you are priced out of your future home.
If you are on the fence about listing your home for sale and debating whether now is the time to move on with your plans of relocating… don't wait!
There are more buyers that are ready, willing and able to buy their first, second, third, vacation, or investment property now than there has been in years! The supply of homes for sale is not keeping up with the demand of these buyers.
Listing your home for sale now will give you the most exposure to buyers and the best sales price.
Whether you are planning on buying or selling a house this year, waiting to act no longer makes sense.
Posted: 04 Apr 2016 04:00 AM PDT
91.5% of Homes in the US have Positive Equity
Posted: 23 Mar 2016 04:00 AM PDT
“The number of homeowners with more than 20% equity is rising rapidly. Higher prices driven largely by tight supply are certainly a big reason for the rise, but continued population growth, household formation and ultralow interest rates are also factors.”